Thai Bankruptcies Rise As Minimum Wage Rolls Out: Southeast Asia

[reflectionx]

http://www.bloomberg.com/news/2013-02-26/thai-bankruptcies-rise-as-minimum-wage-rolls-out-southeast-asia.html

Thai Bankruptcies Rise as Minimum Wage Rolls Out: Southeast Asia

By Suttinee Yuvejwattana & Sharon Chen - Feb 26, 2013 12:00 PM ET

Confederate International Co., a Thai family-owned maker of nightwear, lost a German customer of 22 years after last month’s minimum-wage increase in the Southeast Asian nation raised costs.

“They stopped talking to us, even though we have done business together for a long time,” said Veerayuth Sookhattako, 57, owner of the Chiang Mai-based company that ships about 80 million baht ($2.7 million) of apparel to Germany and Franceeach year. “I established this company 28 years ago. I don’t want to let it go, but I may need to close down our business by the end of the year if we can’t get new orders.”

Veerayuth isn’t alone. Last quarter, 7,221 Thai companies closed down, 27 percent higher than in the same period a year earlier, when the worst floods in 70 years swamped most of the country. The figure is also more than double the average of 3,000 in the previous nine years, according to data from theNational Economic & Social Development Board.

Prime Minister Yingluck Shinawatra’s government raised the daily minimum wage to 300 baht throughout the country last month, after a similar increase in April in seven provinces including Bangkok. Before the increase, minimum wages ranged from 159 baht in northern Phayao province to 221 baht in Phuket, according to the Labour Protection and Welfare Department.

Government stimulus measures, including the wage rise and increased payments to farmers, come as the country’s manufacturers struggle with a stronger baht and slowing export demand amid a global slowdown.

Baht Strength

“The problem with the Thai minimum-wage hike is there might be competitiveness issues because this will lead to high costs for firms and if there’s no way to offset these costs, it translates into higher inflation for consumers,” said Eugene Leow, a Singapore-based economist at DBS Group Holdings Ltd.“There’s also some concern about how strong the Thai baht is.”

The baht is the biggest gainer this year among 11 widely-traded Asian currencies tracked by Bloomberg. The Bank ofThailand held the benchmark rate for a third straight meeting this month even after Finance Minister Kittiratt Na-Ranong renewed calls for lower borrowing costs to discourage inflows that boosted the baht to a 17-month high in January.

Wages in Asia almost doubled between 2000 and 2011, according to the International Labor Organization, and workers from China to Indonesia have pushed for more pay in recent years to counter rising living expenses. The increases will permanently increase business costs, forcing companies to boost prices, according to a report from HSBC Holdings Plc.

‘Fundamental Change’

“Lately, far more persistent and permanent costs have shot up -- wage pressures are now ubiquitous across Asia’s factories,” HSBC economists Frederic Neumann and Julia Wang wrote in a report last month. “A rise in wages is permanent and should thus prompt a fundamental change in pricing.”

Thailand’s small and medium-sized enterprises will suffer the most from higher wages because they’re labor intensive and don’t earn enough to benefit from reduced corporate income tax rates, according to the government and the central bank.

Costs for Thai companies will rise 6.39 percent on average because of the wage increase, according to state planning agency NESB. Costs will climb 0.57 percent for large companies, and as much as 17.8 percent for small companies, it said.

There are more than 2.9 million small and medium enterprises across Thailand, according to 2011 government data. They account for 99.8 percent of all businesses in the country and generate employment for 9.7 million people, or almost 80 percent of all jobs. These businesses earn 3.5 trillion baht annually, or more than a third of GDP.

Beneficial Effects

Even with factories closing down, Thailand’s unemployment rate is still among the lowest in the world, standing at 0.48 percent in the fourth quarter, down from 0.63 percent in the same period in 2011.

While higher wages will increase costs for businesses and boost inflation, they will also improve the purchasing power of consumers and help bolster economic growth, said Fred Gibson, a Sydney-based economist at Moody’s Analytics.

“By raising the minimum wage, you’re also allowing lower-income households to consume and this will help lift consumer spending,” he said. “It’s a trend we’re seeing across the region, as governments try and spread the beneficial effects of growth. Having a higher minimum wage also is one of the steps that helps you transition into higher value-added manufacturing because there’s more incentives.”

The salary increase boosted labor income by 16.5 percent in the fourth quarter last year, while product prices rose 3.2 percent, according to NESDB. Labor productivity rose an average of 2.3 percent in the last 10 years.

