The challenges and opportunities facing Thailand’s industrial sector

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Thailand’s manufacturing sector has received a boost following new investment in automotive production; however, fragile domestic demand, a widening skills gap and cooling export demand pose challenges to the broader industrial sector.

In January Toyota Motor Thailand announced that it had submitted two applications to the country’s Board of Investment (BOI) for the manufacture of hybrid electric vehicles (HEVs), which can operate on both conventional fuel and electricity, and battery-powered electric vehicles (EVs).

Under the proposal, Toyota would assemble 7000 HEVs each year, along with 70,000 batteries for EVs and a range of other vehicle components, totalling 9.1m units per annum.

These recent proposals mark a significant expansion of Toyota’s existing operations in the country, building on the company’s BT19bn ($601m) HEV project, which started in 2017 at its plant in Chachoengsao.

The announcement also comes after the BOI approved two large projects from Nissan Motor Thailand and Honda Automobile to build HEVs in July last year.

Nissan will invest BT11bn ($346m) to boost capacity at its Samut Prakan plant, while Honda will spend BT5.8bn ($182.4m) on operations to produce both HEVs and batteries.

In order to support the growth of the HEV segment the government introduced a range of incentives last year, including five to eight years of corporate tax exemption and an exemption from import duties on machinery.

See also: The Report – Thailand 2018

Car sales down on the back of lower demand, trade concerns

Despite these recent investments, the automotive industry is facing some key short-term challenges.

While overall domestic car sales grew by 19% last year, Japanese manufacturer Toyota has forecast a 3.8% drop this year to around 1m units, citing elevated household debt and an increase in interest rates, which rose 25 basis points to 1.75% in December, as the primary causes.

Furthermore, slower growth in major economies, the ongoing trade dispute between China and the US, and an appreciation of the baht may put pressure on Thai exports.

Given that the automotive industry makes up around 10% of GDP and employs one-tenth of the workforce, any downturn could affect the economy more broadly.

Indeed, Siam Commercial Bank has predicted that easing demand in major economies and trade tensions will lead to national GDP growth of 3.8% this year, down from 4.1% in 2018.

Skills shortage threatens industrial expansion

Another factor that could impact the competitiveness of the broader industrial sector and hinder growth in the longer term is a shortage of skilled labour.

According to the Ministry of Labour (MoL), 45% of the country’s 38m-strong labour force is currently unskilled, with 400,000 skilled positions waiting to be filled in an economy with an ageing workforce.

In December the Future Innovative Thailand Institute – a domestic research and policy think tank – warned that the country risks losing competitiveness as a result of the widening skills gap, highlighting that an unskilled, low-cost labour force no longer provides a comparative advantage.

As a result of this issue, industry players have called for increased vocational training, coupled with a greater emphasis on science, technology, engineering and mathematics education.

“Overhauling the country’s education system will provide an initial step towards solving the mismatch of skills in the market,” Tanit Sorat, the vice-chairman of the Employers’ Confederation of Thai Trade and Industry, and a senior advisor to the MoL, told local media in January.

In addition, stakeholders say private firms also have an important role to play in boosting skills capacity.

“We need a strong focus on increasing technical capabilities in Thailand,” Antoine Barthes, president of Nissan Thailand, told OBG. “This will take time, but industrial companies can speed up this process; for example, by collaborating on joint training schemes.”

The need to improve the skills of the workforce is particularly pertinent given the government’s Thailand 4.0 policy, which foresees developing industries such as smart electronics, robotics and biotechnology as key drivers of long-term economic growth.

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