Political clouds have partly dimmed Thailand’s FDI star since early last year, but in recent years it shone brightly in surveys, statistics and anecdotal accounts. The country is south-east Asia’s second largest economy and it has carved out an FDI niche – worth $7.9bn in 2006 according to United Nations Conference on Trade and Development (Unctad) estimates – as east Asia’s leading alternative to China, thanks to often better infrastructure, costs, regulations and human resources. These factors helped Thailand to rank third in all of Asia in 2005 in Unctad’s most recent predictive survey of FDI, trailing only the far larger markets of China and India.
The growing ranks of sceptics, however, see Thailand’s recent political uncertainty as a deterrent. Doubt began in January 2006, when political gridlock ensued after the family of then prime minister Thaksin Shinawatra sold their telecoms group, Shin Corporation, to Singapore’s government investment arm, Temasak, for a tax-free $1.8bn. Months of protests culminated in a bloodless military coup on September 19. The interim administration of prime minister Surayud Chulanand has slated elections for December this year; however, a series of political and economic missteps have eroded confidence.
International investors have complained, especially about proposed changes to the Foreign Business Act (FBA), which is meant to close legal loopholes on non-Thai holdings of corporations engaging in restricted sectors, mostly services such as telecoms. Capital controls, imposed clumsily on December 19 to combat the Thai baht’s year-long rise against the dollar, further riled investors with requirements such as a 30% withholding on baht purchases. Manufacturers were largely exempt from this and the FBA plan, but were discouraged by the government’s fickleness.
Then came a series of bombings in Bangkok on New Year’s Eve that killed three people. Still unsolved in early April, the incident has been blamed variously on Islamist rebels, disaffected military elements and Thaksin supporters. Doubting investors solved the quandaries by betting elsewhere: the US firm First Solar, for example, chose Malaysia over Thailand for a $100m photovoltaic manufacturing facility in January.
Yet believers say that Thailand’s advantages persist, proven by several large investments since the coup. Against the odds, Board of Investment applications in January and February rose 77% in value terms year on year, to a total of about $2bn among 244 projects. Most of the post-coup proposals came from manufacturers that were already on the ground in Thailand in industries such as automotives, consumer goods and electronics. Among them have been three disk-drive makers: Nidec, with a $450m plan; Fujitsu, with a proposal of similar value to employ 13,000 workers; and Western Digital, with a $1bn project.
For companies like these, Thailand offers advantages over China and other competing countries on both hard and soft factors. Hard considerations include traditional criteria such as overall costs, human resources, logistics, supplier networks and government incentives. The soft factors are inducements like lower cultural barriers, fewer hassles and higher quality of life.
Less red tape
Thailand does rate as an easier place to do business than China, thanks to factors such as wider use of English and less red tape. A tradition of free enterprise helped Thailand to rank higher than any other low-cost economy in Asia in the World Bank’s exhaustive 2006 survey, Ease of Doing Business. Only Singapore and Hong Kong beat Thailand within the region; China ranked 16th.
“Manufacturers can own 100% of their Thai operations, unlike in China and other Asian countries, where joint ventures are required,” says Thomas Reese, president of Amata Corporation industrial estates. He credits this advantage with helping to attract many of the 500 factories at Amata’s two Thai sites near Bangkok, including blue chips like BMW.
Thailand often has human resource advantages over China, where bottlenecks and rising costs have been widely reported. UBS survey data shows that annual gross wages for unskilled and semi-skilled workers in 2006 were cheaper in Bangkok, at $1500, than in Shanghai, at $2100. Bangkok’s skilled labour also cost less at $4700 compared with Shanghai’s $6700. The difference widened at higher levels: a factory department head in a Bangkok manufacturing firm commanded $15,300 versus $25,400 for a Shanghai counterpart.
While the Thai baht has risen against the dollar since the most recent UBS survey was conducted early last year, local labour costs are not rising at the fast rates seen in China. In March, the Hay Group’s Global Pay Day Report, for example, predicted that inflation-adjusted pay for administrative, professional and senior management level employees would rise less than 2% this year in Thailand compared with increases of between 7.9% and 8.9% in China.
