Thailand is known as the Land of the Smiles – not without reason, judging from the friendly faces that beam out at foreign visitors – but international headlines about the country have not been sunny since the military toppled the regime of Thaksin Shinawatra in a bloodless coup in September 2006.

Whatever the faults and foibles of the Thaksin regime, news of a coup rarely lends itself well to investment promotion. “I agree entirely that political stability is a must for economic stability. The coup damaged Thailand’s international reputation and sent a very wrong signal to international investors,” acknowledges the foreign minister Noppadon Pattama, part of the Samak Sundaravej administration that entered office in February, once the generals allowed elections to resume.

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Company ownership rules

In this respect, what was more damaging than the coup itself was the generals’ tinkering with the Foreign Business Act (FBA) and the rules regarding company ownership, which infuriated many foreign investors and put off countless other potential investors.

The new government says it will amend the law to make it friendlier for foreign investors. “All the rules and regulations have to be relaxed,” with regard to business, says deputy prime minister and minister of industry Suwit Khunkitti.

“From now on, things will be smoother. Democracy will go on. Most of the parties are centre-right so we pretty much go in the same direction anyway. The certainty is always there,” he adds.

Business-friendly administration

Business seems reassured about the administration’s intentions, if not entirely placated about the nuances of the somewhat complicated investment regime. “The new government has shown itself to be business friendly,” says Rodney Bain, chairman of the British Chamber of Commerce in Thailand.

His colleague Greg Watkins, executive director of the Chamber, points out that while the Thai political structure might not have matured much in the past 20 years – with power still based on patronage and geography – the business structure has.

“Business has become so strong that the ability of the government to be an impediment to business has lessened over the past 20 years and will continue to do so,” he says. “Business here is mature, sophisticated and professional and there is significant potential, particularly in the services sector.”

Record application level

Paradoxically, the effect of the FBA has been to encourage investors to go through the comparatively more open channel of Board of Investment (BOI) regulation. In 2007, BOI-approved applications surged to a record high of 744bn baht ($22.84bn) and approved foreign applications beat a record of more than 500bn baht. Most foreign companies ultimately use the vehicle of incorporating as a Thai entity.

“Investment is still growing in Thailand,” says BIO secretary-general Satit Chanjavanakul. “Whether you invest or not depends on the business factors, not the political factors. Investment in the auto sector last year grew to $5bn. Hard disk drive (HDD) producers are still investing in Thailand.

“For the first time, our exports were larger than production for the domestic market in 2007 – that should also be the case this year.” So far this year, inflows have remained buoyant, he says.

Electronics is the main export earner, accounting for one-third of the total and averaging export growth of 11% a year. But the sector also requires a lot of importing of parts, creating a negative trade balance with China, Japan and the Association of South-east Asian Nations (ASEAN). Last year, 40% of the total volume of global HDD consumption was produced in Thailand.

Electrical manufacturing push

Thailand has espoused a goal of becoming ASEAN’s leader in electrical and electronics manufacturing by 2012. To do this, it would need to increase its exports threefold and leapfrog Malaysia and Singapore.

Big investors such as Western Digital are happy to help boost those numbers. Thailand offers “plenty of engineers, plenty of workers and plenty of suppliers”, says Joe Bunya, vice-president of HDD operations of Western Digital, a California-based HDD producer with 50,000 employees worldwide, 34,000 of them at the company’s three plants in Thailand. Western Digital’s 150,000 square metre (sq m) facility at Bang Pa-in, in Ayutthaya province, is Western Digital’s largest export plant (it also has a read/write sub-assembly plant across the road).

“We do everything here – bring the parts in, manufacture the products, and send them out to customers just in time,” says Mr Bunya.

The company also has a HDD plant in Malaysia, in Kuala Lumpur, which is integrated logistically with the Thai facilities. “Malaysia and Thailand are connected by roadways, so we are able to balance operations simply by using land transportation. Delivery of our products between the two countries is very efficient.”

Western Digital says that it has been able to work well with the Thai government — political upheavals notwithstanding — on special incentives for the HDD industry. Last year, the government announced that it would set aside 1.4bn baht to fund the growth of the HDD industry. “That helps us grow the business. We could not expand in Thailand without those programmes,” says Mr Bunya.

