Does Anyone Understand The Thai Economy?

[fxm88]

I have been fascinated and baffled by the Thai economy since the day I arrived. It was in the middle of a downturn and I was confused by sellers saying things such as "If I don't sell to you then I won't sell anything all day so how can I lower the price?" which, for sure, was a sales-pitch but there really weren't any customers around and as often as not I walked away without buying -- an action often prompting some unkind words from the sellers, BTW. Things seems to have picked up a little since then but I'm still confused.

For example: there are lots of markets with many -- sometimes hundreds of -- small shops all offering exactly the same things at exactly the same prices e.g. mobile phone markets (esp. the MBK's 4th floor); any of the clothes markets; on some highways you can drive for an hour passing individual fruit stands every minute, at least. Then there's the restaurants, hotels, bars, massage places, beach chair setups, etc. All the same, nothing different. (And what's the point of advertising if you really have nothing to set you apart from the fifty places closer to your customer?) There seems to be very little innovation or even branding. A lot of these places seem to be continually on the verge of going out of business. And another thing about some of these clothes shops: they're packed full of clothes that, to be honest, are never going to come back into style. Is there a benefit to having inventory for the sake of having inventory?

I've looked around the web -- Universities, government agencies -- and while I can find lots of MBA programs I'm not finding much in the way of research on Thai economics, not at this level, not in a language I can read anyway. So I can only guess, but sadly, I'm not very imaginative.

What a lot of these businesses seem to have in common is very few barriers to entry. Anyone can sell clothes (especially if you don't have choose the design), anyone can serve a drink and (in Thailand) everyone knows how to give a massage. There seem to be very few zoning restrictions so you can set up shop out of your home. So it's easy for new sellers to come into the market and that keep profits from rising. Now, I'm not saying that a lot of money can't be made -- it was chicken farming that built this, right? But there's got to be more to the story. What is it?

Some things I don't have any hard info on e.g. how cheap and easy is it to get a loan from the government? how many markets actually have very few owners and giving only the appearance of competition? how much corruption is there and what in form does it take?

[OlRedEyes]

Understanding Thai economics is fun. Re-read Economics 101, then throw the book away.

If demand falls, prices do not go down. Demand or input costs do not have to increase for prices to rise.

Innovative ideas are scarce, and often frowned upon. Following the 'Thai Way' is good business. Copying is the norm.

Looking at items in a shop and not buying anything is very bad. Especially if you are the first customer for the day. Repeat business is seldom thought of. You buy the crap, you own the crap, don't come back and complain.

Giving service is seen as lowering yourself, therefore its not big either.

It's a different world, not neccesarily a bad world.

Enjoy your confusion. As long as it does not turn to disdain.

[~G~]

Some observations of mine -

- Thais are very suspicious of any new product. I have Thai customers asking me why my product is not on TV. Sometimes they do understand my explanation that if is was on TV I'd have to set the price much higher to cover these costs.

- If there is no big "kosana" (promotion/advertisement) then the product is considered as a "copy" and will be purchased only if its very very cheap.

- Giving discounts is sometimes interpreted as a weakness and again as a sign that the product is not "real". Fixed price gets respect. Some Thais spend half an hour bargaining, then when the price they wanted is accepted, they walk away. "Ha! We knew it's not real". That can drive you crazy. Hence the policy of no discounts.

- A quote from my Thai salesperson, who responded to my question - "how do Thais behave in our shop?": "Kon Thai for look, for read, for talk too much".

- Sales staff need to have a very gentle approach to Thai customers who are easily scared away by a pushy salesperson - hence the common phrases - "doo gorn daai na ka", "tham daai na ka" ("it's ok just to look", "it's Ok to ask"). We will not force you to buy. (by some mysterious power every establishment has - the awe of authority is the dominant factor here)

[steveromagnino]

- many of the ppl doing these non innovative businesses have no education and minimal skills....they have the energy but not the creativity

- the barriers to entry of these businesses are very low

- the risks of innovating are that you will be copied very quickly (look at the Siam Square for that sort of thing) so this is in itself a difficulty because innovation does not deliver the super normal profits for a long duration that it might overseas

- the supply chain for many of these "same" product types are actually the same logistics supplier in the background; they might have 10 stores the same, and supply through 1 warehouse facility somewhere else in the building (e.g. MBK mobile phones)

- the value of branding is difficult; for an SME being Thai automatically means "mid to low quality" so why invest in branding? On the other hand, there are plenty of Thai brands that are well known even outside Thailand, and certainly well known here... hmmm The food brands, Jaspal, Greyhound, etc

Sometimes the things sales people say are not a good indication of what the underlying factors of the market are; they are earning what, 200 b or less a day and in many cases are under orders to do things and don't have any authority to do otherwise. Couple that with the desire to keep you happy, and you'll hear all the time what you want to here, confusing as that may be.

