Still moving: Despite major setbacks, some segments are recovering full swing

Having proved itself a regional manufacturing powerhouse in 2011, Thailand exhibited strong growth across the board on the year in spite of enduring the its worst monsoon flooding in 50 years. Unlike other countries in the region that depend heavily on the export of raw materials such as timber, petroleum or mineral wealth to even the trade balance, Thailand’s exports are fuelled by a manufacturing sector that accounted for 84% of all exports in 2011. In fact, raw material exports barely registered on the country’s export balance sheet, with forestry and mining products contributing less than 1% ($1.07bn and $1.8bn), respectively. Salt rock mining, for example, has felt pressure. “The majority of proven salt rock reserves are in the north-east, but producers are increasingly prospecting in other parts as traditional reserves gradually deplete,” Dhiraphorn Srifuengfung, the managing director of Pimai Salt, told OBG. “Crucial to this is insuring the sustainability of the operations, both environmentally and socially.”

THE MAIN SELL: Although the manufacturing sector encompasses a variety of products, from computer components and automobiles to canned seafood and beer, the largest contributors to exports are electronics and electrical appliances, which accounted for a combined total value of 23% ($44.09bn) of all 2011 exports. The quickly growing automobile industry continues to expand and now contributes 10% of total exports, up from just 2% in 1996, while the chemicals and petrochemicals sector combined for 9% of the value of all 2011 exports according to central bank figures.

PETROCHEMICALS: Leveraging Thailand’s significant natural gas supplies located in the Gulf of Thailand, the country’s petrochemicals industry is thriving. International demand for downstream polymers continues to expand while the country’s domestic appetite is being fuelled by manufacturing growth in sectors such as automotives, packaging and electronics. “The domestic market for petrochemicals is also improving post-floods, as people move to replace the stocks they depleted last year,” Bowon Vongsinudom, the president of PTT Global Chemical, told OBG. “Growth in demand for plastics in particular is gathering pace and we foresee sustained growth on the local market.”

Much of the chemicals and petrochemicals production is based out of the Map Ta Phut industrial park, located 200 km east of Bangkok in Rayong province near the Gulf of Thailand, and is home to numerous upstream petrochemicals cracker plants in addition to downstream operations. These include facilities operated by leading international producers such as the Dow Chemicals Company, BASF and Bayer, as well as homegrown companies including Siam Cement Group (SCG) via its subsidiary SCG Chemicals, Indorama Ventures and a number of subsidiaries of PTT, Thailand’s national energy company. Through the first five months of 2011, the country’s polyethylene exports totalled 800,000 tonnes, a 104% year-on-year increase, according to the Petroleum Institute of Thailand (PTIT). In May 2012 an explosion and fire at a Bangkok Synthetics petrochemicals plant, 20% of which is owned by SCG, in Map Ta Phut killed a dozen people and injured 129, according to The Bangkok Post. Pongsvas Svasti, the minister of industry, said he ordered the factory to close and instructed other factories to inspect their own security systems to avoid a similar disaster elsewhere.

JOINING FORCES: National integrated energy giant PTT is the largest player in the domestic petrochemicals market, producing a range of downstream products including olefins, polyethylene and polymers. The vertically integrated company consolidated operations in a cost-saving move when it merged PTT Chemical Public Company and PTT Aromatics and Refining Public Company into a single flagship company, PTT Global Chemical Public Company (PTTGC), in October 2011. According to company documents, the new entity now has a total olefins and aromatics capacity of 8.2m tonnes per annum (tpa) in addition to its petroleum output of 280,000 barrels per day, which ranks not only as largest domestic producer but the third largest integrated petrochemicals and refining company in Asia.

FURTHER EXPANSION: In 2011 PTT expanded capacity by commencing commercial production at a number of subsidiary plants. In January of 2011 the Bangkok Polyethylene Company (BPE) rolled out its new 250, 000-tpa high-density polyethylene (HDPE) plant, followed closely in February 2011 by the start-ups of several polymer plants, including HMC Polymers, 310,000-tpa propane dehydrogenation (PDH) plant; PTTGC, a 50, 000-tpa HDPE plant; PTT Polyethylene Company, a 300, 000-tpa low-density polyethylene (LDPE) plant.

