Development plans seek to add value to Thailand's strongest industries and upskill the workforce

After a decade of external disruption – which saw the 2008 global financial crisis, the floods of 2011, political protests in 2013-14 and the military coup of 2014 – Thai industry is getting back on track. According to the Ministry of Industry, the manufacturing production index (MPI) grew by 2.5% in 2017, with stronger growth in the second half of the year. This trend continued in 2018, with January and February both seeing year-on-year (y-o-y) growth of 4.7%. This has moderated in more recent months. In May the MPI grew by 3.2% y-o-y.

Despite these positive signs, industry faces several challenges, including rising wages, higher production costs, an ageing society, lack of skilled labour, and intense regional and global competition. At the same time, there is significant potential for Thai industries if these obstacles can be overcome. The authorities are aiming high, with flagship initiatives such as Thailand 4.0 and the Eastern Economic Corridor (EEC), which have spawned programmes supporting robotics and next-generation technologies (see analysis). Thailand is working to scale up its manufacturing capabilities with the aim of progressing from being an important link in international value chains to become a global leader in the production of advanced goods.

Emerging Sector

Before the Second World War, manufacturing was limited in Thailand. The factories that existed mainly produced basic consumer goods or building materials. Over time, however, more manufacturers established operations in the country. Boonrawd Brewery, producer of Singha Beer, was established in 1930. Following the end of the war, the authorities adopted an import substitution policy until 1972, when a new economic plan that focused on the promotion of manufactured exports was implemented. Steel, automobiles, electronics and textiles were among the industries that were promoted, with the new approach driving development in the sector. Value-added manufacturing as a percentage of GDP rose from 12.5% in 1961 to a high of 31.0% in 2010, before moderating to 27.1% in 2017. The signing of the ASEAN Free Trade Area in 1992 was also beneficial for the export of Thai goods.

In time, Thailand became a significant base for international manufacturing firms, and a number of global trends helped the country become an industrial destination. The rising yen, for example, encouraged many manufacturers to move their operations from Japan in order to cut costs, while concerns about the long-term cost competitiveness of China as a production base led many firms to develop a “China plus one” strategy, whereby they would invest in an additional Asian market, which was often Thailand. As a result of concerted efforts and some positive external forces, Thailand now commands a solid position globally. It was ranked 14th in Deloitte’s 2016 manufacturing competitiveness index, ahead of Malaysia, Vietnam and Indonesia, though behind India, Singapore and Taiwan.

However, many stakeholders believe more needs to be done to secure Thailand’s position at the forefront of global industries. “Most manufacturers are looking to develop new products with value added, but the return from developing a new product is not immediate, so smaller companies are at a disadvantage,” Roongchat Boonyarat, CEO and executive director of Malee Group, a local food and beverages producer, told OBG. “The government should help all manufacturers looking to establish research and development (R&D) centres by covering the initial set-up costs.”

Key Segments

Automotive has emerged as the country’s most successful manufacturing segment (see analysis), but others have also performed well, such as electrical appliances.

As of 2016, an estimated 400 manufacturers in the country were making electrical appliances, according to Krungsri Research. Major manufacturers include Thai firm Hatari and Philips Electronics. Additionally, Thailand is the second-largest exporter of air conditioners, contributing 11.8% of the world’s exports. In terms of washing machines, its exports constitute 8% of the global total, making Thailand the fourth-largest exporter of the appliance. As for refrigerators and microwaves, Thailand exports 5% of the world’s total. The top three markets for its electrical goods are Japan, the US and fellow ASEAN member states.

The domestic and export market for appliances from 2012 to 2016 was relatively stagnant, though the segment is expected to expand over the medium term as consumer debt levels improve. Recovery in the real estate market should also help, as homeowners and tenants acquire new appliances for their homes. Meanwhile, international investment in the sector – largely as a result of incentives and infrastructure upgrades –should lead to an increase in exports.

Food is the country’s third-largest industry. Thailand’s main food exports include rice, canned tuna, sugar, meat, cassava products and canned pineapple. According to the National Food Institute, Thai food exports are expected to rise by 8.7% in 2018 to reach $36bn. “Our food exporters are ranked first in ASEAN, and 14th worldwide in export value,” Yongvut Saovapruk, president of the National Food Institute, told OBG. “What’s more is that we have players who continuously fuel the upstream segment with knowledge and skills.”

Positive Signs 

Thai industry has been on an upward trajectory of late. The Nikkei Manufacturing Purchasing Managers’ Index rose from 49.5 in 2016 to 50.1 in 2017. The figure increased to 50.6 in January 2018, dropped in March and April, and then rebounded to an all-time high of 51.1 in May. In terms of output, light industries grew by 1% in 2017 after no growth in 2016, raw material manufacturing was up by 2.8% from 2.5%, while capital goods manufacturing rose by 4.2% from 4.6%. In the first quarter of 2018 light industry fell by 0.7%, capital goods expanded by 7.5% and raw materials rose by 5.3%. The National Economic and Social Development Board reported that the fall in light industry output was led by tobacco products as a consequence of rising in excise tax rate on cigarettes. Textile production also declined.

