Sound growth despite storms
The industrial sector stayed sound in the first six months of 2008, even though the elected-government failed to make any improvements to the unfavourable business climate.
"Most Thai private industrial companies are very competitive and they could survive a tough situation without any support from the government," said Santi Vilassakdanont, chairman of the Federation of Thai Industries. "They are even performing well amid numerous negative factors."
He noted that production for export was particularly competitive.
The main contributor to performance worries was volatile oil prices, which played a major role in slowing economic growth and driving up costs for raw materials, operations and transport for all industries. This led the export sector to maintain its double digit growth for 2008.
Record-high agricultural prices also spelled positive growth for exports as well as boosting the purchasing power of consumers in the farm sector, which helped to offset the shrinking wallets of those who earned a living in other sectors.
"So far, I would say that the overall industrial sector is still growing steadily," Mr Santi said.
Political conflicts wouldn't make a negative impact on the industrial sector unless the clash between political groups becomes uncontrollable, which would dampen consumer and business confidence, he said. That could trigger an economic recession in the country.
"Look at Vietnam and China. Who cares what system the countries are? The investors keep going there because their governments focus on boosting their economies," Mr Santi pointed out.
The dour business climate hasn't changed despite the introduction of a campaign dubbed 'Thailand Investment Year 2008' by Suwit Khunkitti, the industry minister and deputy prime minister, when he first took office.
The main sector that concerns Mr Santi is small business operators because of their limited access to credit.
"Some of them have started to go out of business because of the economic slowdown. If the political situation gets worse, it will be the last straw for them," he said.
Small and medium businesses rely on the bigger manufacturers as suppliers for the large companies who choose to outsource some orders to these small producers instead of expanding their production to meet their rising fixed costs.
In addition, the purchasing power of local markets was also shrinking severely because of inflation, which affects the producers who supply the local markets.
Some small companies in apparel, construction and furniture were the first ones to be dampened by economic decline according to an FTI survey. Higher costs had depressed their margins so severely it was not worthwhile to produce even though orders from overseas remained strong. Some companies decided to take fewer orders just to keep their staff and maintain relations with important clients.
In the first quarter most of the industrial indices still showed strong expansion, led by electronics, computers and components, air-conditioning and automobile and auto parts industries, said Atchaka Brimble, the director-general of the Office of Industrial Economics.
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| The steel and construction materials industries are facing high raw-material costs but the baht’s strength will help offset the higher costs. |
However, there were some export industries that were affected by the US economic recession, such as suitcase production, which dropped by nearly 60% as some plants were closed.
The furniture market for steel and wooden items declined 2.6% because both US and local demand were weak.
The outlook for the second half is poor as negative factors such as oil prices and high material costs will linger.
The steel and construction materials industries will need to be monitored, as their raw material prices keep jumping in line with the global market, said Mr Santi. But the baht's strength against the US dollar and other major currencies will help offset higher costs.
Higher raw material prices could also affect related industries such as contractors and products that are produced from steel.
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| SMEs are the most vulnerable due to limited access to funds, says Mr Santi. |
"Over the next few months, the government should seek measures to take care of small and medium businesses. Otherwise, disaster could happen when weak businesses cause the whole system to collapse," he noted.
Another challenge in the second half will be the toll the global economic slowdown will take on the investment climate.
Prospective foreign investors may hesitate while manufacturers who already have bases in Thailand will maintain their production, Mr Santi predicts.
The outlook for small and medium-sized operators is gloomy in the second half because of low competitiveness and lack of financial support.
The Office of Small and Medium Enterprises Promotion (Osmep) projects the number of SMEs in both the manufacturing and service sectors would grow slightly by 1.3% in 2008, while their return from operations would fall sharply from 7.10% a year earlier to between 3.6% and 5%.
INVESTMENT
Upbeat BoI will need to work harder
VICHAYA PITSUWAN
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| Satit: Auto industry remains strong |
Despite numerous unexpected threats during the first half of the year, the Board of Investment (BoI) reached its target, but is expecting a hard second half.
The BoI set a goal of new applications of those investors seeking incentives worth 600 billion baht, though this was lower than last year.
That year set an unexpected record with investment applications seeking BoI incentives of 655.8 billion baht, which was up 32% from a year earlier. Its target was only 500 billion baht in 2007.
In terms of project approvals, the value also broke the previous year's record, doubling to 744.5 billion baht in spite of the political woes.
While political uncertainties were thought to affect the business sector last year, this year political tension has increased while energy price rises have pushed commodity prices to record levels.
Satit Chanjavanakul, the BoI secretary-general, said the agency's performance in the first five months of the year was satisfactory, with 556 project applications submitted for tax and non-tax incentives with a total investment value of 189.8 billion baht. The figure was 100 million baht higher than in the same period last year.
Of those 556 projects, 127 plan to export at least 80% of their production.
Total investment capital of 62.5% is to finance large projects with investment value of more than one billion baht each. They include investment for expansion in light industry, electronics and petrochemicals. Some will be spent on new investment in the hotel industry, midstream steel plants, metals and biodiesel production.
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The figures in the first five months of this year have moved as expected and there have been no indicators showing negative response to the surge in oil prices yet, Mr Satit said.
