Thailand Should Benefit From Japanese Firm Relocation

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FDI

Thailand should benefit from Japanese firm relocation

By SUCHEERA PINIJPARAKARN

THE NATION

Thailand stands to gain in the long term as many Japanese companies will relocate their production out of their own country in the next two to three years to smooth production disrupted by this month's earthquake and tsunami.

Prominent economist Sompop Manarungsan said at a seminar on the economic outlook and baht trend for Thailand that the nuclear crisis could lead to some energy problems in Japan. Meanwhile, Japan will soon face severe labour shortages due to the higher proportion of ageing population.

"Japanese companies need to search for new production bases, and Thailand is among the attractive countries thanks to the availability of labour and facilities. The relocation could happen in the next two to three years," he said at the seminar held by Bank of Ayudhya.

He acknowledged that in the near term, the disaster in Japan would reduce foreign direct investment in Thailand, as Japanese companies, which contribute one-third of total FDI here, may need more funds at home for the restoration process.

As funds flow into Japan, which estimates damage of up to US$309 billion (Bt9.35 trillion), Thailand could also witness lower capital inflows than last year. Still, Sompop is convinced that the Thai economy this year will expand 4-5 per cent as expected. Economic activities should continue as usual, though the central bank's policy interest rate may rise to 3-3.25 per cent by the end of this year to cope with rising inflation.

HSBC Global Research also highlighted Thailand as one of beneficiaries from the disruption in the global supply chain due to the Japanese quake and tsunami.

"The world has now witnessed a series of natural and political events that have exposed concentration risks in global supply chains," it said in a research note. "Already, firms have taken steps to diversify production and sourcing sites to become more nimble in the face of periodic adversity. Japan's disaster will only reinforce this trend.

"For Asia, this means a spread of production sites across the region. Vietnam, Thailand and Indonesia

stand to benefit the most from greater foreign direct investment."

The research showed that global supply chains rely heavily on Japanese components. The country remains a major supplier of key products to global industry, most notably hi-tech products and car parts.

A number of countries are especially dependent on imports from Japan. For example, Japan produces about 90 per cent of all BT (bismaleimide-triazine) resin, a crucial material used for packaging semiconductors, and makes almost 60 per cent of raw wafers used for global microchip production. It is the shortfall of these products in particular that led to worries over a lasting supply-chain crunch in the IT sector.

After the devastating earthquake and tsunami, about 15-20 per cent of world production of wafers and the majority of BT resin capacity were taken offline because of electricity shortages and outright destruction of manufacturing facilities in northern Japan.

The car industry was also badly hit by the disaster. A number of key component suppliers had to shut down production, while transport bottlenecks, especially port and road congestion, severely limited the ability to ship goods. In this industry, Thailand once more leads the way in terms of exposure, while South Korea, China and Malaysia are also heavily dependent.

Japanese firms, which continue to be a major source of FDI into Asia, are likely to reallocate their investments into Asean economies in particular, notwithstanding how the recent quake would affect the speed of strategic decisions in the immediate term.

China may continue to be an important investment destination for these firms, but they are increasingly aware of the rising wage costs there as well. Hence other countries with a large population on relatively low wages could be beneficiaries of the diversification wave. Indonesia, Vietnam and Thailand stand out in that regard.

Although rigid labour laws continue to prevent Indonesia - which has the largest population in Asean - from tapping its human potential to its full extent, the relatively low wages there should continue to make it look attractive. Moreover, the country's abundant commodities are a big plus.

Meanwhile, Vietnam's sizeable young population is also an attraction, so much so that it is ranked highly in investors' surveys, despite the macroeconomic challenges.

Compared with its more populous peers, Thailand may be less competitive in terms of wages. Nonetheless, Thailand offers relatively better infrastructure and labour-skill levels. Also, it has developed niches in specific sectors such as automobile production that should continue to be attractive to Japanese investors.

If the political overhang here is resolved to some extent this year after the upcoming general election, the country could be even better positioned.

Elsewhere, the Philippines continues to be dogged by poor perception, scoring below the regional average in the Global Competitiveness Survey on a number of key dimensions, for example. And Malaysia, with a population of 28 million, can never really hope to compete on labour costs.

