Thailand should benefit from Japanese firm relocation

[Coss]

Thailand stands to gain in the long term as many Japanese companies will relocate their production out of their own country in the next two to three years to smooth production disrupted by this month's earthquake and tsunami.

 

Prominent economist Sompop Manarungsan said at a seminar on the economic outlook and baht trend for Thailand that the nuclear crisis could lead to some energy problems in Japan. Meanwhile, Japan will soon face severe labour shortages due to the higher proportion of ageing population.

 

"Japanese companies need to search for new production bases, and Thailand is among the attractive countries thanks to the availability of labour and facilities. The relocation could happen in the next two to three years," he said at the seminar held by Bank of Ayudhya.

 

He acknowledged that in the near term, the disaster in Japan would reduce foreign direct investment in Thailand, as Japanese companies, which contribute one-third of total FDI here, may need more funds at home for the restoration process.

 

As funds flow into Japan, which estimates damage of up to US$309 billion (Bt9.35 trillion), Thailand could also witness lower capital inflows than last year. Still, Sompop is convinced that the Thai economy this year will expand 4-5 per cent as expected. Economic activities should continue as usual, though the central bank's policy interest rate may rise to 3-3.25 per cent by the end of this year to cope with rising inflation.

 

HSBC Global Research also highlighted Thailand as one of beneficiaries from the disruption in the global supply chain due to the Japanese quake and tsunami.

 

"The world has now witnessed a series of natural and political events that have exposed concentration risks in global supply chains," it said in a research note. "Already, firms have taken steps to diversify production and sourcing sites to become more nimble in the face of periodic adversity. Japan's disaster will only reinforce this trend.

 

"For Asia, this means a spread of production sites across the region. Vietnam, Thailand and Indonesia

 

stand to benefit the most from greater foreign direct investment."

 

The research showed that global supply chains rely heavily on Japanese components. The country remains a major supplier of key products to global industry, most notably hi-tech products and car parts.

 

A number of countries are especially dependent on imports from Japan. For example, Japan produces about 90 per cent of all BT (bismaleimide-triazine) resin, a crucial material used for packaging semiconductors, and makes almost 60 per cent of raw wafers used for global microchip production. It is the shortfall of these products in particular that led to worries over a lasting supply-chain crunch in the IT sector.

 

After the devastating earthquake and tsunami, about 15-20 per cent of world production of wafers and the majority of BT resin capacity were taken offline because of electricity shortages and outright destruction of manufacturing facilities in northern Japan.

 

The car industry was also badly hit by the disaster. A number of key component suppliers had to shut down production, while transport bottlenecks, especially port and road congestion, severely limited the ability to ship goods. In this industry, Thailand once more leads the way in terms of exposure, while South Korea, China and Malaysia are also heavily dependent.

 

Japanese firms, which continue to be a major source of FDI into Asia, are likely to reallocate their investments into Asean economies in particular, notwithstanding how the recent quake would affect the speed of strategic decisions in the immediate term.

 

China may continue to be an important investment destination for these firms, but they are increasingly aware of the rising wage costs there as well. Hence other countries with a large population on relatively low wages could be beneficiaries of the diversification wave. Indonesia, Vietnam and Thailand stand out in that regard.

 

Although rigid labour laws continue to prevent Indonesia - which has the largest population in Asean - from tapping its human potential to its full extent, the relatively low wages there should continue to make it look attractive. Moreover, the country's abundant commodities are a big plus.

 

Meanwhile, Vietnam's sizeable young population is also an attraction, so much so that it is ranked highly in investors' surveys, despite the macroeconomic challenges.

 

Compared with its more populous peers, Thailand may be less competitive in terms of wages. Nonetheless, Thailand offers relatively better infrastructure and labour-skill levels. Also, it has developed niches in specific sectors such as automobile production that should continue to be attractive to Japanese investors.

 

If the political overhang here is resolved to some extent this year after the upcoming general election, the country could be even better positioned.

 

Elsewhere, the Philippines continues to be dogged by poor perception, scoring below the regional average in the Global Competitiveness Survey on a number of key dimensions, for example. And Malaysia, with a population of 28 million, can never really hope to compete on labour costs.

 

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[cavanami]

The labor cost are not so high in Malaysia plus you can have some better educated and better work ethics in Malaysia.

[shygye]

... along with the religious police.

[cavanami]

... along with the religious police.

That could be a downside.

 

Waiting for LK to chime in as he has spent some time in Malaysia...

[unit731]

Here in farangland I see more and more crap - stuff - made in Vietnam - at my local retail establishments.

[LizardKing]

... along with the religious police.

That could be a downside.

 

Waiting for LK to chime in as he has spent some time in Malaysia...

The religious police are pretty much non-existent unless you are Malay. I never saw one in 3+ years of living there. And the laws they enforce do not apply to you as a non-Muslim.

 

That said, I'm told that things have changed since I last lived there in the 90s. The whole country has gotten more polarized and the Muzzies more fundy. Still 1,000,000 miles away from Saudi attitudes, but still not a good thing IMHO.

 

The education level is certainly better in MY than TH, IMHO. Work ethics are similar. Thais are good workers (I'm talking about those in real jobs, not bar girls).

 

I would suspect that labour costs in MY are higher, especially since they have a mandatory EPF (retirement) fund to which the employer has to contribute.

[shygye]

Here in farangland I see more and more crap - stuff - made in Vietnam - at my local retail establishments.

 

Vietnam has lower costs than China.