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Thailand’s Eastern Seaboard – Quietly Confident in 2009

February 10th, 2009 · No Comments

Thailand’s Eastern Seaboard (ESB) zone’s fundamentals are strong enough to weather the global recession and to maintain its position as a regional hub for manufacturing, petrochemical and export-based industries, according to industry experts.

They say its solid infrastructure, logistical facilities and utilities, underpinned by highly competitive Board of Investment (BOI) privileges and a relatively cheap, well-skilled workforce, will continue to attract foreign businesses investing in Asia.

These positive strengths, combined with its geographical location, make Thailand an industrial focus for multinationals seeking to export throughout the region and to penetrate its local markets. But political stability, good governance and the rule of law must be returned in order to rebuild investor sentiment that was shattered by last December’s airports blockade by anti-government protestors.

Furthermore, forward-looking policies such as extending BOI investment privileges to service industries like IT and research and development, improving the quality of, and access to, further and higher education, and the easing of existing employee-focused labour laws will help build and maintain the country’s regional competitiveness.

The ESB Credentials
The ESB is Thailand’s core industrial development zone, one of its fastest growing economic regions and the second largest contributor to the Thai economy.

It has the highest gross regional product outside of Bangkok and its vicinities, at around 1.3 trillion baht per year, according to the National Economic and Social Development Board. It also enjoys some of the region’s best BOI privileges. These include up to eight years corporate income tax holiday (capped at the value of the initial investment), with an additional 50 percent reduction for a further five years; import tax exemptions for machinery; and up to a 75 percent cut in duty on essential raw materials.

These incentives have attracted industry clusters such as automotive, petrochemicals, plastics and polymers, electronics, packaging, logistics, agro and others. “The tax incentives alone can make it worthwhile investing in the eastern seaboard,” says Graham MacDonald, Managing Director of the MBMG International Group, an investment and business consultancy advisory, Vice- Chairman of the British Chamber of Commerce Thailand (BCCT), and Chairman of the BCCT Eastern Seaboard for eleven years.

Quality logistics and utilities, which have been continually developed over the past decade, are an added draw for manufacturers. Its two deep-sea ports, Laem Chabang – the world’s 21st busiest container port by volume, according to the American Association of Port Authorities – and Map Ta Phut in Rayong, make importing raw materials and exporting goods for sale easy.

“The [ESB’s] core strengths are the fact that everything is in close proximity to each other, which means that a company’s supplier is very accessible,” says MacDonald. “One of the great things about the eastern seaboard is the continuing growth and strengthening of what is already an excellent infrastructure.”

Recent improvements in the ESB’s logistical infrastructure have bolstered its position, says John Hamilton, Director of Transportation and Industrial Services, Waste Management Siam.

“Access to the new Suvarnabhumi airport is a very easy 90 minutes maximum on prime highway from every industrial zone on the eastern seaboard. The infrastructure on the industrial estates on the eastern seaboard is strong with very good utility supplies,” he says. “Completed road network improvements on the 331 highway makes Hemaraj Eastern Seaboard Industrial Estate only 20-30 minutes by car from Laem Chabang port, when it would have taken an hour before”

Furthermore, “Shipping costs are at their lowest for four-to-five years due to excess capacity in this sector, and port capacity in Laem Chabang is under-utilised, so it can grow without further investment for four to six years.”

The ESB has Thailand’s highest industrial estate supply, with 16 major industrial estates, and a total area of 69,635 rai (27,531 acres) of the country’s total 104,279- rai supply, according to Colliers International Thailand, a real estate agency. A recent report from the firm says approximately 24,040 rai will be added to supply by 2010, with the vast majority, 14,713 rais, being developed in the Eastern Seaboard.

While the ESB has a relatively low occupancy rate of 70 percent, it has the country’s highest take- up rate at 48,885 rais, and the biggest growth will be in smaller- scale manufacturers, says Risinee Sarikaputra, Head of Research, Colliers International Thailand. While transport and utilities are generally good in the ESB, industry experts say the country’s outdated single-track rail system needs to be upgraded.

The ESB is a focus for the petrochemicals industry, with operations by PTT and SCG Chemicals, and joint ventures with major global firms such as Mitsui Chemicals.

“The whole petrochemicals industry, gas separation plants, refineries and so on has seen major investment over the past 25 years from companies like PTT Siam Cement and a host of other people,” says David Nardone, President & CEO, Hemaraj Land And Development, which operates many of ESB industrial estates. “That investment is continuing, and as they go downstream they are getting higher value added to their product, so Thailand is pretty competitive for local and export markets.”

A Detroit of the East
Thailand is the world’s 14th largest auto manufacturer, in terms of production, at around 1.4 million vehicles in 2008, according to CSM Worldwide, a global industry forecaster. That said, its plans to be 10th, by annually producing 2 million units by 2012, may well be hampered by current economic conditions, it says.

Its diverse export market is broken up between Asia, 30 per cent, Oceania, 30 per cent, the Middle East 15-20 per cent, Europe 10 per cent, with Latin America and Africa importing the rest, according to CSM Worldwide.

The ESB, previously dubbed the “Detroit of the East”, is at the heart of the local industry, and is home to the “Big Three’s” local operations – GM, Ford, Chrysler. Leading Asian OEMs Toyota and Suzuki, are also based here. The ESB is Asia Honda Motor’s leading Asia-Oceania production centre and the company opened a second plant, costing 6.3 billion baht, last October, to double its capacity and create an additional 2,200 jobs.

“The only other regional economy which is close is Indonesia, which also has the capability to expand,” says Nardone. “Malaysia’s market remains limited, with a small population, little or no exports, while incentives for national cars shut out other manufacturers.”