“In the auto industry, labour rates are higher in China than in Thailand if you take into account mandated benefits like housing that need to be paid to the Chinese government,” says David LaForest, managing director of TRW Fuji Serina, an engine parts plant at Amata Nakorn industrial estate that will soon triple capacity to serve customers throughout Asia, Europe and America.
Thailand’s rates for key utilities are competitive with China’s, according to 2006 data from the Japan External Trade Organization. Business-use electricity costs less than $0.042 per kilowatt-hour in Bangkok, compared with peak rates of $0.11 in Shanghai. Industrial water fees in Bangkok range from $0.24 to $0.51 per cubic metre (/m3), while costs in China range from $0.15/m3 in Shanghai to $0.69/m3 in Beijing. A three-minute call to Tokyo costs $1.46 from Bangkok; the same call would cost $3 from Shanghai.
Thai transport benefits from the country’s strategic location at south-east Asia’s geographic centre, and mid-way between India and China, say logistics pros such as Johan Vermeiren, general manager of Thailand operations for Dubai-based Gulf Agency Company (GAC). Mr Vermeiren praises infrastructure upgrades like the doubling of capacity at Laem Chabang Deep Sea Port, near GAC’s new distribution centre at Amata Nakorn industrial estate. Yet upgrades cannot overcome China’s cost advantage in sea-freight; high container volume brings down rates by 25% compared with Thailand, says Mr Vermeiren. Air freight is another story: “It’s 60% more expensive in China. They just can’t cope with capacity there,” he says.
Grade A office rents are cheaper in Thailand. CB Richard Ellis rated total occupancy costs at $4.08 per square foot in Shanghai’s Pudong district, compared with $1.91 in Bangkok, as at Q4/2006. Those differences are mirrored in Thailand’s lower expatriate living costs. Bangkok’s rank in the 2006 global Cost of Living Survey by Mercer Human Resource Consulting fell two places from the year before to 127th, while Beijing climbed five rungs to 14th and Shanghai rose 10 places to 20th.
Cost edge continues
Thailand’s cost edge on China and regional rivals, such as Singapore and Malaysia, has been blunted somewhat by the baht’s 14.8% climb on the US dollar in 2006. But for many exporters, the currency’s appreciation has made little difference because overall local costs are low while many inputs are sourced abroad. TRW Fuji Serina, for example, imports its main raw materials, which are metal alloys. Evidence that Thai exports remain competitive despite a rising currency can be seen in 2006 export growth of 17.4% year on year, which helped to drive economic growth of 5.1%.
Exports by foreign-affiliated factories and others are boosted by Thailand’s growing roster of bilateral and regional free trade agreements involving countries such as Australia, India and China. The regional Asean Free Trade Area lowers barriers among the 10-member Association of Southeast Asian Nations (Asean), encompassing a market of 600 million people. The Thailand-Australia Free Trade Agreement, signed in 2005, is credited with boosting exports to Australia by 30% last year, including manufactured products such as automotives and parts, air-conditioners, processed seafood and machinery.
The Japan-Thailand Economic Partnership Agreement, which was signed on April 3 and is due to take effect by October, is expected to have a big impact on exports and FDI. Free trade agreements with the US and other partners are also planned.
Pursuit of knowledge
Foreign investors increasingly choose Thailand for ‘knowledge’ operations, such as regional headquarters and R&D centres, attracted in part by new incentives from the government’s Board of Investment. Infant nutrition specialist Mead Johnson recently established its largest R&D centre outside the US at its factory at Amata Nakorn, staffed largely by Thai researchers and headed by a local scientist. “Thailand has an excellent, skilled workforce, and our R&D centre is proof of that,” says general manager Matthew Chapple.
The Bristol-Myers Squibb subsidiary also invested in high-tech production equipment to expand its factory, which will export half its production.
“It’s been a tough year but Thailand still offers the ultimate advantage, which is superior profitability,” says Mr Reese.