PTT Phenol spearheaded operations at its 150, 000-tpa Bisphenol A facility in April 2011, and the PTT Tank Terminal Company commissioned a new jetty and petrochemicals tank farm with an import/export capacity of 2m tpa. Other petrochemicals- and plastics-producing PTT subsidiaries include PTT Asahi Chemicals Company, PTT MCC Biochem Company, PTT Polymer Marketing Company and PTT Polymer Logistics Company. As a group, PTT has total ethylene and propylene capacities of 2.38m tpa and 512,000 tpa, respectively.

A number of other players are also active in the upstream sector, the next-largest of which is Rayong Olefins Company (ROC), a joint venture between SCG and Dow. Already operating an 800,000-tpa-capacity naphtha cracker in Map Ta Phut, the company more than doubled its capacity when it brought its new 900,000-tpa naphtha cracker – Map Ta Phut Olefins Company (MOC) – in March 2010. The MOC project also includes extensive downstream operations producing a wide range of products including polyethylene (SPEII), speciality elastomers, propylene oxide and hydrogen peroxide. Many of these downstream operations were initially constrained by government restriction until March 2012, at which time the plant began operating at full capacity. The centrepiece of the facility is the 390, 000-tpa hydrogen peroxide to propylene oxide (HPPO) facility, which produces propylene oxide (PO) through a new method of hydrogen peroxide to propylene oxide technology jointly developed by Dow and BASF. Starting operations in 2011, The ROC’s new HPPO plant produces PO, which is used as feedstock for polyurethanes, propylene glycols and glycol ethers that are used in enduse applications such as insulation, furniture, personal care products and brake fluids.

The third major participant in the sector is another large, vertically integrated Thai company, Indorama Ventures (IVL), one the largest chain producers of integrated polyester in the world. The company controls numerous subsidiaries including IRH Rotterdam, TPT Petrochemicals, Indorama Petrochem, PT Indorama Petrochemicals and Ottana Polimeri, which produce a wide variety of downstream products such as polyethylene terephthalate (PET), polyester, purified terephthalic acid (PTA) and PTT. Already a manufacturing giant, IVL has announced an ambitious expansion plan which would grow the company’s total output from a current base of 6.2m tpa to 10m tpa by the end of 2014.

FACING CHALLENGES: Running contrary to the aggressive expansion strategies employed in recent years, the sector is still wrestling with a number of difficulties. Global demand for downstream products took a hit as the global economy slowed starting in 2009, and while demand is recovering, the price of inputs and energy in the form of hydrocarbons has rebounded more quickly. “The cheap prices of Chinese oil have caused Chinese-made carbon black to capture about 30% of the Thai market from the customers who are price sensitive irrespective of quality,” Sanjeev Sood, the regional president far-east and South-east Asia and managing director of Thai Carbon Black, told OBG. The average price of naphtha, for instance, was $938 per tonne in 2011, an increase of $214 per tonne over the previous year, according to data from SCG. As a result, profit margins have shrunk. From 2010’s first quarter to 2011’s second quarter, the average petrochemicals margins for ethylene and HDPE decreased from $502 per tonne to $252 per tonne and $580 per tonne to $370 per tonne, respectively, according to data from JP Morgan. However, not all downstream products were affected, as some subcategories such as high-end, value-added plastics remain strong. “High-value-added petrochemicals like medical grade products tend to be more resilient to downturns in the business cycle,” Cholanat Yanaranop, president of SCG Chemicals, told OBG. “While producers benefit from an upswing in prices for petrochemicals commodities, it is also important to have a diversified product portfolio for sustainable growth.”