I run one of Bangkok's premiium shopping destinations and I can advise we have absolutely no problem with Thai people willing to spend 100,000b on a handbag or whatever. MOst of our customers are Thais.

However, those same people will often go and haggle for a kg of fish or whatever at the market.

[txp158]

The answer is simple. The people you see on street or at pawn shops selling small and frivolous items don't care much about economic. Most of the stuffs in these shops are from unkown sources, so branding is out of question here. You can not brand your own store if some of the stuffs you are selling are possibly illegal...er right?? Taxation is also out of question because there are no record of what is sold, and where the stuffs are coming from. In brief, the small shop people are only there to make a quick cash. They only invest their money in what they know will sell. The cell phone and small items are the catch. Moderate and humble life style is over-valued here in Thailand. If something is very very cheap, given that it's not broken, it's likely to be sold.

Corruption in Thailand takes many forms from the explosive detection device known as CTX machine, ambulance purchased by the department of public health, agriculture product and runway cracking of the new international airport. The story is rather confusing and there are so much debate going on now. The case regarding CTX machine is a good incident of the current goverment corruption. You can read about this issue in bangkok post or in case you can read thai, manager online at www.manager.co.th is a good place to read about corruption in Thailand. If you can't find anyway to read about it, maybe if I have enough time I'll try to summarize how the CTX incident takes place.

Edited October 9, 2005 by txp158

[~G~]

I run one of Bangkok's premiium shopping destinations and I can advise we have absolutely no problem with Thai people willing to spend 100,000b on a handbag or whatever.  MOst of our customers are Thais.

A Handbag for 100K baht? Can I get one? It must be good.

[~G~]

- the value of branding is difficult; for an SME being Thai automatically means "mid to low quality" so why invest in branding?  On the other hand, there are plenty of Thai brands that are well known even outside Thailand, and certainly well known here... hmmm The food brands, Jaspal, Greyhound, etc

Samart is quite successful with iMobile. There are many other retails shops who brand themselves. Even the small shops in MBK try to brand themselves - very minimally, to keep this expense as low as possible. Many of these shops do very well over years - I believe their success rate is higher than the average farang biz in Thailand.

The people you see on street or at pawn shops selling small and frivolous items don't care much about economic

They care a lot about the economics that matters: income minus expenses equals profit. You'd be surprised as to the sophistication of the trade in MBK, especially the way these shops link with each other, as to minimize their own stock, and to maximize advantage from a successful location. It is certainly not a trivial suppliers->shops mechanism.

Edited October 9, 2005 by ~G~

[The_Other_Mac]

Everyone wants to run their own business, it's a sign of succcess. What's the failure rate for little farang-run beer bars in Samui?

[samran]

Its funny how people are saying 'forget the economics text book'. In fact, its all economics, just not European/US/Australian economics.

Any demand curve is made up of tastes and preferences (what do people like to buy and how do they like to buy it?)

And every demand curve has various levels of elasticity, hence, the willingness to fork over 100,000THB for a louis vitton bag, cause you can only get it at Emporium or Siam Paragon, but happy to haggle over 10 baht for a kilo of fish, cause the next guy sells fish too.

[fxm88]

Its funny how people are saying 'forget the economics text book'. In fact, its all economics, just not European/US/Australian economics.

<{POST_SNAPBACK}>

Well then by all means please help us to understand Thai economics (which is why I started this thread). I've got a hypothesis or two. For example, I've read a little about "prospect theory" which suggests that [western] people feel approximately twice as much pain from a loss as the pleasure the feel from an equivalent gain. I've got an idea that Thai people feel 5x as much pain from a loss, maybe more. It's no doubt a cultural difference but from what part of Thai culture does behavior like that come from? Buddhism? Face? Class? Poverty? Something else? If it is as simple as good old supply and demand then why does it so often appear that prices do not decline when demand drops off (or disappears altogether)? "Zero-profit" conditions suggest that in markets like those apparently in Thailand no-one should be able to make any profits at all -- but if that's not the case -- as suggested by some of the above posts -- why not? What else is going on?

