Abstract. 1. Introduction. Saowaruj Rattanakhamfu Somkiat Tangkitvanich Wirot Sukphisan Ploy Thammapiranan Thailand Development Research Institute

Transcription

1 Relocating Labor-intensive Industries from Thailand to Neighboring Countries: Possibility and Policy Implications Saowaruj Rattanakhamfu Somkiat Tangkitvanich Wirot Sukphisan Ploy Thammapiranan Thailand Development Research Institute Abstract As a result of higher wage and labor shortages in Thailand, Thai companies in labor-intensive industries are forced to find the new business model to remain competitive. In the short run, some companies may choose to relocate their production bases to neighboring countries with lower wage rates to maintain their traditional cost comparative advantage. However, in the long run, they have to move up their value chain by adding higher value added activities, such as research and development (R&D), design, marketing, and branding to stay competitive. This paper aims at finding out the possibility of relocating Thai production bases to neighboring countries, especially CLMV (Cambodia, Lao PDR, Myanmar and Vietnam), as well as who are likely to relocate, how and where? It also draws policy implications regarding the role of the government in facilitating the relocation process as well as in increasing the competitiveness of these industries. 1. Introduction Labor intensive industries, especially textile and garment, shoes and leather goods, and gems and jewelry, have played an important role to Thai economy as the major export industries as well as the main employment sources. In terms of exports value in 2012, textile and garment, and gems and jewelry industries contribute to 3.2 and 2.6 percent, respectively. In addition, textile and garment industries employ about 11.8 percent of the total employment in the manufacturing sector in the same year. However, the competitiveness in these labor intensive industries has declined. Figure 1 shows that their market shares in the world market have decreased over time. 20

2 Relocating Labor-intensive Industries from Thailand to Neighboring Countries 21 Source: UN Comtrade Figure 1: Market share of export to the world by products and countries In the past, Thailand enjoyed the comparative advantage in labor intensive industries due to its cheap and abundant labor. However, the continual increase in wages decreases its comparative advantage. In the short run, one way to stay competitive in laborintensive industries is moving the production bases to low-wage countries. They still have to move up their value chain by R&D, design, marketing or creating own brands to be competitive in the long run. The next section will provide possibility for relocating Thai manufacturing bases in labor intensive industries to neighboring countries. The third section will provide an overview of the companies likely to relocate, and how they would do so. The fourth section will describe where to relocate. The fifth section will provide case studies of companies relocating to neighboring countries. The cases will not only highlight why and how they have relocated but also help us draw lessons on the factors that determine the successful relocation. The sixth section will compare the production cost differences in different locations, namely Bangkok, Ho Chi Minh City, and Yangon. The last section will summarize and provide policy recommendations. 2. Possibility for relocating laborintensive industries to neighboring countries

3 22 東 協 瞭 望 009 The flying geese theory is proposed by Akamatsu (1962) 1 to explain the phenomenon of industry development in East Asia. This theory explicates that the economic development model in Asian countries is similar to a flying-geese pattern such that more developed countries move their production bases to less developed countries, starting from Japan as a technology leading country to Newly Industrializing Economies (NIEs) (i.e., South Korea, Taiwan, Singapore and Hong Kong), then old ASEAN members (i.e., Malaysia, Thailand, Indonesia and Philippines) and finally new ASEAN countries (i.e., Vietnam, Cambodia, Lao PDR, and Myanmar). The main driver of a change in production pattern is the internal restructure of leading countries. That is, an increase in wages in more developed countries reduces their comparative advantage in labor-intensive products; therefore they have to relocate low-value added activities to less developed countries with lower wages. The flying geese theory can explain the production pattern in Southeast Asia well. For example, in garment industry, the manufacturing base is moved from Japan to South Korea and Taiwan, later Thailand, Malaysia, and Indonesia and now Vietnam, Cambodia, Lao PDR and Myanmar. In Thailand, most manufacturers are original equipment manufacturers (OEMs) 2. Of them, only 5 percent conduct research and development (R&D) 3, therefore their comparative advantage mainly depends 1 Akamatsu K. (1962). A historical pattern of economic growth in developing countries. Journal of Developing Economies, 1(1): In this paper, an original equipment manufacturer (OEM) means a company producing products for another company that sells those products under its own brand name. 3 Source: National Science Technology and Innovation Policy Office on labor costs. As domestic labor costs have escalated significantly, these companies, especially in laborintensive industries, find it increasingly hard to continue their operations in Thailand. Some have relocated their production bases to lower wage countries, especially Vietnam, Cambodia, and Lao PDR and lately Myanmar. In particular, the reduction in competitiveness of Thai labor-intensive industries is due to the following reasons. Firstly, wages have continuously increased in Thailand. Recently, a nationwide increase in the daily minimum wage to 300 baht (or 9.7 USD 4 ) has further reduced the already thin profit margins of laborintensive industries. Continual rise in labor cost has gradually diminished Thailand s cost advantages in laborintensive products in the international market. Figure 2 shows the differences in the average labor wages in some labor-intensive industries between 2007 and During this period, the average wages in these laborintensive industries have increased significantly. In particular, in the textile industry, the average wage increased from 4,867 baht in 2007 to 9,217 baht in 2013, accounting for the growth rate of 89 percent. Similarly, the average wage in the garment industry increased from 4,884 baht in 2007 to 7,745 baht in 2013, accounting for the growth rate of 59 percent. The wage in the shoes and leather goods industries increased from 5,467 baht in 2007 to 8,150 baht in 2013, accounting for the growth rate of 49 percent. The wage in the gems and jewelry industries also increased from 7,219 baht in 2007 to 10,955 baht in 2013, accounting for the growth rate of 52 percent. 4 The average exchange rate in 2013 is baht/usd. (source:

4 Relocating Labor-intensive Industries from Thailand to Neighboring Countries 23 Recently, due to the introduction of new daily minimum wage policy started in some provinces in April 2012 and nationwide in 2013, the annual growth rates of wages in these industries have jumped enormously to 23 percent in textile industry, 11 percent in garment industry, 10 percent in shoes and leather goods industries, and 35 percent in gems and jewelry industries in Source: Labor Force Survey (various years), National Statistics Office Figure 2: Average monthly wages in labor intensive industries As a result of higher wages, companies in these industries have become more sensitive to the external pressures, such as Thai Baht appreciation 5. Furthermore, some of them are at risk of shutting down their businesses. Based on the data from the Office of Industrial Economics, our estimation shows that after the introduction of new minimum wage policy, the average profit margin of textile and garment industry is down to only 1.9 percent. Moreover, companies in the shoes and leather goods industries as well as those in the gems and jewelry industries could potentially suffer a loss (Figure 3). 5 The exchange rate from Thai baht to USD has changed from baht/usd in 2007 to baht/usd in (Source:

5 24 東 協 瞭 望 009 Source: Authors, calculated based on the data from the Office of Industrial Economics Figure 3: Average cost and profit to sales after the introduction of new minimum wage policy Secondly, labor shortage problem, especially unskilled labor, becomes increasingly severe in Thailand. During the past ten years, the unemployment rate has gradually decreased, so as the absolute number of the unemployed, as shown in Figure 4. In 2013, there are less than 300,000 unemployed workers in Thailand, and the unemployment rate stands at only 0.7 percent. Source: National Statistics Office Figure 4: Number of unemployed and unemployment rate in Thailand

6 Relocating Labor-intensive Industries from Thailand to Neighboring Countries 25 Looking forward in the future, Thailand is quickly approaching the aging society. Figure 5 shows that the shares of people with the age of 60 and above to the total number of population in Thailand have exceed 10 percent since 2004, and continued to increase to almost 13 percent in According to the World Population Prospects prepared by the United Nation, Thailand will reach the stage of aging society before any other countries in Southeast Asia, excluding Singapore 7. Source: National Statistics Office Figure 5: Share of people with the age of 60 or above Thirdly, competition from other countries, particularly emerging economies, becomes more and more intense in the world export market. Figure 6 shows that China has sharply increased its market share of manufacturing products in the world market since Currently, Thailand s main competitor for the low-end market is China, which has comparative advantage in cheap labor. Although India has slightly increased its market share which is still at the low level, its market share is likely to increase when it gradually industrializes. It is expected that India will become another main competitor in labor-intensive products because India recently started developing its manufacturing sector, and will become one of the most attractive manufacturing destinations due to its abundant supply of cheap labor and large domestic market. 6 Source: National Statistics Office, Thailand 7

