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Mightiest of the Mighty Five Manufacturers

Amid a global shift in the manufacturing hierarchy, the Mighty Five cluster – Malaysia, Indonesia, Thailand, India and Vietnam – is expected to  assume an increasingly significant role. Its ascendance comes as India appears to be the only member of the BRIC nations to be truly fulfilling its potential on that front, with the remainder – Brazil, Russia and China – having either fallen behind or shifted their focus. The most notable instance of the latter is China, with the country now moving towards a higher value, more technology-intensive manufacturing model.

Within the Mighty Five, Thailand is emerging as the leading manufacturing destination. According to Deloitte's 2016 Global Manufacturing Competiveness Index, Thailand's manufacturing exports were worth US$167 billion in 2014. While this puts it slightly behind India, it sees it well ahead of Malaysia, Vietnam and Indonesia.

Thailand's success in achieving this output level has been primarily attributed to its highly literate, skilled workforce and its high labour productivity. Overall, these factors are seen as more than compensating for the country's comparatively high labour costs, with the average monthly wage recorded as US$383 as of September 2016.

Foreign Investment Magnet

However, the country remains an attractive prospect for foreign investors. Its appeal has been boosted by the adoption of a number of policies designed to foster liberalisation and spur free trade, particularly in areas likely to enhance local skills, facilitate technology transfer and promote innovation.

The success of these policies has been acknowledged globally. In 2014, the World Bank rated Thailand 18th overall, in terms of the dollar value of its manufacturing output. In 2016, Deloitte promoted the country to 14th place based on the same criteria, a position it is expected to maintain until at least 2020.

In terms of specific incentives, Thailand offers manufacturers “tax holidays” of up to 10 years, as well as other tax exemptions and preferential import duties. It also has a low-duty regime with regard to capital goods and any raw materials used in the production of export-oriented items.

Its manufacturing industry is focused on electronics, canned goods, plastics, jewellery, electric appliances, furniture, toys, computers and parts. It has also made increasing inroads into integrated circuits, machinery, automobiles and automotive parts.

Indeed, Thailand now lays claim to being home to Asia's most developed auto-parts industry, having become a manufacturing hub for several global motoring brands, including Toyota, Honda and Mercedes-Benz. According to McKinsey's Understanding ASEAN: The Manufacturing Opportunity report, between 2009 and 2013, the automotive industry accounted for 42 per cent of Thailand's total foreign direct investment.

Such investment has allowed Thailand to attract an impressive array of manufacturers and assemblers, including BMW, Ford, Mazda, Mitsubishi and Nissan. It has also developed a substantial base of domestic auto component suppliers, which in turn, has had a knock-on effect of nurturing the country's steel production industry.

The country's investor-friendly policies have made it particularly easy for foreign investors to do business in the country. Thailand's corporate tax rate of 20 per cent, for instance, is lower than that of Vietnam, India, Malaysia or Indonesia.

Thailand's Board of Investment (BOI), meanwhile, offers a range of tax incentives, support, services and import duty exemptions/reductions across a wide range of industries. More specifically, any manufacturing company receiving investment promotion privileges from the BOI is also exempt from all foreign-equity restrictions, with no local content export requirements in place.

The country's competitiveness is also enhanced by its relatively well-developed infrastructure. In all, it has six deep-sea ports and two international river ports, while its growing highway system connects every province, as well as offering rapid overland access to Laos, Cambodia and Vietnam.

In terms of future infrastructure projects, plans are now in place for a high-speed rail network serving all four corners of Thailand, as well as providing a direct freight link to southern China. There are also moves to extend Bangkok's mass-transit system into more suburban areas.

Economic Setbacks

Despite the positive environment nurtured by its government, manufacturing in Thailand is not without its challenges. Large-scale civil upheavals in 2006, 2008 and 2010, culminating in the 2014 military coup, have undermined economic growth, for instance, while contributing to an ongoing climate of political instability.

The central region of Thailand experienced severe flooding in 2010 that had a hugely adverse effect on the country's manufacturing output, resulting in the overall level dropping by 36 per cent in 2011. Most specifically, the floods saw more than 100 automotive components makers struggle to fulfill orders.

Collectively, these political and environmental problems saw Thailand's economic growth slow substantially. After the 2014 coup, growth dropped to just 0.9 per cent. It rallied again in 2015, reaching 2.8 per cent, while the final figure for 2016 is expected to be in the region of three to 3.5 per cent.

Concerns remain, however, over the possible impact of rising labour costs. There are also concerns over the long-term stability of the local currency. Although the baht has weakened against a surging dollar in recent months, it is expected to strengthen in the long-term, posing a potential risk to the continuing growth of the country's increasingly export-oriented economy.

"If the baht does not fluctuate or appreciate to a level that could affect competitiveness, export growth is expected to be around zero to two per cent,” said Sanan Angubolkul, Vice-Chairman of Thailand's Board of Trade. “If the baht continues its appreciation, however, then Thai exports could register negative growth this year."

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