Cheap Products

“Productivity rose much slower than wages,” Suwannee Khamman, deputy secretary general at NESDB, said yesterday at a briefing in Bangkok. “This is not good. It means that we will continue to produce cheap products, while our costs are higher.”

Southeast Asia’s second-largest economy grew a faster-than-expected 6.4 percent last year. Gross domestic product is forecast by the government to rise 4.5 percent to 5.5 percent this year, with export growth predicted to be 11 percent.

For Veerayuth, whose business in Chiang Mai employs 140 workers, the benefits aren’t yet apparent. “My clients said they can’t understand why our country raised wages drastically like this,” he said. “It should be done step by step.”

[chainarong]

Maybe they would have gone bankrupt anyway, just an excuse, HK introduced a minimum wage, there was a hue and cry from the rich pricks, nothing happened,

[TommyUK1960]

300 baht a day min wage is not going to make anyone bankrupt.

These companies were insolvent before the minimum wage was implemented.

I want to see Thai wages up to 300 baht an hour so they would be competing against the West on a level playing field.

[Morden]

In our area, factory jobs are being lost because of falling order numbers. The minimum wage has been circumvented by taking away benefits such as free meals and transport so the minimum wage hardly seems to be a factor.

[mania]

The baht is the biggest gainer this year among 11 widely-traded Asian currencies tracked by Bloomberg.

Funny they barely give this any attention & it is probably

the bigger reason for less orders.

Welcome to the strong currency club

For how many decades did strong currency western countries see their customers leave to

buy products where their money bought more.

If this Confederate company is shutting down or going bankrupt over this wage increase it is only

to run out on debts & go setup shop in another country

A company of 28 years success does not close up shop or file bankruptcy after less than a year

of wage increases.

Edited March 1, 2013 by mania

[Phronesis]

Given the location of this guy's factory. My guess is that 80 percent of his workers would be from Myanmar anyway.....AND I am damn sure he would NOT be paying them minimum wage...

[chainarong]

The shameful history to the HK basic wage, was Donald (Chief Exec at the time ) gave the rich pricks two years to come up with a plan or he would introduce the government plan , this was after he got a flat tyre and was helped by a 76year old peasant ,who talked to him about poverty in HK, would you believe only two submitted any thing concrete, so dear Donald introduced the government model, right on two years to the day, rich arsoles are hated in HK by the way , wounder why. Just a bit of usless info folks.

[yoshiwara]

The shameful history to the HK basic wage, was Donald (Chief Exec at the time ) gave the rich pricks two years to come up with a plan or he would introduce the government plan , this was after he got a flat tyre and was helped by a 76year old peasant ,who talked to him about poverty in HK, would you believe only two submitted any thing concrete, so dear Donald introduced the government model, right on two years to the day, rich arsoles are hated in HK by the way , wounder why. Just a bit of usless info folks.

The situation is quite different in HK from Thailand. Actually it isn't the rich who are hated in HK, rather it is the fear of losing HK's independent identity to Mainland interference.

[MJP]

300 baht a day min wage is not going to make anyone bankrupt.

These companies were insolvent before the minimum wage was implemented.

I want to see Thai wages up to 300 baht an hour so they would be competing against the West on a level playing field.

Excellent post that brings into focus just how far Western currencies would have to fall to equalize pay. On a 9 hour day, 300 Baht is £0.75 per hour. Minimum wage in the UK is £6.19 an hour or over eight times the Thai minimum wage.

[chainarong]

The shameful history to the HK basic wage, was Donald (Chief Exec at the time ) gave the rich pricks two years to come up with a plan or he would introduce the government plan , this was after he got a flat tyre and was helped by a 76year old peasant ,who talked to him about poverty in HK, would you believe only two submitted any thing concrete, so dear Donald introduced the government model, right on two years to the day, rich arsoles are hated in HK by the way , wounder why. Just a bit of useless info folks.

The situation is quite different in HK from Thailand. Actually it isn't the rich who are hated in HK, rather it is the fear of losing HK's independent identity to Mainland interference.

I think you will also find that 70% of Hong Kongers hate the rich, going on the HK Uni poll , they also have free elections in 2017 to elect the chief exec, now that will be interesting

[Sandman77]

If I take a look on eBay uk for Mali rice sellers , the price is not much higher for export industries for 10 kg that we got here locally in the farm!

In my homecountry I not see thai rice in supermarket only china and India mix together!