He continued, “Auto parts are now about 30 percent of Thai automotive exports, so these strategic industries, with the niche market on the one-ton pickup, put Thailand in quite a strong position.”

Nevertheless, the local industry expects to see a 20 to 30 percent slump in production next year as global demand declines sharply, according to the Federation of Thai Industries, which predicts recovery will take two years. It says the impact on the Thai labour force will be severe – and GM (Thailand) recently suspended operations at its Rayong factory for December and January, and lay-off more than 250 employees.

“The global economic slump will see more production suspensions and lay-offs in 2009,” says Surapong Phaisitpattanapong, spokesman, FTI automotive industry club. “First, contracts with subcontractors will not be renewed. Second, overtime will be cut. Third, we’ll see voluntary retirement for employees.”

Labour Unions

Industry has a generally positive view of the ESB workforce’s quality, but there has been a recent groundswell in union activity catalysed by the local impact of the global economic downturn.

“In general, businesses are pretty happy with the local workforce,” says Alain Deurwaerder, Managing Director, Katoen Natie Thailand, a logistics and value added high- tech services company. “Blue-collar workers are relatively easy to find and if they lack skills they are very easily trained.”

But finding suitable candidates for engineering and middle management posts is a tougher task as talent tends to be drawn to Bangkok at the expense of outlying regions, Deurwaerder explained. “Thailand has an enormous untapped potential for talented people who currently don’t have the opportunity to take part in higher education because of its cost and the difficulty of access. Addressing this problem has to be the focus of any government to make Thailand competitive.”

Industry would also like Thai unions to take a more mature approach to workplace disputes. “They’re inexperienced in dealing with companies and negotiating in a mutually beneficial way,” he says. “It’s a learning process that will be smoothed out eventually, to a pattern where things will be resolved without having to go on strike.”

The downturn, Nardone says, is a “wake-up call” to the local workforce. The days of multiple- month bonuses and 6-plus percent annual pay rises are over, at least for the time being, as are the times when employees could move from job to job with ease.

“It’s a wake-up call for organised and unorganised labour in Thailand,” he says. “Everyone is going to have to pitch in, in terms of preserving jobs. Pay rises of 6 percent per annum were to help employees deal with inflation, but when inflation and company profits plummet, pay rises and bonuses need to be adjusted accordingly.”

But Hamilton stresses the positives too; beyond forcing employees to be more loyal to their employers, the current situation also gives firms the opportunity to streamline their operations, and for smaller companies to pick up available talent. “For existing business this is a good time for consolidation of work force cutting of any dead wood, which may have been accumulated when business was better,” he says. “It is also a good time to pick up good staff who may have been let go from larger companies.”

Brooding Shadows

Broader effects of the global recession are being felt throughout the ESB and the rest of Thailand. These have taken a toll on applications for foreign direct investment through the Board of Investment, where total foreign net applications fell to 221.4 billion baht for the first nine months of 2008, down 33.8 per cent YoY.

“The slowdown in domestic consumption will hamper growth in the local market. Export potential is limited at the moment due to the global financial slowdown in major markets like Japan, Europe and US,” says Hamilton. “This is an issue for all developing nations.”

“The reliance on the automotive sector is great down here so there will be no avoiding a slowdown. On the positive side, the bulk of the products the automotive companies are producing are small, fuel efficient vehicles so they should not be as effected as the high-end vehicle producers.”

The ESB’s fundamental infrastructure, the long-term view of businesses investing there and the predictability and stability of institutions like the BOI are cited by industry observers as key reasons why the zone should be able to bear the full brunt of the global downturn, and continue to fend off competition from Vietnam and the Philippines. The fact that the country was forced to implement a number of checks and balances throughout the banking and finance sector after the 1997 Asian financial crisis has made it more robust. Analysts say that three years of political instability meant that the country’s banks did not expand by investing in the complex financial instruments at the centre of the credit freeze. Their reliance on local deposits has better insulated them from the worst effects of the resulting firestorm.

“Given what’s happened in the whole global economy the investment market is going to be slower, whether that’s for 6, 12 or 18 months is hard to predict,” says Nardone. “But European and other foreign companies are not all coming to Thailand just for local costs. They’re doing it to access the local market, so they won’t just jump from country to country.”

“You can see larger Tier 1 suppliers have operations throughout the region. Different things in each country give them economies of scale, they can then trade these commodities throughout the region, while increasing their risk diversification.”

However, the country’s political turmoil and recent violent protests that targeted the economy by closing airports were like pouring gasoline on a fire, he says. Opinions shared by Deurwaerder. “The biggest effect is the financial crisis, no one can escape that. But politics is the biggest worry. A lot of directors out here say their operations are among the most profitable within their respective groups. So it’s still an attractive place for production.”

“If we have a stable government, what happened last year will be forgotten pretty soon. However, if there is further turmoil and violence worsens then it will take a long time to regain confidence. Headquarters in Europe and elsewhere are taking the situation in Thailand very seriously, and are asking us if it is worth investing further. If the situation normalises I would say yes indeed.”

Thailand is still years ahead of its regional competitors in terms of infrastructure, incentives and regulations, but complacency is its biggest enemy, says MacDonald. Overcoming this issue is the key to maintaining ESB’s success.

“Thailand must not rest on its laurels and it should continue to adapt to suit people’s needs and requirements,” he concluded. “This is why people have come in the past and why we must ensure they will still consider Thailand’s Eastern Seaboard in the future.”

Originally published in January 2009 edition of The Brief (British Chamber of Commerce Thailand magazine)

Tags: business · features · Thailand

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