7 26 東 協 瞭 望 009 China India Source: UN Comtrade Figure 6: Market shares of manufacturing products in the world market Finally, Thailand is facing more difficulties to access major export markets, compared with its competitors due to two main reasons. The first reason is that Thailand s main trade partners are in the process of trade negotiations with its main competitors. For example, Malaysia and Vietnam are not only participating in the Trans-Pacific Partnership (TPP) trade negotiation, but also actively negotiating a bilateral free trade agreement with the EU, while Thailand is negotiating only with the EU. If their negotiations are successful, they will have tariff advantages over Thailand in these major markets. Furthermore, some agreements are already effective, such as Economic Partnership Agreement (EPA) between Japan and Indonesia (effective since 2008), and EPA between Japan and Vietnam (effective since 2009). The conclusion of these agreements swipes Thailand s tariff advantages over its main competitors in the Japanese market. Thailand is also graduating from the Generalized System of Preferences (GSP) granted by the US and the EU. For example, the EU abolished the GSP privilege for gems importing from Thailand during Moreover, it is highly likely that the EU will abolish the GSP privileges for all manufacturing products from Thailand in Who are likely to relocate, how and why? In this section, we provide description of companies that are likely to relocate and the way they are expected to relocate. We select three laborintensive industries, namely textile and garment, shoes and leather goods, and gems and jewelry, for our indepth study. Based on data collection from the field trips and interviews with trade associations and government agencies in these countries, we find that large enterprises (LEs) are more likely to relocate or expand their production bases to low wage neighboring countries than SMEs due to their ability to take more risks. In addition, the low value-added, labor-intensive, and low-tech production processes are likely to be relocated or expanded to neighboring countries. For example, for the textile and garment industries, such production processes are cutting, sewing and making

8 Relocating Labor-intensive Industries from Thailand to Neighboring Countries 27 garments, especially sport-specific clothing, nonfashion apparel, and uniforms. For the shoes and leather goods industries, such processes are nonfashion athletic and leather footwear production and preparation, including replicating, cutting, insole decorating, assembling and trimming. Similarly, for the gems and jewelry industries, the unsophisticated final production processes for medium and low-end products, particularly costume jewelry, are prone to be relocated to neighboring courtiers. From our research, it appears that the common form of relocation to neighboring countries with abundant supply of cheap labor is direct investment by setting up factories. In some cases, Thai enterprises may choose to have joint investment with local partners. Another alternative is to outsource their production to suppliers in those countries. In general, the main reason to relocate to these low wage countries is to maintain their cost comparative advantages. Comparing among these three labor-intensive industries, many more enterprises in the textile and garment industries than those in the other two industries have relocated to neighboring countries. This is because the size of textile and garment industries is much bigger than those of the other two. The share of large enterprises is also much higher in textile and garment industries. In particular, the share of large enterprises to total enterprises in the textile and garment industries is 15.9 percent out of 2,390 enterprises, while that in the shoes and leather goods is only 10.3 percent out 1,037 enterprises in Textile and garment industries Comparing to enterprises in textile industry, enterprises in garment industry are more likely to relocate their production bases to neighboring countries, especially CLMV. This is because the production processes of the textile industry in Thailand are involved with higher levels of technology and skilled labor than those in the garment industry. In the latter, most enterprises are large enterprises and are OEMs producing sportswear, non-fashion apparel items and uniforms. The production processes performed in these low wage countries are cutting, sewing and making garments. The main mode of relocation of production in this sector is foreign direct investment, either by a single company or by groups of companies in the same cluster. While the new companies are mainly wholly-owned by Thai investors, if allowed by the law, some are jointly owned with local investors. The advantages of joint investment are better access to local knowledge and understanding about domestic market demand and stronger connection with local authorities. The disadvantage is the risk related to the differences in views and interests of the shareholders. We also find that some Thai enterprises choose to invest in neighboring countries through nominees to avoid some regulatory limitations or discriminations against foreign investors. In Myanmar, for example, foreign and local investors are entitled to different rights in terms of land ownership. In sum, the reasons for some Thai companies to relocate to neighboring countries are as follows. Firstly, the problems of increased labor costs and labor shortages, especially unskilled labor, are becoming severe in Thailand. As a result, some Thai companies have to find new production bases in countries with lower wages and larger supply of labor. Secondly, Thai companies, especially the OEMs for global brands, are pressured by their buyers to move to lower wage countries to maintain their cost advantage.