“We do have some problems,” he admits. “There are some skills we cannot get in Thailand, such as software. But that is why we are investing heavily in training. We look after ourselves.”

The currency issue

The strong baht is another issue for the business sector – but a manageable one. Companies exporting from Thailand tend to import high volumes of components, which balances things out, and many buy and sell in US dollars anyway.

“We are always hedging a bit – we source from a number of countries and sell into different countries in various currencies, so we have a natural degree of hedging in the business anyway,” says Steve Sargent, managing director of Triumph of Thailand, a subsidiary of the UK’s Leicestershire-based Triumph Motorcycle.

Thailand is Triumph’s only overseas production location (it has two factories in the UK and three in Thailand). It shipped its first Thai-made units in October 2002 and since has delivered 1.5 million components from Thailand to the UK.

A 30,000 sq m factory at Amata City Industrial Estate, in Rayong province, started production in 2006-07 and the firm has already built another 50,000 sq m facility elsewhere on the estate. Total employees in Thailand are 883 (compared to 600 in the UK) and total investment to date is £42m ($82m). “To maintain sales growth, we needed to remain price competitive. It was no longer possible to competitively produce components in the UK and difficult to find good quality suppliers,” says Mr Sargent.

When looking abroad, the company was impressed by Thailand’s strong reputation for auto manufacturing and by recommendations from suppliers, who said their Thai plants were among their most productive. The solid skills base in the sector was considered another advantage.

Auto skills base

Long-time auto investors such as Toyota, which arrived in 1975 and is Thailand’s biggest auto producer, have helped cultivate that skills base.

Thailand produced 1.29 million cars last year, more than Italy, and for the first time units exported exceeded those produced for domestic demand.

This year, the expectation is for 1.4 million units and, by 2011, 1.8 million. The country wants to be a top 10 auto producer within the next five or six years (currently it is number 14).

Conditions are favourable: there is strong demand for its main export model, the one-ton pick up truck, and a free trade agreement with Australia has boosted sales to that market. Exports to the Middle East are also surging.

Research and development base

Toyota, Honda, Isuzu and Mitsubishi have all set up R&D centres in Thailand; Toyota, Honda and Ford have made it their regional headquarters.

Thailand serves as Toyota’s biggest production base in south-east Asia and third biggest in Asia-Pacific, after Japan and China. The company employs 13,000 people in Thailand.

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“This year, we expect to produce 550,000 units across our three plants in Thailand. Half of that will be exported,” says Suparat Sirisuwanangkura, senior vice-president of Toyota Motor Thailand Co. “We have a very strong supplier base here because of government policy decades ago to promote the industry for parts suppliers. And we get good support from the government in terms of infrastructure, utilities and the industrial estates.”

 

The company’s 34m baht plant at Ban Pho, in Chachoengsao province, opened last March and produces pick-ups for export to about 90 countries and has capacity of 100,000 units a year, with 1700 employees. The minimum wage in that part of the country is 6000 baht a month; the average engineer makes 15,000 baht.

“We can make the parts much cheaper here than in Japan, and at the same quality,” Mr Sirisuwanangkura says. “But we are not just benchmarking with Japan but with locations around the world, including China.” For the moment, he says, quality is still better in Thailand.

IN FOCUS

Supplying the steel sector

Thailand is attracting the interest of some of the largest steel manufacturers in the world, including Mittal and Nippon, as well as the big Chinese producers.

One major supplier is already there waiting: Danieli, an Italian developer of technologies and manufacturing equipment for steel production. It opened a production and engineering centre in the Eastern Seaboard Industrial Estate in Rayong province in July 2007 and is already expanding, having just completed construction on a hydraulics shop in May. Its 330-metre workshop is one of the largest in Thailand.

From the 360,000 square metre site, in which it has invested £65m ($126.94m), Danieli exports 2000 tonnes of finished steel products every month to customers around the world – produced by its 1500 permanent employees, including about 200 engineers. “We put a big emphasis on training. Currently we have 160 students in training here,” says Giorgio Segurini, managing director of Danieli Far East.