The fastest growing segments in terms of production over the year to April 2018 were leather products (11.3%), food products (11.1%), motor vehicles (8.5%), chemical products (9.8%), and computers and optical products (6.0%). Segments that contracted over the same period included beverages (8.2%), furniture (9.3%), textiles (15.4%) and tobacco (16.3%).

Low to High

Thailand now faces the challenge of transitioning from relatively low-cost manufacturing to higher value-added industries. “The transition to 4.0 needs to be handled carefully if Thailand is to remain competitive,” Stephen Ashworth, managing director of South-east Asia at Hutchison Ports, told OBG. This is especially important as other developing countries build their own lower-value manufacturing industries, thereby competing with Thailand’s traditional offering. Primarily, the country remains an assembler and producer of lower value-added items.

“We need to focus on continuing to promote new and advanced technologies that enable the shift to greater value-added segments, ” Sampan Silapanad, general manager for Thailand of Western Digital, told OBG.

Higher Pay

Value-added industries are also likely to contribute to the rising wages as more skilled labour is needed. Between 2001 and 2016, the average monthly wage in the country roughly doubled. In 2013 the daily minimum wage was set at BT300 ($8.68). However, this was adjusted in 2017 to account for the variations in the cost of living across different areas. The minimum wage in Bangkok was highest, at THB310 ($8.97), with some nearby provinces, including Nonthaburi and Pathum Thani, set at the same level. Phuket is also included in the top category. The lowest minimum wage remains at the level set in 2013, and mostly applies in the less developed southern provinces. Since April 2017 skilled workers have been legally entitled to a higher minimum wage, ranging from BT370 ($10.71) to BT600 ($17.37) per day depending upon the profession.

The labour cost index rose from 60.54 in 2001 to 114.74 as of the first quarter of 2018. Over that same period the manufacturing wage index rose from 61.44 to 118.50. The average monthly wage in the sector was almost BT12,600 ($365) at the end of 2017. While wages are not low enough to compete with Indonesia and Myanmar, the workforce is not yet skilled enough to compete with more advanced economies. The country is in what is known as the middle-income trap.

Labour Needs

At the same time, Thailand is facing a labour shortage. New regulations passed in July 2017 raised the penalties for hiring undocumented migrants, with fines as high as BT800,000 ($23,200) imposed on employers. One of the main drivers of the reforms was the desire to improve the country’s status in the US Trafficking in Persons Report, but it resulted in many workers from Myanmar and Cambodia returning home. The authorities were so alarmed by the exodus that they imposed a 120-day moratorium on enforcement of certain parts of the decree shortly after it was published. It is estimated that Thailand hosts 5m foreign workers, of which only 1.3m hold the required documents.

Prior to this, gaps in the workforce were already substantial. Speaking in 2015, before the restrictions on foreign workers were announced, then-minister of labour Surasak Karnjanarat estimated that Thailand would have a shortfall of some 300,000-600,000 industrial workers over the years to 2020.

Skilled Work

There is a shortage of skilled workers in particular, partly due to a lack of investment in developing human resources. In addition, wages are generally not high enough to attract skilled foreign workers. “Further collaboration between industries and universities needs to be encouraged to wholly foster R&D and produce the right labour skill sets suitable to 4.0,” Markus Lorenzini, president and CEO of Siemens Thailand, Cambodia, Myanmar, told OBG. C-level executives interviewed in the OBG Business Barometer: ASEAN CEO Survey 2018 (see Economy chapter) expressed a similar sentiment. Some 22% of Thai CEOs cited engineering as the skill most needed locally, which was the most popular answer.

While steps are being taken to better align the education system with the needs of industry, some in the private sector believe that more needs to be done to foster industry-academia collaborations. “Innovation depends on partnerships; we need to work with universities and laboratories. University labs are currently developing some interesting products, but the government is still needed to step in and create partnerships here,” Ekaphol Pongstabhon, managing director of local manufacturer Tipco Foods, told OBG. “We want the universities to think more commercially.”

In the meantime, the Ministry of Labour agreed in June 2018 to review the implementation of the 2001 ASEAN agreement to open up the labour market to skilled workers from other member states. Ensuring that foreign workers comply with domestic standards and regulations will be a key consideration.

Thailand 4.0

As part of efforts to escape the aforementioned middle-income trap, the authorities are working to position Thailand as a hub for advanced manufacturing. At the centre of this drive is the Thailand 4.0 initiative, which was launched in 2016 and envisions a knowledge-based economy driven by innovation and value creation. The initiative targets five First S-Curve industries: next-generation automotive manufacturing, smart electronics, affluent medical and wellness tourism, agriculture and biotechnology, and food for the future. As these already have a solid base, the strategy seeks to add value over the short to medium term. Meanwhile, the New S-Curve industries – automation and robotics, aviation and logistics, biofuels and biochemicals, medical hub, and digital economy – have been identified as future drivers of long-term growth in the economy. Defence, meanwhile, has yet to be formally approved. By developing existing industries as well as future ones, the policy minimises the need for employees to switch occupational fields and encourages improvements in efficiency.