[~G~]

"Zero-profit" conditions suggest that in markets like those apparently in Thailand no-one should be able to make any profits at all -- but if that's not the case -- as suggested by some of the above posts -- why not? What else is going on?

<{POST_SNAPBACK}>

Willingness to be satisfied with very little in hard times and just keep the business going.

[samran]

Its funny how people are saying 'forget the economics text book'. In fact, its all economics, just not European/US/Australian economics.

<{POST_SNAPBACK}>

Well then by all means please help us to understand Thai economics (which is why I started this thread). I've got a hypothesis or two. For example, I've read a little about "prospect theory" which suggests that [western] people feel approximately twice as much pain from a loss as the pleasure the feel from an equivalent gain. I've got an idea that Thai people feel 5x as much pain from a loss, maybe more. It's no doubt a cultural difference but from what part of Thai culture does behavior like that come from? Buddhism? Face? Class? Poverty? Something else? If it is as simple as good old supply and demand then why does it so often appear that prices do not decline when demand drops off (or disappears altogether)? "Zero-profit" conditions suggest that in markets like those apparently in Thailand no-one should be able to make any profits at all -- but if that's not the case -- as suggested by some of the above posts -- why not? What else is going on?

<{POST_SNAPBACK}>

Ahh young grasshopper, you are talking economics, though you do not know it. Go off and look up the concepts of ‘Marginal Utility’. Derivatives of this can be the Marginal Utility of Income and the Marginal Utility of Consumption.

Also, the concept of profits in economics is not the same as the accounting concept. Go look up ‘normal profits’ and see what they are.

[Heng]

Its funny how people are saying 'forget the economics text book'. In fact, its all economics, just not European/US/Australian economics.

Well then by all means please help us to understand Thai economics (which is why I started this thread). I've got a hypothesis or two. For example, I've read a little about "prospect theory" which suggests that [western] people feel approximately twice as much pain from a loss as the pleasure the feel from an equivalent gain. I've got an idea that Thai people feel 5x as much pain from a loss, maybe more. It's no doubt a cultural difference but from what part of Thai culture does behavior like that come from? Buddhism? Face? Class? Poverty? Something else? If it is as simple as good old supply and demand then why does it so often appear that prices do not decline when demand drops off (or disappears altogether)? "Zero-profit" conditions suggest that in markets like those apparently in Thailand no-one should be able to make any profits at all -- but if that's not the case -- as suggested by some of the above posts -- why not? What else is going on?

Now this isn't unique to the Thai economy but for myself and my family it has nothing to do with Buddhism, Face, Class, etc. It's economics pure and simple. We don't lower the price on real estate holdings or whatever non-perishable assets because from the top to the bottom, there is no financing pressure. As a matter of policy, even capital purchases should be cash and carry, or at worst case, taken care of with internal financing (and thus not subject to market risk/fluctations), or paid off as quickly as possible. All too often in the west, we are used to seeing double mortgages, these new all interest/no equity mortgages, 30 year mortgages, etc. People are always asking for the longest (and highest interest risk exposure) terms possible. Over here, all I see around me is people religiously trying to pay things off within the first 12-18 months of a 15 year loan.

Now, many would argue that you see people living on credit and up to their eyeballs in debt. IMO, these are typically representatives from 80% of the population that do not own 80% of the country's assets, products, goods and services. That's only about 20% of the population... who I feel tend to conduct business and live more closer to a zero-cost (no financing) philosophy as mentioned above.

So increasing or decreasing interest rates (and often economic downturns in general) often don't mean anything in terms of pricing. This might cause folks who are waiting for the bottom to drop out of the market to scratch their heads, but that's the way it is.

Now, I'm mostly only familiar with real estate type issues, what products or services are you thinking of in your post?

Edited October 10, 2005 by Heng

[steveromagnino]

I think the zero borrowing is relating more to Chinese rather than Thai Thai custom...common practice for many Thai CHinese to practise cash accounting; and try to always be not borrowing....