9 28 東 協 瞭 望 009 Finally, neighboring countries have trade preferences from main export markets, such as the US, the EU and Japan. For example, the EU has lifted the sanction against Myanmar, and provided it with GSP effectively since 19 July Under the EU s Everything but Arm scheme, Myanmar will enjoy trade preferences by getting exemption from import tariffs to the European market for all products, except for arms and ammunitions. In contrast, Thailand is likely to graduate from the GSP soon. As a result, Thai companies have strong incentives to move their production bases to these neighboring countries. 3.2 Shoes and leather goods industries Most Thai companies in the shoes and leather goods industries that have relocated to neighboring countries are relatively large because larger companies are more capable than smaller ones to deal with business risks in neighboring countries. In particular, they are better equipped to handle regulatory risks and inefficient financial system. Some of them are original brand manufacturers (OBMs), while others are OEMs for global brands. The production processes likely to be moved to neighboring countries are those that are highly laborintensive, produce low value added, and use low technology level. Examples of such processes are production and preparation of non-fashion athletic and leather footwear, including replicating, cutting, insole decorating, assembling and trimming. The modes of relocation of production in this sector vary from setting up wholly-owned investment, joint venture with local partners, and outsourcing to local suppliers. The upside of wholly-owned investment is getting full control of the company decisions while the downside is higher regulatory risks. On the contrary, the advantages of joint investment are better access to local knowledge and understanding about domestic market demand and stronger connection with local authorities. However, the disadvantages are difficulties in finding reliable local business partners and the risks related to corporate governance. Finally, the advantage of outsourcing is the reduced investment risks, while the disadvantage is the risk of losing control over production. Similar to the garment and textile industries, the main factors for relocating shoes and leather goods production to neighboring countries are increased labor cost and labor shortages. According to the Thai Footwear Association (TFA), the shoe industry in Thailand still needs more than 10,000 employees for filling vacant positions. Furthermore, OEMs for global brands are pressured by their buyers to move to lower wage countries to maintain their cost advantage. In addition, for some OBMs, the domestic market is quite saturated and facing fierce price competition from Chinese products; therefore they turn to expand their markets in neighboring countries which have rapid economic growth, increased purchasing power and similar preferences for products. 3.3 Gems and jewelry industries Similar to the above two industries, the low valueadded, highly labor-intensive, and low-tech production processes of unsophisticated final production processes for medium and low-end products, especially costume jewelry, are prone to be relocated to neighboring courtiers. However, very few Thai companies in gems and jewelry industries relocate to neighboring countries. Some of them are large companies and OBMs, therefore their main reasons for relocation are expanding their markets as well as accessing the abundant supply of cheap labor in order to keep their price comparative advantage. They also tend to directly

10 Relocating Labor-intensive Industries from Thailand to Neighboring Countries 29 invest in these new markets by setting up production bases and distribution channels. In contrast, some of them are companies interested in raw materials in rich natural resource countries; therefore they have joint investment with local partners who have strong connection with related government officials. Some also choose to invest in neighboring countries through nominees to avoid some discrimination against foreign investors. In Myanmar, for example, foreign investors have different rights from local ones in terms of the exploitation of natural resources, such as jewelry mining rights. However, relocating gems and jewelry production bases to neighboring countries is relatively more challenging than relocating apparel or shoes production bases because labor in gems and jewelry industries are rather skilled or semi-skilled which require investing heavily in training. 4. Where to relocate? Regarding target countries for relocation, Thai companies are likely to move to CLMV due to their large supply of cheap labor and their geographical advantages. Among CLMV, the country with the lowest monthly wage for factory worker is Myanmar (USD 53 in Yangon), followed by Cambodia (74 USD in Phnom Penh), Lao PDR (132 USD in Vientiane) and Vietnam (148 USD in Ho Chi Minh City) 8. In terms of labor force, the country with the largest number of labor force is Vietnam (52.9 million), followed by Myanmar (33.3 million), Cambodia (8.4 million) and Lao PDR (3.3 million) 9. In addition, the location of CLMV is close to Thailand. The north of Thailand is bordered to Myanmar and Lao PDR, and the northeast is bordered to Lao PDR and Cambodia. Formerly, the production linkages between Thailand and its neighboring countries were quite difficult due to poor connectivity among these countries. However, the current development plan for road and rail transportation in Greater Mekong Subregion (GMS) countries and the emerging economic corridors are connecting Thailand with these countries. Under the GMS development program, three economic corridors are intersected in Thailand: the East-West Economic Corridor (connecting Vietnam, Lao PDR, Thailand and Myanmar), the North-South Economic Corridor (connecting the Southern provinces of China, Myanmar, Lao PDR, Thailand, and Malaysia) and the Southern Economic Corridor (connecting the Dawei deep sea port of Myanmar, the Laem Chabang deep sea port of Thailand, and Cambodia), as shown in Figure 7. It is expected that the economic corridors will play a key role to link production and trade in the region. 8 Source: JETRO. The 23 nd Survey of Investment Related Costs in Asia and Oceania (2013). 9 Source: World Bank database (2013)

11 30 東 協 瞭 望 009 Source: Figure 7: Economic corridors connecting Thailand and neighboring countries In addition, CLMV have advantages in terms of trade privileges granted by major markets, as shown in Table 1. For example, the EU provides duty free and quota free, with the exception of armaments, for import from Cambodia, Lao PDR, and Myanmar, as they are least developed countries under the Everything but Arms (EBA) initiative. Major markets US EU Table 1: Trade preferential from major markets Cambodia Lao PDR Myanmar Vietnam Zero tariff rates and no quotas Under EBA scheme, zero tariff rates and no quotas No GSP benefit Under EBA scheme, zero tariff rates and no quotas Note: Data covered only products under GSP and EBA schemes. Under the process of easing economic sanction Abolish the economic sanction since April 2012, and provide GSP since 19 July 2013 under EBA scheme. Under the TPP negotiation Textile and garment: non-zero tariff rates and quotas Leather goods and shoes: no GSP due to export quantities over the quota gems: most tariff rates are zero under GSP and there are quotas

