1 Manufacturing Industry in Thailand

2 References: 1. Peter Warr (ed.) 1993, Ch.2 “Manufacturing” by Somsak Tambunlertchai 2. Medhi Krongkaew (ed.), Ch.1 “Thai Industrialization: An Overview” by Malcolm Falkus, and Ch. 3 “Export-Led Industrialization” by Suphat Suphachalasai

3 I. Industrial Growth and Structural Changes High and sustained growth since 1960s:  10% growth since 1960s  From 16% to 39% of total economy in the past 30 years; now the largest sector  Hit hard and declined sharply during the 1997 crisis, but continued to grow since then  Declined again during the hamburger crisis in

Agriculture27.0%20.6%16.9%9.5%9.4%10.1% Manufacturing16.0%21.7%23.0%29.7%30.2%36.0% Construction5.3%4.5%4.0%7.4%5.7%2.9% Wholesale and Retail Trade17.4%16.9%17.0%16.5%17.2%16.0% Transport and Communications 6.5%6.7%7.4% 7.8%9.4% Banking2.5%2.8%3.6%7.1%6.5%3.2% Real Estate** 3.4%3.3%4.1% Other Services25.3%26.8%28.1%18.9%19.8%18.4% Gross Domestic Product, (GDP) 100.0% 4

r2002r2003r2004r2005r2006p Agriculture10.3%10.4%10.0%10.5%9.6%9.0%8.9% Manufacturing36.4%36.2%36.8%38.0%38.7%38.9%39.2% Construction2.5% 2.4% Wholesale and Retail Trade15.8%15.3%14.8%14.2%14.0% 13.8% Transport and Communications9.7%10.1%10.2%9.8%9.9%10.0%10.1% Banking2.8% 3.0%3.2%3.4%3.5%3.4% Real Estate4.0% 3.9% Others18.5%18.8% 18.0%18.1%18.2% Gross Domestic Product, (GDP) 100.0%

6 I. Industrial Growth and Structural Changes From “import-substituting” during 1950s – late 1970s to “export-oriented” since 1980s Manufactured exports exceeded agricultural exports since 1985; now accounted for over 80% of total

7 Exports by Sector (%) Manufacturing Agriculture Fisheries Others Total100

8 I. Industrial Growth and Structural Changes Top ten export items (1998 – 2007):  Computer parts, integrated circuits, garments, motor vehicles, processed seafood, jewellry, rice, television sets, plastic pellets, rubber, iron/steel products, chemicals, oil products

9 I. Industrial Growth and Structural Changes Shifted away from “food & beverages” (agro-based) towards labor-intensive industries (textiles, leather, shoes, toys, jewelry) Later shifted from labor-intensive to higher technology, engineering-based (electronics, computers, transport equipment)

10 Value Added of Major Manufacturing Industries (Percent) ,006 Food Products and Beverages16.8%18.7%15.8%16.2%15.6% Textiles6.8%7.7%6.9%6.4%5.0% Wearing Apparel7.5% 6.5%5.8%5.1% Refined Petroleum Products8.4%10.9%9.5%9.0%7.0% Other Non-metallic Mineral Products5.8%4.2%4.3%4.8% Machinery and Equipment4.3%3.6%4.1%4.2%5.4% Office and Computing Machinery4.2%6.1%6.5%5.6%8.2% Television and Communication Equipment7.9%8.3%9.7%8.4%9.2% Motor Vehicles7.7%2.2%5.2%7.4%10.7%

11 I. Industrial Growth and Structural Changes Always import-dependent  Producing finished products using imported machine, components, raw materials  Machine and raw materials always among top import items

12 I. Industrial Growth and Structural Changes Top ten import items (1998 – 2007): Electrical machinery, Industrial machinery, integrated circuits, crude oil, chemicals, computer parts, iron & steel, metal products, precious stones, metallic ores, vehicle parts

13 I. Industrial Growth and Structural Changes Assembly, low linkages, low-tech base Low labor absorption: below 15% of labor force

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15 I. Industrial Growth and Structural Changes The number is dominated by small factories: 90% of factories have less than 15 workers, most in the Northeast and North (mostly household manufacturing)

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17 I. Industrial Growth and Structural Changes But employment is concentrated in large firms in Bangkok vicinity and Central region

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20 I. Industrial Growth and Structural Changes More than 80% of manufacturing value added is from large firms in Bangkok, vicinity and Central region

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22 I. Industrial Growth and Structural Changes Heavy concentration in and around Bangkok: 50% of industrial jobs are located in Bangkok, producing half of total manufacturing value added Moving toward the Eastern Seaboard since 1980’s with new industrial estates, ports and gas-related industries Many factories moved from Bangkok to Central since 2001