Some subsectors have also had to overcome a government-imposed lengthy work stoppage to revaluate the social and environmental impact of 76 industrial projects (many involving petrochemicals operations) around Map Ta Phut. The vast majority of these projects have since been given clearance by the courts, allowing them to resume production at full capacity. In addition to the financial and regulatory hurdles, the floods also hit the demand side of the industry, as polymers used in a wide range of applications from automobiles to packaging slacked while production halted as factories were inundated by the floodwaters.

INCENTIVES: As evidenced by the number of well-entrenched, leading regional industries, such as the automotive, electrical and petrochemicals sectors, Thailand continues to remain an attractive investment destination. “Our rationale for expanding in Thailand was to take advantage of the tax incentives, free trade agreements in the region, and the overall access the country enables us to have to reach other markets in the region,” Rohit Vashistha, the managing director of petrochemicals producer Polyplex, told OBG.

Acting at the behest of the Ministry of Industry, the Board of Investment (BOI) is responsible for the implementation and oversight of the country’s incentive programme. Because Thailand’s economic wealth is largely correlated to population centres and geographic regions, the BOI has adopted a three-tiered incentive system intended to spur investment in the less economically developed rural regions further from coastal population centres. As such, each of the three zones – numbered 1, 2 and 3 – receive progressively greater incentive packages depending on location.

THE ZONES: Zone 1 serves as the base level for incentives and includes the capital of Bangkok, as well as the industrialised surrounding provinces of Nakhom Pathom, Nonthaburi, Pathum Thani, Samut Prakan and Samut Sakhon. As in each zone, incentives for Zone 1 vary slightly depending on if businesses are operating within or outside industrial estates or promoted industrial zones. Those operating within the estates, for instance, are eligible for a corporate income tax exemption for three years, while those outside estates are not. Other inducements for all companies in Zone 1 include a 50% reduction in import duties on machinery, along with some exemptions on import duties on raw or essential materials used in manufacturing of export products, the latter of which extends to all companies in any of the zones.

Encircling Zone 1 is Zone 2, which includes the 12 provinces of Kanchanaburi, Chachoengsao, Chonburi, Nakhon Nayok, Ayutthaya, Phuket, Rayong, Ratchaburi, Samut Songkhram, Saraburi, Supanburi and Ang Thong. Companies operating within industrial estates and other promoted industrial zones within Zone 2 are eligible for tax exemptions on import duties on machinery, and a seven-year exemption on corporate income tax, while those outside qualify for a 50% reduction on the former and a three-year exemption for the latter.

FURTHER AFIELD: The third and largest zone encompasses the rest of the country’s 58 provinces, which make up the majority of Thailand’s landmass, and is eligible for the most substantial incentive packages. These include import duty on machinery exemptions and corporate income tax exemptions for eight years, after which companies pay a reduced rate of 50%. Additional benefits include a 25% deduction from net profits for project installation costs, while most businesses (excluding some operating outside of industrial estates in specific areas of the zone) are also qualified for a double deduction of transportation, water and electricity costs for 10 years, as well as a 75% reduction on import duties on raw or essential materials used in manufacturing products for domestic sale for five years.

Although these fiscal incentives are generally available to most companies, there are a number of special criteria regarding geographic location, participation in particular industrial estates, minimum investment requirements and other stipulations, which some businesses satisfy to gain benefits.

Other non-tax incentives include 100% land ownership rights for foreign investors, permission to bring in foreign experts and technicians, and work permit and visa facilitation for selected industries.

INDUSTRIAL PARKS: The dozens of industrial parks operating in Thailand are among the most successful in the region, capitalising on incentives, established infrastructure, economies of scale, centralised labour and other synergies. As of June 2012, there were a total of 38 major industrial parks set up in the country, according to the Industrial Estate Authority of Thailand (IEAT). The majority of these (33 in total) are located in the central plains region near the major population centres and sea ports, followed to a lesser extent by Lamphun and Phichit estates located in northern Thailand and the SongKhla and Pattani estates in the south. According to IEAT’s data, a total of 110,869 rai were covered by the industrial estate master plan as of 2012. This area housed a total of 3858 factories employing 503,993 workers at a combined investment cost of BT2.45m ($78,155) in the second quarter alone. Of the 38 parks, 16 are now managed by the private sector, with the remaining 12 run by the IEAT. The largest private operators include Amata Industrial Estates, Hemaraj Land and Development, and Navanakorn.