12 Relocating Labor-intensive Industries from Thailand to Neighboring Countries 31 In spite of the aforementioned strengths, Thai companies planning to relocate to CLMV should be aware of some pitfalls. For example, Vietnam still faces some problems waiting to be solved. These include the sharp increases in wage rate, unclear law and ineffective enforcement, inefficient infrastructure and unstable macroeconomic conditions, especially high inflation, high level of non-performing loans (NPLs) in the banking sectors, and low confidence in the local currency. Similarly, Myanmar has some disadvantages as an investment destination. The main difficulty is inefficient infrastructure, especially electricity and transportation system. It also suffers from other problems such as the skyrocketing land prices, difficulties in finding sizable land lots, underdeveloped banking system, the lack of market information, uncertainty of laws and regulations as well as political instability. 5. Some case studies of Thai companies relocating to neighboring countries This section provides some case studies of Thai companies in labor intensive industries relocating to neighboring countries to draw lessons why and how they have relocated and how they have been so far successful. Three case studies include a Thai garment factory in Vietnam, and a Thai shoes factory subcontracting to a local supplier in Myanmar, and a Thai wholly-owned jewelry factory in Vietnam. 5.1 Case study of a Thai garment factory in Vietnam One of Thai companies successful in relocating to Vietnam is Alliance One Apparel, a company under the Liberty Garment Group. Alliance One Apparel used to have three factories in Thailand, but there is currently only one domestic factory. The company executives decided to relocate to Vietnam since 4-5 years ago due to increases in wages, and the difficulties in hiring unskilled labor in Thailand. The main factors to set up manufacturing facilities in Vietnam are abundant supply of cheap labor, high growth rate of population, and existing trading partners. The first factory in Vietnam is located in Giao Long Industrial estate in Ben Tre province, with the area of 100,000 square meters, and 5,000 employees. The production there is mainly to serve its clients who are the owners of global sports brands. The purchase orders are usually of small volume with frequent design changes, and sports jackets. The second factory is currently built nearby the first factory. The advantages of setting up factories in Ben Tre province over Ho Chi Minh City are lower wages (80 USD difference per worker per month) and easier to find workers. The company can usually recruit 100 workers within one week. In spite of cheaper labor costs in Vietnam, there are other costs in setting-up business. For example, the company has to invest more on human capital development by provide training courses to local workers in order to assure their quality of production. This is because labor productivity of Vietnamese workers at the moment is comparatively lower than that of Thai workers. Furthermore, the costs of learning the country s laws and regulations and dealing with different law interpretation by different government officials are another item of business cost that cannot be ignored. 5.2 Case study of a Thai shoes factory subcontracting to a supplier in Myanmar In contrast to setting up a new factory in neighboring countries to supply to a global brand, a

13 32 東 協 瞭 望 009 Thai company in the leather shoes industry chooses to keep its cost comparative advantage by relocating some production lines to Myanmar. The company outsources CMP (Cut-Make-Pack) operations to a Myanmese subcontractor. To assure the quality and standard of production, the Thai company provides some technological assistance (such as giving advice on machines to be used for production, and dispatching Thai technicians to monitor and control the production in Myanmar). The company also provides raw materials (such as cow skins and pig skins) for its Myanmese subcontractors. In spite of low labor cost, there are significant extra costs of production in Myanmar. In particular, Myanmar still has poor quality of infrastructures, especially electricity and road. The electricity shortage in Myanmar causes higher production cost because the state can provide electricity about 5 hours a day on average, and producers have to use their own electricity generators to continue their production lines. In addition, complicated export and import laws and regulations cause slow customs process, resulting in higher operating cost. 5.3 Case study of a Thai jewelry factory in Vietnam Pranda Jewelry Public Company Limited, a Thai leading manufacturer of medium-to high-end quality jewelry, has established four factories in Thailand and expanded its manufacturing bases into other countries, including Vietnam, Indonesia, and Germany. Pranda Vietnam Company Limited has been operating in Dong Nai Industrial Zone since The main reasons to set up a factory there are low wage, high potential domestic market and GSP privileges from the EU, which is one of Pranda s main markets. Currently there are about workers in the Pranda Vietnam s factory. Although still low comparing to Thailand s, the wage in Vietnam is quickly increasing. For example, wages have increased three times in a single year of 2012, resulting in an average monthly wage of 120 USD. The quoted wage rates are exclusive of social security contribution at 17% in 2013 and recently increased to 18% in Although its factory in Vietnam has an advantage of lower labor cost over the Thai counterparts, the company still has to import raw materials from aboard. Therefore, the net production cost in Vietnam is merely7-8 percent lower than that in Bangkok due to the recent wage increases. For Pranda, 90 percent of total production in Vietnam is mainly for exports with the rest 10 percent for domestic market. The main export markets are Germany, France and UK. Because the EU provides GSP to imported products from Vietnam, the tariff charged for jewelry exported from Vietnam is 2.5 percent lower than that from Thailand. For domestic market, the company sells the products under its own brand name Prima Gold to serve the medium-low end customers. As distribution channel is key to expand its sales, Pranda plans to increase its retail outlet in Vietnam from 4 in 2012 to 16 in the near future. While labor cost is on the rise, business environment in Vietnam has improved during the past five years. In terms of public utilities, both roads and electricity system have been upgraded, even though power blackouts are still the problem in Vietnam, especially in the dry season. The government has also amended laws and regulations to be friendlier to foreign investors. However inconsistency in law interpretations among government agencies remains a problem. In addition, bureaucratic red tapes add more cost in doing business in Vietnam.