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27 REGIONAL DISTRIBUTION OF MANUFACTURING VALUE ADDED REGION BANGKOK AND VICINITIES62.7%58.1%57.0%56.4%47.1% CENTRAL6.5%6.2%5.9%6.1%16.0% WESTERN3.5%3.1%3.2% 2.3% EASTERN16.6%21.9%23.0%23.5%22.9% SOUTHERN2.0% 2.1%2.9% NORTHERN3.8% 3.9%3.8%4.4% NORTHEASTERN4.9% 5.0% 4.4% WHOLE KINGDOM %

28 I. Industrial Growth and Structural Changes Important role of foreign direct investment (FDI)  One-third of FDI flows into manufacturing, esp. textiles, electronic, transport equipment and machinery  Important sources: Japan, 4 NICs, U.S., E.U.  5% of total investment in manufacturing: small but significant in technology

29 II. Factors Affecting Manufacturing Changes High growth and investment Macroeconomic stability (but political uncertainty)  conservative macroeconomic policies (except pre-crisis period)  market-oriented economy with minimal government intervention

30 II. Factors Affecting Manufacturing Changes Abundant natural resources, e.g. marine products, fruits & vegetables, rubber  raw materials for industries Large supply of unskilled labor up to 1980s, but labor became more scarce and expensive, attracting workers from neighbors

31 II. Factors Affecting Manufacturing Changes Active local entrepreneurs (traders-turned- industrialists), Chinese connection and bank financing Favorable world  industrial markets  technology transfer of labor-intensive industries  industrial relocation from Japan and NICs  economic integration, e.g. AFTA, attracting new industries

32 II. Factors Affecting Manufacturing Changes Constraints on economic and social infrastructure (roads, ports, electricity, water) and environment; serious in 1990s Shortages of skilled labor (engineers, technicians); very serious in 1990s Shortages of semi-skilled workers in recent years, after the crises

33 III. Policy Measures Government direct involvement through state enterprises in production, as in 1950s  failure Infrastructure provision by government since 1960s  Development plans  Transport (roads, rail, rivers, ports, airports)  Communication (telephone, postal services)  Power and water  Industrial estates

34 III. Policy Measures Border Measures  Tariff protection in 1960s and 1970s High for consumer goods, import-competing industries, and low for intermediate goods and capital goods Lower tariffs in late 1980s Import surcharge and anti-dumping measures  Import quota not significant

35 III. Policy Measures Export promotion  Tariff reductions  Tax rebates for imported raw materials used in production for export  Marketing: trade fairs, road shows ASEAN economic integration and other free trade areas

36 III. Policy Measures Investment promotion through Board of Investment (BOI) “Promotional privileges”: 3-8 year period of exemption from profit tax, import taxes on machine and raw materials; land ownership by foreign investors; employment of foreign experts

37 III. Policy Measures Regional dispersion  3 BOI Zones 1. Bangkok + surrounded 2. Zone 1- bordering provinces 3. Country areas  Maximum Benefit + special zone for 3 southern provinces

38 III. Policy Measures Integrated planning  Eastern Seaboard: Industry, Community planning + Social + Econ infrastructure (Port, Rail, Estates, Schools, Hospital etc.)  Gas related + Heavy industries  Southern seaboard + Western seaboard

39 III. Policy Measures Financial assistance through some financial institutions:  Industrial Finance Corporation of Thailand (IFCT) : abolished in 2004  Export-Import Bank  SME Bank

40 III. Policy Measures Exchange Rate  Stable and overvalued in 1960 – 1980  Baht devaluation in 1984  basket peg  More flexibility after July 1997: managed float

41 III. Policy Measures Others:  Labor training Tax incentive for training by firms Training institutes by government

42 III. Policy Measures  Industrial institutes Federation of Thai Industries; institutes on textile, food, iron & steel, motor vehicles  Environment protection : Air, Water, Noise, Toxic, Solid Waste  Environment as a constraint on industrial growth?

43 IV. Future Directions Abrupt slowdown of exports in 1996  declining competitiveness, and industrial slowdown Higher labor cost, no more labor surplus cf. China, India, VN, Indonesia Recent labor shortage when factories reopen after the hamburger crisis

44 IV. Future Directions Competition from low-cost countries More protected foreign markets, despite Uruguay trade agreement  Trading blocs, less Generalized System of Preferences (GSP), voluntary export restraint (VER)  More trade opportunities with the Doha Round Agreement (when?, 2010?)

45 IV. Future Directions Exporting industries declined during the hamburger crisis ( )  Are we relying too much on the world market? (exports being 70% of GDP)

46 IV. Future Directions Deteriorated natural resources Unsatisfactory technology transfer from foreign investors, and limited R&D Limited infrastructure How to upgrade industries?