Hoping to build on the success of these established estates, the IEAT is in the process of an ambitious expansion of these zones, with more than a dozen new projects in various stages of development. Among the new parks generating the most interest recently are estates being developed along the Thai-Burmese border to take advantage of the large market and the inexpensive labour force accessible now that the government has thrown open its doors for business. These include four new industrial estates planned by the IEAT to be operational by 2015, the first of which is scheduled to by in Ban Phu Nam Ron in Kanchanaburi province and would link with Myanmar’s Dawei industrial estate project. This would be followed by the Chiang Kong industrial estate near the Golden Triangle in Chiang Rai, another in Tak province’s Mae Sot district, and an eco-friendly estate in Khon Kaen province.

GOING GREEN: Complementing the geographic expansion along regional corridors, there are also efforts to shift industrial activities within theses estates in a more sustainable and environmentally responsible direction. Driven by the IEAT’s Eco-Industrial Estates Development (EIED) programme supported by the German Technical Cooperation Organisation beginning in 2000, the scheme seeks to make industrial estates more ecologically and socially friendly by focusing on decreasing the environmental impact of nine areas: materials, production, transportation, quality of life and public relations, energy, communication systems, human resource recruiting, marketing, and environment hygiene and safety. There were no problems in selecting the five original eco-industrial parks (EIP) for the programme, which included Thailand’s largest petrochemicals complex in Map Ta Phut, auto and electronic complexes along the eastern seaboard, as well as mixed industrial estates in Bang Poo and northern Thailand.

GROWING WIDER: In recent years, the number of EIEDs has grown to include a number of other sites, including the 304 Industrial Park complex located in Prachin Buri Province. Sites such as these are now offering a more ecologically friendly approach to traditionally high-impact industries looking to “green up” their activities and image as evidenced by current tenants such as leading Thai paper producer Double A. “Industry leaders strongly believe in developing a system of sustainable pulp and paper production. Therefore, we invest significantly in research for the enhancement and development of new technology, which has helped significantly improve the speed of development of tree plantations as well as optimal usage of limited resources like land,” Virabongsa Ramangkura, the chairman of the executive board of Double A and of the Bank of Thailand, told OBG. The government’s highest-profile moves to hold industrial companies accountable to these stringent social and environmental standards came in 2007 when a court froze 76 factories in the Map Ta Phut area until they could prove compliance with laws governing environmental and health impacts. Nearly all the companies have proved they were abiding by the rules.

INVESTMENTS: While tax breaks and other financial incentives – particularly for specialised export-oriented industrial zones – are now a commonly accepted practice the world over for countries looking to boost foreign direct investment (FDI), Thailand has been very successful in attracting large investors.

In 2011 the BOI approved 1652 investment projects for the country with a cumulative value of BT449bn ($14.3bn) and has averaged 1339.5 projects worth BT473.35bn ($15.1bn) annually from 2006-11. Of the 2011 total, FDI accounted for BT278.47bn ($8.88bn) spread over 904 projects. Metal products and machinery was the most active sector, seeing 300 approved projects totalling BT86.16bn ($2.75bn), followed by electric and electronic products, which managed 180 projects worth BT61.20bn ($1.95bn) and the services sector with 166 projects totalling BT31bn ($988m). Chemicals and paper were BT37.96bn ($1.21bn) from 101 projects, followed by minerals and ceramics (31 projects, BT24.96bn, or $796.22m), agriculture products (64 projects, BT18.36bn, or $585.68m) and light industries/textiles (62 projects, BT11.5bn, or $366.85m).