14 Relocating Labor-intensive Industries from Thailand to Neighboring Countries Cost structure analysis This section compares the differences in the exfactory production cost in some cities in neighboring countries, namely Yangon and Ho Chi Minh City, comparing with that of Bangkok. The costs in the two cities are obtained by imputing the production cost of factories in Bangkok, adjusted for the differences in labor and facility costs among the three cities. The production cost of Bangkok factories in the three industries are obtained from data collected by the Office of Industrial Economics. Based on aforementioned methodology, Table 2 shows that for all three industries, the factory costs in Bangkok are the highest among these three locations, followed by those in Ho Chi Minh City and Yangon. Comparing among the three industries, the gap of the ex-factory cost is the least in the gems and jewelry industry. The key factor contributing to the cost differences among these three locations is the cost of labor. It is noted that Yangon has the lowest cost of labor, but the highest electricity cost among these three locations. However, in general, Yangon is still the location with the lowest ex-factory cost of products in all the three industries. Table 2: Factory costs of products in the three industries in different locations Industry Bangkok Ho Chi Minh City Yangon Garment Shoes and leather goods Gems and jewelry Source: Authors, based on field-trip data and the Office of Industrial Economics s survey 6.1 Textile and garment industries Based on our estimation, if the ex-factory production cost in the garment industry in Bangkok is normalized to 100, the production costs in Ho Chi Minh City and Yangon are and 86.18, respectively (Table 3). The main factor contributing to the different production costs is the gaps in labor cost. The city with the highest labor cost is Bangkok, followed by Ho Chi Minh City and Yangon, respectively. Although Yangon has relatively cheaper labor cost, it has severe electricity shortages. Factories there need to have their own electricity generators to ensure their operation, resulting in high effective electricity cost. Table 3: Comparison of garment production costs in Bangkok, Ho Chi Minh City and Yangon cost Bangkok Ho Chi Minh City Yangon raw material labor* office cost electricity water others Total production cost at factories ** Source: Authors Note: * labor cost includes labor wage, and employers payment for social security contribution ** exclusive of logistics and transportation cost from factories to ports 6.2 Shoes and leather goods industries Similar to the garment production cost, our estimation shows that among three cities, the ex-

15 34 東 協 瞭 望 009 factory production cost of shoes and leather goods in Bangkok is the highest, while that in Yangon is the lowest. In particular, if the production cost of shoes and leather goods is normalized to 100 in Bangkok, the production costs would be and in Ho Chi Minh City and Yangon, respectively (Table 4). Again, the main factor contributing to the difference in production costs is labor cost. The city with the highest labor cost is Bangkok, followed by Ho Chi Minh City and Yangon, respectively. Unlike the garment production cost, the differences in electricity cost in the shoes and leather goods production in Bangkok and Yangon are not much because the production process of shoes and leather goods requires lower share of electricity usage than that of the garment products. Table 4: Comparison of shoes and leather goods production costs in Bangkok, Ho Chi Minh City and Yangon cost Bangkok Ho Chi Minh City Yangon raw material labor* office cost electricity water others Total production cost at factories ** Source: Authors Note: * labor cost includes labor wage, and employers payment for social security contribution ** exclusive of logistics and transportation cost from factories to ports 6.3 Gems and jewelry industries Likewise, the production costs of gems and jewelry are different in three cities, although the gaps are not as significant as in the two industries previously discussed. In particular, if the ex-factory production cost in Bangkok is normalized to 100, the production costs would be and in Ho Chi Minh City and Yangon, respectively (Table 5). Unlike the other two products, the costs of gems and jewelry production in these three cities are not significantly different because the share of labor cost in this industry is only about 12 percent, only about half of those in the other two industries. Similar to the other two industries, the main factor contributing to the differences in production cost among the three cities is labor cost. The city with the highest labor cost is Bangkok, followed by Ho Chi Minh City and Yangon. Table 5: Comparison of gems and jewelry production costs in Bangkok, Ho Chi Minh City and Yangon cost Bangkok Ho Chi Minh City Yangon raw material labor* office cost electricity water others Total production cost at factory ** Source: Authors Note: * labor cost includes labor wage, and employers payment for social security contribution ** exclusive of logistics and transportation cost from factories to ports 7. Conclusion and policy recommendations