However, some stakeholders have noted that other established industries, such as petrochemicals, are important for economic growth. “Thailand 4.0 creates a strong path forward, but our existing industries provide the base of skilled workers and infrastructure that is required to support high-tech development,” Martyn Tickner, president of HMC Polymers, told OBG.

In line with Thailand 4.0, the country has been investing heavily in factory automation. In 2017 the Cabinet approved a BT200bn ($5.8bn) investment in the development of automation and robotics systems through to 2022. The spending plan estimates 500,000 robotics and automation units will be installed at production lines in 2018, with demand projected at 10,000 units per year over the next five years. Companies will receive incentives to utilise and invest in robotics, including tax deductions for R&D undertaken to explore their productive application. Additionally, the number of systems integrators will be increased from 200 to 1400, by allowing the necessary components to be imported duty free. Investments in automation are also expected to partially offset the problems associated with the lack of available labour, an issue that has been exacerbated by tougher migration laws and an ageing population.

“To align with Thailand 4.0 we must develop value-added products, but to do this we will need to enhance the quality of our production process and our labour,” Yongvut told OBG. To address these shortfalls, the Department of Skill Development and the Federation of Thai Industries have signed a memorandum of understanding to set up a Manufacturing Automation and Robotics Academy. In addition, plans are under way for the government to attract BT12bn ($347.4m) of investment and work with the private sector and academia to create centres for robotic excellence. The authorities are seeking to reduce the import of robotics parts, envisioning Thailand eventually being an exporter of such equipment.

In the Zone

Industrial expansion in the targeted sectors will be largely concentrated in the EEC (see Trade & Investment chapter), which serves as an industrial base along the eastern seaboard. The government has plans for considerable infrastructure upgrades and developments in the region, which are intended to improve productivity and catalyse some $45bn of investment. In February 2018 the Eastern Special Economic Zone Act (EEC Act) was passed into law, stipulating numerous incentives designed to attract investments for the development of targeted industries in the EEC region, such as the easing of restrictions on foreigners owning or leasing land within special economic zones (SEZs), and allowances for the employment of skilled foreign workers in such zones. Each SEZ created within the EEC will specialise in one or more S-Curve industries. The incentives offered under the EEC Act are separate to those that are provided by the Board of Investment.

The success of each S-Curve industry will in large part be dependent on attracting foreign direct investment (FDI) and establishing joint ventures between Thai companies and foreign firms. In the aerospace segment, the country is working to develop maintenance, repair and overhaul (MRO) capacity and manufacturing. In June 2018 Thai Airways and Airbus signed an agreement for an MRO joint venture at U-Tapao International Airport, which is located in Rayong Province in the EEC. The government plans to open bidding for the development of a BT11bn ($318.4m) MRO centre at the airport by October 2018. The MRO hub is expected to cover some 500 rai (80 ha) of land, of which 200 rai (32 ha) is reserved for the Thai Airways-Airbus joint venture. A further 60 rai (9.6 ha) has been requested by Air Asia for its own regional MRO centre.

New Investments

FDI in the manufacturing sector has risen substantially, increasing by more than 40% from 2012 to 2018. According to the Bank of Thailand, FDI reached a record high of $104.7bn in the first quarter of 2018. This was driven by major international manufacturers establishing or expanding their operations. For example, local beverages producer Suntory and PepsiCo formed a joint venture in 2017. Now operating as Suntory PepsiCo Beverage, the firm had registered capital of BT19.7bn ($570.2m) as of March 2018. Prior to this, PepsiCo had invested in two food and two beverage manufacturing plants: the first was constructed in 2012 at Amata City Industrial Estate, and the second at Nong Khae Industrial Estate, Saraburi Province, in 2016. In December 2017 German-based Bosch opened a factory specialising in injection technology – including connection technologies and knock sensors – in Hemaraj, 130 km from Bangkok. It is the firm’s second plant in Thailand, but its first so-called smart factory. Investment in the 10,000-sq-metre facility, which includes a R&D lab, totalled €80m. This was followed by Japan’s automotive manufacturer Mazda opening a JPY22.1bn ($198.7m) engines factory in Chonburi Province in early 2018. The factory is expected to employ 800 people by 2020.

Outlook

While it is still early days, Thailand is well placed to add value to its robust manufacturing sector. With the political will and necessary funding in place, the main challenges lie in up-skilling the workforce to align with new needs. The sector is on track to achieve its bold goals, and it is likely that the targeted S-Curve industries will expand further as investments in technology improve operations and the quality of products.