In addition to these new financial commitments, Thailand is also expecting a new wave of capital investment as companies recover from the 2011 floods that had caused substantial damage across the board. To facilitate these expenditures, Thailand’s government has approved a number of additional temporary financial incentives designed to assist the recovery of businesses affected by the 2011 flooding. To help the more than 800 factories get back on their feet, the Ministry of Industry has authorised the removal of tariffs on new equipment imports and will also allow for foreign companies to import more staff from their home countries to help eligible companies rebuild.

According to the Ministry of Industry, the primary target of this aid will be the 3m-odd small and medium-sized enterprises (SMEs) operating in the country as the larger companies are believed to have the resources and flexibility to absorb setbacks.

The BOI incentive scheme is seen as a way to keep specific industries in Thailand by increasing tax exemptions and extending other key incentives and measures for industrial estates. Eligible companies affected by the flooding that have projects previously receiving BOI promotional privileges and that were subject to a tax exemption limit at the time of the flooding will now be granted a new eight-year exemption, subject to a 150% cap on new investment plus the remaining unused cap and other exemptions contingent on the project’s prior status with BOI. In addition, industrial estates that invest in flood prevention measures will receive an eight-year tax waiver with a maximum exemption not to exceed 200% of the investment value.

SOLID AS STEEL: Used in a variety of industries from automobiles to cutlery, the iron and steel sector mainly supplies inputs to domestic manufacturers, although it does maintain a modestly-sized export trade. As a whole, the industry produced 487,000 tonnes of galvanised iron sheets and 1.39m tonnes of steel and shaped steel through the first 11 months of 2011. Annual production in 2010 totalled 1.46m tonnes of steel bar and shape steel (up 13.6% over 2009) and 512,000 tonnes of galvanised iron sheets (up 15.5%).

Despite these recent increases, domestic demand still far outpaces supply and a steady stream of imports is necessary to make up the difference. In 2011 iron and steel imports averaged BT33.36bn ($1.06bn) per month while exports averaged just BT4.14bn ($132.07m) according to the Iron and Steel Institute of Thailand (ISIT).

More investment is on the way for the sector as well, with the BOI approving a total of 368 metal processing investments worth a total of BT86.9bn ($2.77bn) through the first 11 months of 2011. One major project already under way is Canadoil Group’s BT20bn ($638m) investment in a new production facility for high-grade alloy and steel plates for pipes with an annual capacity in excess of 1m tonnes.

CONSUMABLES: Food and drink is one of Thailand’s biggest sectors, with agro-manufacturing product exports topping BT28.89bn ($9.22bn) in 2011 and beverage exports chipping in another BT1.28bn ($408m). The country’s agricultural products and fisheries base, combined with its strong industrial backbone, have proven an attractive destination for large-scale farming firms, which include the likes of Thai Agri Foods, CP Group, Thai Union Frozen, Agro-On Thailand, Thai Agro Exchange Company, Dole, Cargill, Grampian, The Royal Group, Sri Thai Food and Beverage Public Company, Asian Group and Pan Asian. Two breweries dominate the alcoholic beverage segment, Thai Beverage (ThaiBev) with a market share by volume of 31% in 2011 and Boon Rawd Brewery Company with 59%. ThaiBev’s primary offerings on the beer market consist of the Chang brand family of beers, which include Chang Classic, Chang Export, Chang Draught, Chang Light as well as the Archa and Federbräu brands. ThaiBev also supplies the market with something a bit stronger, producing an array of distilled spirits including the Ruang Khao, SangSom, Mekhong and Hong Thong local labels as well as a Scotch whisky operation in Scotland and white spirits production in China.

Through its subsidiary Singha Corporation Company, Boor Rawd Brewery produces popular domestic brands Singha and Leo , which have a strong following, as well as imported brands including Corona Extra, Miller Genuine Draft, Miller Lite and Asahi Super Dry. In total, Singha operates three breweries and six soda water and drinking water factories across the country. In addition to their beer line-ups, both major brewers also produce a wide variety of non-alcoholic beverages like soda water, drinking water, tea and various energy drinks. The remaining 10% of the market is divided among other small competitors led by the Thai Asia Pacific Brewery, with roughly 5% of the market.