-- The Nation 2011-03-25

[asiawatcher]

It is certainly a valid observation and high probability. The key issue is to have Thai incentives such as purple zoning extended and BOI tax free income for 8 year period tabled as incentive. And some improvements in road and transport from Thailand's side to move goods to outgoing ports for export is necessary and perhaps a drop in the bureaucracy nightmare for attached to doing business in Thailand!

[scorecard]

It is certainly a valid observation and high probability. The key issue is to have Thai incentives such as purple zoning extended and BOI tax free income for 8 year period tabled as incentive. And some improvements in road and transport from Thailand's side to move goods to outgoing ports for export is necessary and perhaps a drop in the bureaucracy nightmare for attached to doing business in Thailand!

Long-term I wish Thailand would take an adjusted approach to such opportunities and do whatever is needed (in terms of support / subsidies etc., ) to spread investment (therefore work opportunities) all across Thailand.

Just this week there was a news article about more Thai children abandoned by their parents. This has many factors, but one factor is clearly to do with long-term separation whilst parents (often both parents) are working in a distant location, often both parents doing extra overtime, often the funds are sent home but the damage in terms of long-term seperataion from parents / grow up having had very littel contact with parents is doing massive and irreversable damage.

Several highly credible socialogy professors have been researching this subect for quite a few years, and their findings are disturbing.

One example, kids living is Essan with elderly grandparents who don't push the kids to go to school (because they don't understand the importance of education), and if you ask the kids about their mother, the reply might well be "Yes I have a mother but I forget what she looks like".

There is more and more evidence that concentrating industrialization in just a few locations (Eastern Seaboard the biggest example) is doing massive long-term damage to family life.

In some states in India foreign investment is strongly encouraged and is supported by taxreaks, subsidies etc., but the investor must agree to start their operations in whatever location is dictated by that state government, all to ensure that work opportunites are spread. (Is it another opportunity for corruption? Probably yes, but better than causing massive social problems).

[Siripon]

This Japanese disaster could well be a blessing for Thailand as companies relocate here to avoid further losses and interruptions back home. More jobs in Ayuttaya and the Eastern Seaboard.

The problem of separated families due to parents migrating for work is a tragedy,many Issan families have moved into the Rayong area,indeed everywhere in Thailand, but many more are transient constructiont workers with no permanent base for their children to live at, so the kids stay at home with the grandparents. Let's hope the present rubber boom continues, a lot of Issan land is being converted to rubber plantations and if the high prices continue it can only be of benefit to Issan.

[geriatrickid]

Thailand has a skilled labour shortage and aging population as well.

Japanese investments will be in Japan, not Thailand and when Japan re-enters foreign investment, it will be weighted to Vietnam.

[SomTumTiger]

Thailand has a skilled labour shortage and aging population as well.

Japanese investments will be in Japan, not Thailand and when Japan re-enters foreign investment, it will be weighted to Vietnam.

Prominent economist GK has spoken.

[bkkjoe]

Having worked in Vietnam for some years, and now in Thailand, I can say that Vietnam is now very real alternative to Thailand for Japanese firms. The labour cost is still much lower than that of Thailand, and are well educated cross the board unlike Thai in general. On the ground, Vietnamese seem more hard working and eager to learn new skills from Japan than Thai. I think Thai have become too lazy (or have always been and will be?). Thailand is becoming ageing country now while being as a developing country, while some 60%+ population in Vietnam is less than 30 years old.

I think In 3, 5, 10 years time, Vietnam will be a more advanced country than Thailand.

So why am I here in Thailand? That's another story.

[MaiChai]

Japan has been moving production out of Japan for some time. There are many reasons, but the one near the top is Japan has very little usable land for factories, and another would be high labour costs. Typically they like to keep production in Japan for very advance, high tech or high cost products; basically they dont trust production of these outside Japan to be as good. They really value their reputation.

Vietnam is where alot of Japanese investment is now going. Thailand has benefitted from being available as a manufacturing base much earlier than other Asian ecomomies, but is now becoming expensive and too developed.

Edited March 25, 2011 by MaiChai