16 Relocating Labor-intensive Industries from Thailand to Neighboring Countries 35 In conclusion, due to wage pressure and labor shortages, companies in labor-intensive industries have to adjust in order to survive and grow. The best solution is to upgrade to higher value-added activities to increase their competitiveness. However, some companies may not be able to do so, and choose to relocate their production bases to neighboring countries with lower wage rates. In this case, the off-shoring production activities should be limited to low valueadded ones, such as cutting and making, while keeping high value-added activities, such as design and marketing, in Thailand. Companies may consider keeping their local production to serve customers that require short-time delivery, which needs close monitoring and engagement. Most importantly, it is necessary to recognize that relocating to poorer countries with cheaper labor would increase competitiveness of the companies only in the short term. Companies in labor-intensive industries should strive to upgrade their technical capabilities by using information and communication technologies (ICTs) to manage their supply chain and increase the linkages with their buyers. In order to increase their long-term competitiveness, they have no choices but to move up the value chain to higher value-added activities, by transforming themselves to preferred OEMs, ODMs or OBMs. Our study provides the following policy recommendations for the government to support Thai companies to relocate to neighboring countries as well as to promote the industrial development in the laborintensive sectors. 7.1 Policy recommendations on supporting Thai companies to invest in neighboring countries Firstly, the government should establish a onestop service unit which can provide both basic and indepth information necessary for making decision to invest in neighboring countries (see Figure 8). The basic information includes trade and tax rates, incentives for foreign investors, laws and regulations on foreign investment, availability and quality of infrastructure, spatial and industrial information, procedures and documents required for business establishment. The in-depth information includes information on market conditions and consumer tastes. In addition to providing information, the one-stop service unit should also facilitate Thai companies in doing business in neighboring countries as well as support them to build the business linkages with local companies in neighboring countries. The Japan External Trade Organization (JETRO), considered one of the best practices in supporting and facilitating companies in investing abroad, can provide a model. Secondly, the government should consider establishing special economic zones (SEZs) in the border areas. The laws and regulations for these SEZs should provide some privileges to investors, such as special minimum wage rates and facilitating them in hiring foreign workers. The establishment of SEZs in border areas will be beneficial to Thai companies, especially SMEs, because they will be able to keep operating their production in Thailand where they are accustomed to local laws and regulations, and to avoid the risks from investment abroad, such as regulatory, business and cultural uncertainties.

17 36 東 協 瞭 望 009 Trade and tax privileges Facilitating Thai investors in doing business in neighboring countries One-stop service Incentives for foreign investors Laws and regulations on foreign investment Availability and quality of infrastructure Procedures and required documents for establishment Spatial and industrial information Supporting SMEs to build business linkages with local enterprises in neighboring countries Providing useful and updated information Marketing information Figure 8: One-Stop Service Unit 7.2 Policy recommendations on promoting industrial upgrading The government should support and promote Thai companies to upgrade their production capabilities to higher value-added activities. The strategies for sustainable competitiveness are varied according to their production approach, as follows: Assemblers (e.g., garment makers) In the short term, the assemblers may offshore their production base to areas with cheaper labor cost. They should also aim at upgrading their production capabilities to be OEM suppliers in the long term. In this regard, the government should support their upgrading efforts by facilitating access to capital and equipping them with necessary skills concerning procurement and logistics. Original Equipment Manufacturers (OEMs) The OEMs might consider sub-contracting or off-shoring their production bases to the areas with cheaper labor costs in the short term. In addition, they should strive to become preferred OEM suppliers by complying with international labor and environmental standards. In the long term, they should upgrade their production to become ODMs. Thus, the role of the government is to equip them with technological knowledge and skills on design, research and development as well as management. Original Design Manufacturers (ODMs) In the short term, the ODMs should strengthen their design and production capacities to be more efficient. At the same time, they should strive to become original brand manufacturers (OBMs) in the long term. In this respect, the government should support them to gain knowledge and skills on branding, marketing and customer services. Original Brand Manufacturers (OBMs)

