Manufacturing, Operations, Risk Management

Asia Manufacturing Solutions: Is Thailand a Viable Plan B?

This year, we are refreshing our understanding of the manufacturing landscape in Thailand. Through extensive sourcing efforts followed by visits to dozens of facilities on behalf of clients, we are establishing relationships with the most relevant factories. The top takeaways: A solid industrial base, on par with China’s manufacturing landscape, is well established. Quality and capability is high (including IATF and TS for automotive, thanks to a Japanese influence on manufacturing). A culture of customer service is refreshing, despite the challenges with English. And the biggest concern is capacity: many plants are 60-90% utilized, and more investment will be needed to support additional volume. The bottom line: get in now, get in early…

Window of Opportunity

As the tariff situation heats up, companies with China interests are increasingly looking for a Plan B (and C and D) to protect supply chains and mitigate risk. Thailand in particular is gaining traction, given the country’s decades of experience in manufacturing, well-developed infrastructure, bustling deep-sea shipping port, and more. Professionals at CMD are proactively pursuing options for multiple clients in Thailand. In this article, we’ll explore what Thailand has to offer and why companies are taking Thailand seriously during these turbulent times.

About Thailand

Since 1932 Thailand has been a constitutional monarchy, with a parliamentary structure modeled after the UK’s Westminster system. After the coup d’etat in 2014, Thailand’s parliament has been controlled by a military junta. King Vajiralongkorn (or Rama X) ascended the throne in Fall of 2016 after the death of his father, and travelers to Thailand will note the presence of his picture everywhere.

Thailand is a formidable player on the world stage of manufacturing. In Deloitte’s 2016 Global Manufacturing Competitive Index, Thailand scored 14^th out of 40 countries. Thailand is expected to hold its position through 2020.

Manufacturing Experience

Automotive. Over past 50+ years, Thailand has grown from an assembler of parts into a top destination for automotive manufacturing, shipping to more than 100 countries.^[i] As “The Detroit of the East,” Thailand is the largest producer of vehicles in Southeast Asia, on track to produce approximately two million vehicles in 2018, and 3.5 million by 2020. International brands dominate the domestic production scene.
Electronics. Valued at more than $55 billion US, electronics are among Thailand’s largest exports, accounting for 15% of the country’s total. Thailand is the second largest producer of hard disk drives on the planet. Thailand is a top five global producer of air conditioners and refrigerators; and is the largest manufacturer of electrical appliances in Southeast Asia.^[ii]
Plastics and rubber. Thailand exports more than $25 billion US of plastics and rubber.^[iii] Rubbermaid, for example, has built an extensive manufacturing, warehousing, and shipping presence in Thailand over the past 20 years.
Other. Thailand also has multiple fast-growing manufacturing sectors in appliances, wood products, furniture, electric tools, machinery, canned food, and more.^[iv]

Feeder Industries

The benefits for companies sourcing suppliers and contract manufacturers are many. Thailand’s manufacturing environment is mature, and there are robust Tier 1, Tier 2, and Tier 3 suppliers feeding a large network of large plants. Doing business in other countries in Southeast Asia with lest developed vertical integration might result in higher costs to bring in parts and materials for finished goods manufacturing.

Infrastructure & Shipping

Laem Chabang is Thailand’s main shipping port and ranks 20^th among the largest in the world.[v] The port was built in 1991 and is located outside of Bangkok as part of an initiative to reduce congestion.

Thailand’s highway system is particularly impressive compared to elsewhere in Southeast Asia. By 2008, Thailand’s road network coverage reached 98.5% (paved). Electricity coverage reached 99% of the population.[vi]

According to PWC, “The Eastern Economic Corridor (“EEC”) Act” is the Thai government’s flagship policy to accelerate infrastructure development and encourage local and foreign investments in the 3 eastern provinces of Thailand including Rayong, Chon Buri, and Chachoengsao. The government aims to target at least 30 world-class companies to invest in the EEC over the next five years.”^[i]

As of October of 2017, there are several key projects that will positively impact foreign companies in Thailand, including:

U-Tapao Airport
Sattahip Commercial Seaport
Laem Chabang Deep Sea Port Phase 3
Map Ta Phut Port Phase 3
Eastern High-Speed Trains
Double-track Railways
More Expressways and Motorways

Projects targeted for business, industrial clusters, and an innovation hub include:

Next-generation Automotive (EV/AV)
Aviation Industry, Robotics and Electronics
Advanced Petrochemical and Bio-based Industry
Medical Hub^[ii]

Challenges

Low unemployment rates have pushed up costs for labor, resulting in rising competition from lower-wage markets like Vietnam, Philippines, and Myanmar. Demand for automation is on the rise in Thailand to improve efficiency and control costs. Thailand launched an initiative to encourage companies to adopt high-tech manufacturing processes, including more automation in 2015.^[iii] Thailand is also making attractive offers of tax breaks, unlimited bandwidth, and submarine cables to Europe and China (as part of the latter’s One Belt, One Road initiative) to high-tech companies willing to do business in Thailand.

Foreign Investment Incentives

To attract foreign investment, Thailand offers a variety of tax and non-tax incentives, including:

Up to eight years of exemption for corporate income tax
Exemption of import duty for machinery
Exemption of import duty on raw materials used in manufactured goods for export
Simplified permits for skilled workers and experts who work in target investment sectors
Simplified permits related to owning land
Permit to take out or remit money in foreign currency.^[iv]

A comprehensive summary of Thailand’s corporate tax rates, individual tax rates, and foreign investment incentives can be found in Deloitte’s 2017 Taxation and Foreign Investment Report.^[v]

Ready to Talk Thai?

“Chı̀” (Thai for yes). With decades of experience in manufacturing, well-developed (and growing) infrastructure, and relatively stable business environment…there’s never been a better time to have a look. Our experts are ready to find viable alternatives for your business to diversify your supply chain and reduce risk.

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References:

[i] https://www.pwc.com/th/en/deals/assets/public-private-partnerships-in-thailand-2018.pdf

[ii] https://www.pwc.com/th/en/deals/assets/public-private-partnerships-in-thailand-2018.pdf

[iii] https://www.allianceexperts.com/en/knowledge/countries/asia/how-to-export-your-technology-to-the-manufacturing-sector-in-thailand/

[iv] https://www.aseanbriefing.com/news/2018/05/10/thailands-automotive-industry-opportunities-incentives.html

[v] https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/international-business-support/deloitte-cn-ibs-thailand-tax-invest-en-2017.pdf

[i] https://www.aseanbriefing.com/news/2018/05/10/thailands-automotive-industry-opportunities-incentives.html

[ii] https://www.business-sweden.se/contentassets/e87919e751fd4247842bd6bd6fcb22c6/opportunies-in-thailands-manufacturing-sector.pdf

[iii] https://www.worldatlas.com/articles/the-biggest-industries-in-thailand.html

[iv] Thailand Foreign Office, The Government Public Relations Department

[v] http://www.worldshipping.org/about-the-industry/global-trade/top-50-world-container-ports