The funny thing is that it sits against the odd customs of blowing it all on gambling, weddings and "face things" like er, 100k handbags (which are a very nice BTW :-).

Gotta look like a success I guess.

Yep, it amazes me too the level of debt that people are willing to deal with, but I suspect at least some of that is a generation thing. My mum would not dream of hving a mortgage of a term more than 5 years; for my brother and I we would buy the nice place with a 25 yearer without not sleeping.

Re. all doing the same thing... well if there is enough demand most people do ok; just look at the MBK telephone biz.... and especially if ok ain't that much.

[The_Other_Mac]

Now, many would argue that you see people living on credit and up to their eyeballs in debt.  IMO, these are typically representatives from 80% of the population that do not own 80% of the country's assets, products, goods and services.  That's only about 20% of the population... who I feel tend to conduct business and live more closer to a zero-cost (no financing) philosophy as mentioned above.

<{POST_SNAPBACK}>

Well now, there were quite a few property developers that were living on credit in June 97. Not to mention some state mega-projects. Where does that fit in?

[Heng]

^ A lot of those cases were "other people's money." I'd be more than happy to take outrageous risks with capital as long as it has no impact on my own holdings. Also, I'm not saying one won't be able to find any examples those not following the low/zero cost philosophy.

[Heng]

I think the zero borrowing is relating more to Chinese rather than Thai Thai custom...common practice for many Thai CHinese to practise cash accounting; and try to always be not borrowing....

The funny thing is that it sits against the odd customs of blowing it all on gambling, weddings and "face things" like er, 100k handbags (which are a very nice BTW :-).

Thai Thai, Thai-Chinese.... not same same, but same same enough for us.

It's all relative. A 100k handbag might be frivolous to some, but to other's it's half a days interest income. I've yet to see a businessman who's spent much of their youth building their fortune blow it all on gambling or weddings. Plenty though who got rich quick and subsequently poor quick as well, yes.

[cclub75]

Now, many would argue that you see people living on credit and up to their eyeballs in debt.  IMO, these are typically representatives from 80% of the population that do not own 80% of the country's assets, products, goods and services.  That's only about 20% of the population...

<{POST_SNAPBACK}>

You've got a point. The rate of the BOT has certainly absolutly no effect on the "poors" because actually they borrow money at much higher rate (loans sharks) !

Regarding the prices thus, I would say that an "external" factor like oil can create a chain of prices hikes (we see already this phenomena in Thailand).

Oil is a "farang" and "hidden" factor, perfect to increase prices at home without loosing face...

[samran]

Now, many would argue that you see people living on credit and up to their eyeballs in debt.   IMO, these are typically representatives from 80% of the population that do not own 80% of the country's assets, products, goods and services.   That's only about 20% of the population... who I feel tend to conduct business and live more closer to a zero-cost (no financing) philosophy as mentioned above.

<{POST_SNAPBACK}>

Well now, there were quite a few property developers that were living on credit in June 97. Not to mention some state mega-projects. Where does that fit in?

<{POST_SNAPBACK}>

Well you have the dichotomy of half the population, with no form of equity, forced to borrow from sharks at massively high rates. Dear Leader was pretty keen on the idea of equitisation of assets for poorer people, to give them access to formal credit options. Dunno what happened to that though.

The other side of the coin is obviously an business oligarchy used to getting access to funds at cheap or easy rates. Bank lending practices were often over looked for many connected hi-so types, and prior to 97, were even relaxed for others given the speculative nature of everything at the time.

The main problem with the pre 97 situation was however the fixed exchange rate allowing Thai's to borrow money OS at low interest rates (comparative to Thai interest rates). This money was then invested into speculative, rather than profitable ventures. When the baht was attacked, and the BOT was unable to defend the baht any longer, locals were faced with foreign currency denominated debt which had just doubled.

Having said that, this is a lesson that probably 'has' to be learnt after a bout of financial deregulation. Like a kid growing up, the system doesn't know its own boundries. Australia in the 1980's experenced exactly the same thing following financial deregulation in the early part of the decades. Farmers borrowing in Swiss francs at lower rates, unhedged, were burnt when the Aussie dollar tanked. Aussie banks went on a credit binge, which caught up with everyone in the late 80's and early 90's.

With any luck though, maybe enough people in LOS have learn their lesson.