I not think that a strong bath is a problem

When the thai bank pressure it down to protect exports , the weak euro is the problem!

If the thai bisness people recogneized to late that the cannot go up with the prices 30 procent in the same time the euro go 30 procent down!

In hotel prices is the same, before you get a discount the let the room stay emty!

No the customers go away and the big

Crying begins !

[yoshiwara]

The shameful history to the HK basic wage, was Donald (Chief Exec at the time ) gave the rich pricks two years to come up with a plan or he would introduce the government plan , this was after he got a flat tyre and was helped by a 76year old peasant ,who talked to him about poverty in HK, would you believe only two submitted any thing concrete, so dear Donald introduced the government model, right on two years to the day, rich arsoles are hated in HK by the way , wounder why. Just a bit of useless info folks.

The situation is quite different in HK from Thailand. Actually it isn't the rich who are hated in HK, rather it is the fear of losing HK's independent identity to Mainland interference.

I think you will also find that 70% of Hong Kongers hate the rich, going on the HK Uni poll , they also have free elections in 2017 to elect the chief exec, now that will be interesting

going on the HK uni poll? what poll?

[reiltin]

Minimum wage always a bad idea- let the Market decide it's rate the workers free to accept or decline.productivity bonus systems works better.

[fletchsmile]

Minimum wage always a bad idea- let the Market decide it's rate the workers free to accept or decline.productivity bonus systems works better.

In a developed country, with a fairer society, and better employee rights I'd agree.

Problem is in Thailand it's not the market that gets to decide, it's the rich elite exploiting the lower class that decide. The employees have little bargaining power and protection in wage negotiations.

In a country like Thailand at this stage of development, a minimum wage is useful. Increasing it from time to time is useful too. The main problem is the speed and scale it has been implemented this time.

Ideally someone would have come up with an idea a couple of years ago to spread that 40% in say 10% pa over the last 4 years, and started implementing it. instead they leave a big jump in one year. Unfortunately in Thailand it can take years to get things done. If time to debate is given, that just becomes an excuse to delay the exploitation.

The company in Chiang Mai needs to be taken with a pinch of salt. I doubt the German company just stopped talking to them. More likely they discussed they didn't want to pay increased prices of that scale. If the CM company could find a way I'm sure the German company would talk again. Probably a good thing in the long run a company with such management does close. If you can't survive without exploiting your workers and paying them a half decent wage, then we probably don't want them in business long term any way. They probably ran a business model which just relied on cheap labour, where owners just took and made money instead of re-investing in their people, production etc and sustainability.

Edited March 3, 2013 by fletchsmile

[Yo Sup]

300 baht a day min wage is not going to make anyone bankrupt.

These companies were insolvent before the minimum wage was implemented.

I want to see Thai wages up to 300 baht an hour so they would be competing against the West on a level playing field.

The productivity level of the labor in Thailand is light years behind the west. In my company, if you stood around picking your nose, you wouldn't make it through the shift. A level playing field is a pipe dream. Blame it all on the "educational system" of Thailand, that's where the problem begins.

This country may be getting a bump right now, that may be coming to an end soon, but it's not ready for the world stage by any stretch of the imagination.

[Thailand1977]

300 baht a day min wage is not going to make anyone bankrupt.

These companies were insolvent before the minimum wage was implemented.

I want to see Thai wages up to 300 baht an hour so they would be competing against the West on a level playing field.

Excellent post that brings into focus just how far Western currencies would have to fall to equalize pay. On a 9 hour day, 300 Baht is £0.75 per hour. Minimum wage in the UK is £6.19 an hour or over eight times the Thai minimum wage.

Minimum wage is far higher then that for the majority, if you include child tax credits, working tax credits, housing benefit, child benefit, .... and the many other benefits companies/ corporations receive from the taxpayer to be able to pay people this wage.

Edited March 6, 2013 by Thailand1977

[ajarnpot]

Be interesting to know who is competing for low cost production of nightware now. Was this a case of german customer being short, switched suppliers? have customers realised africa is the way forward wrt cheap wages/cheap production costs?

[Thailand1977]

Be interesting to know who is competing for low cost production of nightware now. Was this a case of german customer being short, switched suppliers? have customers realised africa is the way forward wrt cheap wages/cheap production costs?

Not much infrastructe or stability in the cheaper parts of Africa, also expats like Asia as there is decent education for kids, shopping for the wife and a western style of life.

When Greece and such like leave the Euro theyll offer a cheap labour force on the doorstep of Europe looking to entice big business.