Thailand’s finance minister has a message for all the naysayers who
believe his country will be a major loser if plans for a new regional economic
community come together in 2015: Don’t bet on it.
Economists have long debated
whether Southeast Asia’s second-largest economy will struggle once the new
regional bloc – known as the Asean Economic Community (AEC)—gathers momentum in
the next few years, potentially bringing more-integrated financial markets,
freer flows of labor, streamlined customs procedures and better transportation
links to a region of 600 million people. The fear among some investors in
Thailand is that those and other steps to tie Southeast Asian economies more
closely together will make smaller or less-developed countries such as Cambodia,
Laos and Myanmar more attractive, allowing them to suck away some of the
investment that once went to Thailand.
Those worries surfaced again late
last month, when the Japanese Chamber of Commerce (JCC) and Japan External
Trade Organization (Jetro) in Bangkok released a survey which found that half
of Japanese corporations based in Thailand are considering destinations
elsewhere in Southeast Asia for future production bases once the AEC comes into
play, as is now expected in 2015. In its coverage of the survey, Thai newspaper
The Nation noted that Thailand “will need to ramp up its performance in several
areas” to make the country more attractive to foreign firms or “else face a
decline in investment and even relocations.”
But Thai Finance Minister Kittiratt
Na-Ranong dismissed those worries in an interview, saying that if Japanese
companies had wanted to leave, they would have done so already after last
year’s devastating floods that temporarily shut down much of Thailand’s
industrial sector. He said 99.5% of the companies involved remain in Thailand,
and that Japanese investment continues to rise.
In the past seven months, he
said, the number of investment applications filed from Japanese companies
increased 51% from the previous year.
“Thailand remains the center of
Japanese investment in Southeast Asia,” he said. As for the AEC, “I don’t think
Thailand will lose out,” he said. “We will retain almost all of our investors
in Thailand.”
Of the 374 Japanese firms in
Thailand that were surveyed for the joint JCC-Jetro report, 49% said they
anticipated no change to their production plans in Thailand in response to the
AEC. But 29% said they would consider Myanmar for future production bases, and
21% said they would look to Indonesia.
Mr. Kittiratt said it was only
normal that some investors would have their eyes on Myanmar, which has a market
of 60 million people and is undergoing a major reform process to modernize its
economy after decades of harsh military rule. “It’s the same in Indonesia—it’s
a new market of 250 million people that’s opening up,” he said.
Whatever happens, it’s clear that
the plans of Japanese firms will be crucial to Thailand’s future. Japanese
companies have long been among the dominant investors in Thailand, using the
country as a major production base for vehicles and other products sold locally
and around the world. In 2011, the investments of Japanese corporations
comprised 57% of all foreign investment approved by the Thai Bureau of
Investment (BOI); in the first six months of 2012, the Japanese share grew to
62%, according to BOI figures released in July.
Despite last year’s floods, which
the World Bank says caused an estimated THB1.4 trillion (USD45.7 billion) in
economic damages and losses, most Japanese firms still have a positive outlook
on growth in Thailand for the second half of 2012, with 83% reporting that they
expect pre-tax profits and 70% saying that business sentiment is improving.
In April, Toshiba Corp. announced
plans to relocate their chip manufacturing facilities from north of Bangkok,
which was inundated with water last year, to Prachinburi province, about 100
miles northeast of the capital, in an area with no major waterways. Canon Inc.
is also currently constructing new manufacturing facilities in the province.
But many Japanese investors have
said privately that they were frustrated over what they perceived to be an
inadequate Thai response to the massive floods last year, and many analysts
have predicted that at least some of them will leave once Southeast Asian
countries become more integrated and it becomes easier to set up shop
elsewhere.
The JCC-Jetro survey found other
issues of concern for the country, notably labor constraints. An overall
shortage of workers and rising labor costs due to recent and upcoming minimum
wage hikes were the most significant problems mentioned by Japanese enterprises
in the survey—65% of respondents noted a negative impact on their businesses
and profits due to these factors.
“Thailand has very good
infrastructure, supporting industries, and government incentives,” said Jetro
president Setsuo Iuchi. “But shortage of labor and the rise in costs are big
issues.”
Some Japanese businesses have
already moved the labor-intensive segments of their supply chains and
manufacturing processes to Cambodia, according to Mr. Iuchi. “At the same time,
other Japanese companies are looking to other destinations in the region for
their future expansion,” he added.
To be sure, not everyone is
convinced the AEC will fully come together as planned, and Thai authorities may
well respond with more incentives of their own to sweeten the pot for foreign
firms. Either way, Mr. Kittiratt says he’s convinced the AEC will be good for
Thailand in the long run.
“The reason we’re integrating is
because there will be a benefit for all countries,” he said. “We will all win
once we become the AEC, by being a wider, bigger market with greater purchasing
power.”
Patrick Brzeski
Business & Investment Opportunities
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