[~G~]

It's economics pure and simple.  We don't lower the price on real estate holdings or whatever non-perishable assets because from the top to the bottom, there is no financing pressure. 

Pressure is not the only issue here; it's the utilization of your assets in a way which will maximize income. You've got an asset with little or no yield over years, in a declining market; why do you choose to stick to it, no matter what, whereas you can sell it, maybe at a lower price you intended to, and put that capital in more promising channels?

[Heng]

It's economics pure and simple.   We don't lower the price on real estate holdings or whatever non-perishable assets because from the top to the bottom, there is no financing pressure.  

Pressure is not the only issue here; it's the utilization of your assets in a way which will maximize income. You've got an asset with little or no yield over years, in a declining market; why do you choose to stick to it, no matter what, whereas you can sell it, maybe at a lower price you intended to, and put that capital in more promising channels?

It's called being content with what you have and having a long term time horizon on expected returns. Yeah, I can sell that lot I bought for 100 million for 80 million, but what am I going to do with 80 million anyway? And it's a sure thing that sometime between now and when the sun burns out, my family will realize 10-1000 times what it's worth now.

[Heng]

Now, many would argue that you see people living on credit and up to their eyeballs in debt.   IMO, these are typically representatives from 80% of the population that do not own 80% of the country's assets, products, goods and services.   That's only about 20% of the population... who I feel tend to conduct business and live more closer to a zero-cost (no financing) philosophy as mentioned above.

Well now, there were quite a few property developers that were living on credit in June 97. Not to mention some state mega-projects. Where does that fit in?

Well you have the dichotomy of half the population, with no form of equity, forced to borrow from sharks at massively high rates. Dear Leader was pretty keen on the idea of equitisation of assets for poorer people, to give them access to formal credit options. Dunno what happened to that though.

They are hardly forced to go to loan sharks. They find and beg us for loans with no advertising required (those kids handing out instant loan handouts aren't traditional money lenders but rather a new generation of get rich quick scam artists using people's credit cards). For traditional money lenders, if you deny them a 1% a month loan, they go right next door to the 3% a month guy, and then the 5% guy, up to the 20% guy without giving a second thought that whatever they need the funds for isn't going to provide them a 240% per year yield.

They've gotten access to lower rates rates through Easy Buy, Aeon, and Quick Cash and market rates through Government Savings Bank. What have they done with it? Same thing they did with their OTOP funds. Bought toys and have defaulted left and right.

[~G~]

It's economics pure and simple.   We don't lower the price on real estate holdings or whatever non-perishable assets because from the top to the bottom, there is no financing pressure.  

Pressure is not the only issue here; it's the utilization of your assets in a way which will maximize income. You've got an asset with little or no yield over years, in a declining market; why do you choose to stick to it, no matter what, whereas you can sell it, maybe at a lower price you intended to, and put that capital in more promising channels?

<{POST_SNAPBACK}>

It's called being content with what you have and having a long term time horizon on expected returns. Yeah, I can sell that lot I bought for 100 million for 80 million, but what am I going to do with 80 million anyway? And it's a sure thing that sometime between now and when the sun burns out, my family will realize 10-1000 times what it's worth now.

<{POST_SNAPBACK}>

Heng, whatever you call it, it is not pure economics. More like not caring to get the maximal yield of your assets. Don't get me wrong - there is nothing wrong about it if you have plenty, and are satisfied with it . The case I will criticize this policy is when it is adopted by bodies who are accountable to their shareholders, public companies above all.

[The_Other_Mac]

[...] sometime between now and when the sun burns out, my family will realize 10-1000 times[...]

<{POST_SNAPBACK}>

The difference between eastern and western economics.

After all, stockmarkets have only been around for a few generations. Current government systems, and therefore bonds, for not much more. On the other hand, if you're risk-averse, land is required to grow food to provide labour. With good management, the capital and enterprise can come later or at any time.

The Chinese are known for their long dynasties...

[KhunPadThai]

There are a couple of excellent economic texts about Thailand by Chris Baker and Pasuk Phongpaichit: "Thailand's Boom and Bust", about the 90's and "Thailand Economy and Politics", an economic history.

[thedude]

Its funny how people are saying 'forget the economics text book'. In fact, its all economics, just not European/US/Australian economics.