Domestic beer production has remained relatively static in recent years with 1.95bn litres produced in 2010, up just 0.2% over the previous year’s 1.94bn litres according to data from the central bank. Through November 2011, production was similar to previous year and reached 1.71bn litres. With total soda production of 296.38m litres through the first 11 months of 2011, output is on pace to reach 323.33m litres in 2012 which puts output slightly under the 2010 total of 354.91m litres and just over the 322.95m litres produced in 2009.

AFTER THE FLOODS: The biggest challenges faced by many Thai industries in 2011 arose in October and November as abnormally high monsoon rainfall sent floodwaters surging into the heavily industrialised areas surrounding Bangkok. As a result, production forecasts were scrapped and 838 factories were affected by the event, according to the Ministry of Industry.

The automobile and electronics sectors were particularly hard hit, as 2011’s fourth quarter exports fell by 35.9% ($7.02bn to $4.50bn) and 36.6% ($12.9bn to $8.18bn), respectively, from third-quarter levels according to central bank data. Exports as a whole for Thailand fell from $63.3bn in the third quarter to $49.16bn in the fourth quarter, a 22.33% slide.

FROM TROUBLE, OPPORTUNITY: While the effects of the floods undeniably decimated a substantial portion of Thailand’s industry at the end of 2011, there may well be a silver lining to the catastrophe. Retooled factories that have dried out and resumed production are now facing high levels of latent demand across many sectors, which should serve to both drive up demand and increase prices for many products. This is particularly true for the electronics industry, where the global shortage of hard drives and other crucial components is expected to keep prices above normal for some time.

Wong Wai Ming, the CFO of the world’s second-largest maker of PCs, Lenovo Group, said in February 2012 that the global shortage caused by flooding is adding $5-10 to the cost of each hard disk drive (HDD). Other major computer companies also felt the impact, with Microsoft estimating that global computer sales were down 1% at the end of 2011 as a direct result of the event while Intel Corporation, the world’s largest chipmaker, cut its fourth-quarter revenue forecast by $1bn due to the HDD shortage.

Thai exports of all colours will also benefit from in aftermath of the floods, which pushed the value of the Thai baht to the lowest levels seen in the 17 months prior to January 2012, making Thai exports far more attractive for other nations.

RAISING STANDARDS: With this situation now past, a number of other longer-ranging challenges still face the manufacturing sector. The most encompassing of these is the growing cost of production, which is under increasing pressure from evaporating trade barriers and cheap costs of business from regional competitors.

A key issue here is the new government’s decision to increase the minimum wage to BT300 ($9.57) a day for general workers and BT15,000 ($478.50) a month for holders of bachelor degrees.

While many companies bemoan the new policy as an unfairly imposed expense, in particular SMEs with less ability to absorb higher prices for inputs, others see the country’s skilled labour pool as another competitive advantage to be utilised.

“Thailand has an advantage over its neighbouring countries in the E&C market because of its established manufacturing base and skilled human capital,” Sumeth Simakulthorn, chairman of Kulthorn Kirby, told OBG.

In addition to rising labour costs, growing demand for power and increased global energy prices are also likely to exert a good deal more upward pressure on electricity prices. Furthermore, the cost of borrowing is also expected to see a sizeable increase as interest rates are predicted to rise later in the course of 2012.

OUTLOOK: Thailand’s industrial sector continues to show it is a force to be reckoned with, not only within the region but also globally, after barely breaking stride despite the impacts of severe floods and a supply shortage from Japan earlier in 2011. The supply chain will take some time to fully recover though.

However, given the latent demand left over from 2011 and a production capacity increasing by nearly 30% per annum, the auto sector should continue to be among the country’s top performers, while strong demand from the computer markets should ensure the continued success of the E&E sector.

The upwards-creeping production costs in Thailand, driven by increasing wages and power costs, may hasten the decline of some low-skilled, labour-intensive segments, which could in turn leave for greener pastures with cheaper labour markets, although this will have a much lower impact on higher-value-added producers.