18 Relocating Labor-intensive Industries from Thailand to Neighboring Countries 37 The OBMs might consider upgrading their domestic brands to regional ones in order to expand their markets. Correspondingly, the role of government is to support their activities in marketing and building international networks by supporting them to expose themselves in regional trade exhibitions and roadshows. In general, to support Thai companies to upgrade along value chains and to increase their competiveness, the government should play the following roles. Firstly, it should facilitate SMEs access to capital. SMEs, especially in labor intensive industries, usually have difficulties in getting the bank loan because some labor intensive industries, such as textile and garment and shoes and leather goods, are considered as sunset industries. To promote greater access to capital, government s specialized financial institutions, such as the Export-Import Bank and the Thai Credit Guarantee Corporation, should play a leading role. Secondly, government agencies should provide support for SMEs to develop and strengthen linkages among themselves as well as among them and large companies. In this regards, the Department of Industry Promotion should partner with related industry associations to strengthen its cluster support programs. Thirdly, public universities and specialized institutes should provide support in terms of education and training in order to equip companies with essential skills, such as technical, management, product development, design, and marketing research skills, with subsidy from the Ministry of Industry and the Skill Development Fund. Fourthly, government agencies should support SMEs to expand their marketing and networking by providing useful and up-to-date information, such as information on potential markets and technology. In particular, the Department of Foreign Trade Promotion should support them to attend international trade shows and events. Fifthly, the Ministry of Industry should encourage the upgrading of SMEs technological capabilities by focusing on technology development and technology transfer through various activities, such as providing industrial experts, promoting industrial network, and strengthening the linkages between industry and the academia. Finally, relevant government agencies, especially the Ministry of Industry, should encourage SMEs to improve their manufacturing process in order to achieve international standards, such as ISO 9000 and ISO Manufacturers should also be promoted to adopt lean manufacturing to make their operation more cost efficient. The government should declare this decade to be the Decade of Productivity Improvement to set a clear direction in which all relevant stakeholders will follow. The government, business and workers are advised to get together and set up policies that accommodate predictable and continual wage increase and productivity improvement. Collaboration between the government and private sector organizations, especially the Thai Chamber of Commerce and the Federation of Thai Industries, is the key to successful upgrading.

19 38 東 協 瞭 望 009 Dr. Saowaruj Rattanakhamfu, the first author of this paper, is currently a research fellow in Science and technology development program at Thailand development research institute. She earned her PhD in economics at the University of Melbourne, Australia. Her research specialties include applied economics, development economics, science and technology upgrading, and productivity upgrading. Dr. Somkiat Tangkitvanich, the second author of this paper, is currently the president of Thailand development research institute. He earned is PhD in computer science at the Tokyo institute of technology, Japan. His specialties include trade policy, industrial policy, ICT policy, and Media policy. References Akamatsu K. (1962) A historical pattern of economic growth in developing countries. Journal of Developing Economies, 1(1):3 25. JETRO. (2013) The 23nd Survey of Investment Related Costs in Asia and Oceania. Thailand Development Research Institute. (2013) Relocating Labor-intensive Industries to Neighboring Countries: Case Studies of Textile and Garment, Shoes and Leather Goods, Gems and Jewelry. (in Thai) 本 刊 所 載 內 容 包 括 文 字 攝 影 圖 片 及 其 他 資 訊, 均 受 著 作 權 法 保 護, 除 有 合 理 使 用 情 形 外, 應 取 得 該 著 作 財 產 權 人 同 意 或 授 權 後, 方 得 利 用 所 謂 合 理 使 用 情 形 包 括 : 為 個 人 或 家 庭 非 營 利 之 目 的 而 重 製 ; 為 報 導 評 論 教 學 研 究 或 其 他 正 當 目 的, 在 合 理 範 圍 內, 得 引 用 本 刊 內 容, 引 用 時 並 請 註 明 出 處 ; 其 他 合 理 使 用 情 形, 請 參 考 著 作 權 法 第 四 十 四 條 至 第 六 十 五 條 之 規 定 除 有 合 理 使 用 情 形 外, 應 取 得 該 著 作 財 產 權 人 同 意 或 授 權 後, 方 得 利 用 本 刊 所 登 各 學 者 專 家 具 名 之 文 章, 不 代 表 本 刊 或 發 行 單 位 之 立 場, 內 容 由 作 者 自 負 歡 迎 各 界 批 評 指 教, 電 子 郵 件 :tasc@cier.edu.tw 電 話 :(02) 地 址 :10672 台 北 市 大 安 區 長 興 街 75 號