<{POST_SNAPBACK}>

Well then by all means please help us to understand Thai economics (which is why I started this thread). I've got a hypothesis or two. For example, I've read a little about "prospect theory" which suggests that [western] people feel approximately twice as much pain from a loss as the pleasure the feel from an equivalent gain. I've got an idea that Thai people feel 5x as much pain from a loss, maybe more. It's no doubt a cultural difference but from what part of Thai culture does behavior like that come from? Buddhism? Face? Class? Poverty? Something else? If it is as simple as good old supply and demand then why does it so often appear that prices do not decline when demand drops off (or disappears altogether)? "Zero-profit" conditions suggest that in markets like those apparently in Thailand no-one should be able to make any profits at all -- but if that's not the case -- as suggested by some of the above posts -- why not? What else is going on?

<{POST_SNAPBACK}>

Ahh young grasshopper, you are talking economics, though you do not know it. Go off and look up the concepts of ‘Marginal Utility’. Derivatives of this can be the Marginal Utility of Income and the Marginal Utility of Consumption.

Also, the concept of profits in economics is not the same as the accounting concept. Go look up ‘normal profits’ and see what they are.

<{POST_SNAPBACK}>

its quite simple really.

these goods are usually sold on a consignment basis where there is a reserve price from the supplier. the retailer doesn't actually buy all the inventory. since, as you describe, this is a "perfectly competitive" type of economic environment, margins are very low. so, if you lower purchase price below the vendor's margin, then they won't sell, because they will otherwise have to compensate the supplier for the unit sold.

its not merely an economic issue, its in the commercial set-up of this type of business.

[~G~]

its quite simple really. 

these goods are usually sold on a consignment basis where there is a reserve price from the supplier.  the retailer doesn't actually buy all the inventory.  since, as you describe, this is a "perfectly competitive" type of economic environment, margins are very low.  so, if you lower purchase price below the vendor's margin, then they won't sell, because they will otherwise have to compensate the supplier for the unit sold.

its not merely an economic issue, its in the commercial set-up of this type of business.

<{POST_SNAPBACK}>

Correct. Many small retailers prefer low margins with almost zero risk (=consignment) over higher margins with greater risk.

[fxm88]

these goods are usually sold on a consignment basis where there is a reserve price from the supplier.  the retailer doesn't actually buy all the inventory.

AH-HA! So what you are saying is that these shops actually don't really purchase their inventory and can return it to the wholesaler at any time for full reimbursement! Seems a little odd from the wholesalers perspective (e.g. it shifts all the risk to the wholesaler) but this would explain why the retailers are so unwilling to lower their prices! I was under the impression that the retailers had bought their inventories ("sunk costs") so that if they had stock that wasn't turning over they'd have to hold on to it or sell it at a discount ("one can't eat inventory").

But then what then happens to all the unsaleable goods that get returned to the wholesalers? They just keep loaning it out to different shops? Do they destroy it? Send it back to the factories or to China? Is the cost to manufacture these goods so miniscule that it doesn't matter?

[chuchok]

these goods are usually sold on a consignment basis where there is a reserve price from the supplier.  the retailer doesn't actually buy all the inventory.

AH-HA! So what you are saying is that these shops actually don't really purchase their inventory and can return it to the wholesaler at any time for full reimbursement! Seems a little odd from the wholesalers perspective (e.g. it shifts all the risk to the wholesaler) but this would explain why the retailers are so unwilling to lower their prices! I was under the impression that the retailers had bought their inventories ("sunk costs") so that if they had stock that wasn't turning over they'd have to hold on to it or sell it at a discount ("one can't eat inventory").

But then what then happens to all the unsaleable goods that get returned to the wholesalers? They just keep loaning it out to different shops? Do they destroy it? Send it back to the factories or to China? Is the cost to manufacture these goods so miniscule that it doesn't matter?

<{POST_SNAPBACK}>

It's called "sale or return" and is also rife in the rag trade in the Western World when dealing with very large and powerfull retailers.

[~G~]

The one who keeps the stock has the risk, of course. Wholesalers will generally not be willing to rely solely on consignment. This system is most common between shops or with new products, for a limited period. Strong distributors, on whom the shops depend, will sell the products outright.

Big retailers (i.e. the major department stores) are another story. They are much more difficult to deal with from the wholesaler point of view. They usually insist on consignment. And on a huge margin on top of that!