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19 Jul 2007

Industry

Electronics Industry: Eroding Competitiveness amid Stronger Baht (Current Issue No.1984)

The electronics industry in Thailand has experienced continued expansion, drawing huge Foreign Direct Investment (FDI) each year. However, Thailand is now confronted with more intense competition from rivals in terms of investment and with regard to export destinations. Since 2005, growth in electronics investment has slowed steadily. The surging Baht has even pushed investment-related costs here comparatively higher than rival countries.
KASIKORN RESEARCH CENTER (KResearch) takes the view that the ebbing value of FDI implies slower growth in production and export for the electronics industry in the future, falling victim to Thailand's faltering competitiveness due to the lower wages found in rival countries. At the same time, Thailand's limitations in technological development have also caused us to lag far behind other countries in industries focusing mainly on sophisticated design and technology. However, factors that have aided the industry include reductions in import duties charged on raw materials in accordance with a recent Cabinet resolution, exemptions of export taxes on the industry, as well as the use of common product standards per the Japan-Thailand Economic Partnership Agreement (JTEPA). Meanwhile, cheaper import costs because of the recently stronger Baht and expected relief from political impasse at the end of this year would also be pluses for the industry. Even so, these factors may be positive for Thailand only over short-term, as competitor countries have focused on entering into favorable bilateral trade agreements with trade partners.
Concerning the trend for the Thai electronics industry in the latter half of this year, both production and exports will likely increase due to seasonal sales peaks for this industry. However, it is projected that the average growth of production and exports of electronic goods for all of 2007 will be lower than last year due to the impact of Baht's appreciation causing exporters' to realize lower income when their foreign currency earnings are converted into Baht.
KResearch is of the opinion that Thailand should expedite self-adjustment by shifting to production of goods with greater value added to them. The government, together with the business sector, should promote the development of Thai labor skills, which could be achieved by establishing skills development centers within industrial estates for each type of industry so that workers that have undergone training will have the skills required to meet the demands of that specific industry. In addition, more support should be given to domestic producers in other electronics-related industries, as well as providing investment incentives to skills & technological development, apart from granting tax exemptions in the first one or two years. For example, this can be done by providing financial support, e.g., low interest rate loans to companies that have entered into projects to develop their products, production systems, workers and/or business planning. Moreover, greater coordination in putting the technological and product research and development of universities and other institutions into practice with the business sector should be promoted so that their research can find applications in actual commerce.
In the short-term, businesses can take advantage of the Baht's appreciation to import more advanced machinery and capital equipment to boost their production efficiency, and, over the long-term, the state sector should seriously consider the development of upstream industries to reduce our dependence on imports and improve our logistical infrastructure. In these ways, we can maintain our status as an attractive investment destination that can draw investors and upgrade our electronics industry, as well.

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