Fear of another coup harmed the investment climate as foreign investors contributed 53.2% of total investment value during the first five months or a total of 100.945 billion baht, 17.9% less than in the same period last year.
Japan remains the largest investor with proposals to spend 25.73 billion baht in metal processing projects. European Union countries seek to spend 26.56 billion baht in petrochemicals, auto parts and electronics projects, up sharply from 5.4 billion in the same period last year.
Projects proposed by Singapore in hotels and intermediate steel production increased Asean's investment by 84.9% year-on-year to 20.15 billion baht.
Services and infrastructure, electronics and electrical goods and petrochemicals led all other industries in investment.
The BoI is hopeful of seeing continued expansion in electronics and electrical goods, where Thailand had high competitiveness in the latter half of last year.
Mr Satit also expects to see continuing growth in the automobile industry, which was a main engine that drove investment in 2007, with momentum likely to persist throughout the year.
"In the first half of the year, we have approved more than 16 billion baht in investments on eco-car projects," Mr Satit said.
"When each of these companies works out its manufacturing specifications, the auto parts industry will have an idea of what new projects or expansion they would have to do to accommodate them in the later half, so we should see more auto parts investment," he said.
Despite expected growth in some industries, the BoI boss admitted the latter half of the year remains a concern.
He was still optimistic, saying that the BoI may reach 600 billion baht worth of investment proposals, even though it needs to work a lot harder than expected.
To achieve its target, the board will launch more incentives to promote investment in the energy-efficiency industry. Focusing on this industry will benefit other industries as fuel costs are driving up production expenses and investors in Thailand will be more competitive if these costs drop, Mr Satit said.
In addition, the BoI plans to offer more incentives to encourage investors to establish their regional headquarters and international procurement offices in Thailand. The Thailand Investment Year 2008-09 campaign may make it a more attractive investment destination than others.
The scheme aims at promoting investment in existing industries with high growth potential, promoting knowledge-based and high technology industries, enhancing competitiveness, and promoting outward investment to expand business opportunities.
COMPETITIVENESS
Sharper edge sought in logistics
NAREERAT WIRIYAPONG
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| Policymakers want Thai Airways International to set up a national cargo airline to increase the speed of Thai exports to international markets. |
Skyrocketing global oil prices and intensifying competition in international trade have prompted Thailand to sharpen logistics competitiveness to lower manufacturers' costs and cut the kingdom's import oil bills.
With a road network nationwide of 190,000 kilometres compared to just 4,000 km of railways, Thailand has relied heavily on road transport, accounting for almost 88% of total transport use, while the remaining 12% is divided among marine, rail and air modes.
In fact, road transport is the least-efficient means of transport, consuming one litre of petrol for 25 kilometres compared to 85 km and 217 km, respectively, for air and marine transport, according to the National Economic and Social Development Board.
All told, when other factors including road repairs necessitated by the prevalence of overloaded trucks are factored in, road transport costs eight times more than marine shipments and three times higher than using the rail system.
Oil prices, which jumped by $60 in the first five months of this year to above $120 a barrel, have focused concern on Thailand's energy use, of which 35% is consumed by the transport sector.
Currently, logistics costs amount to 19% of Thailand's gross domestic product - much higher than in neighbouring countries such as Malaysia. In Japan, logistics costs make up only 8.7% of the GDP. The National Economic and Social Development Board (NESDB) aims to bring the figure down to 16% of GDP by 2011.
To achieve the target, the think-tank plans to speed up construction of mass-transit rail lines in Bangkok and develop dual-rail and high-speed train routes linking the capital with major provinces, with further links to neighbouring countries and onward into China.
Additionally, a deep-sea port on the eastern Andaman coast has been planned to reduce the period for shipping goods to and from Thailand to key destinations in Europe and the Middle East.
The government, meanwhile, has instructed Thai Airways International to move ahead with its plan to set up a cargo airline to increase the speed of Thai exports to international markets. It also aims for greater utilisation of both Don Mueang and Suvarnabhumi airports in terms of cargo movements.
An NESDB paper cited inefficient transport as the major obstacle to improving the logistics capabilities of strategic industries. As well, business operators do not have enough appropriate depots and distribution centres to serve their needs.
"Trade and transport facilitation need to be upgraded to help bring down lead time and fixed costs. Both the government and the private sector to seriously look at in order to maintain trading with the country's major trade partners," the NESDB paper said.
By improving logistics efficiency and promoting alternative fuels, such as NGV, gasohol and biodiesel, the government aims to cut oil consumption by 10% in 2009 and 25% in the transport sector.
However, the expansion of NGV outlets has not kept pace with fast-rising demand. Currently, NGV is available at 200 service stations nationwide with the target to increase to 247 outlets by July 2008.
Toyota Motor Thailand, the country's biggest auto maker, said earlier that NGV demand rose by 190% in 2007 while the number of NGV outlets expanded by only 60% over the previous year.
The carmaker currently uses NGV for 40% of its inbound logistics, as the fuel is up to eight times cheaper than diesel.
Citing the need for higher technology to help improve logistics efficiency, authorities have also looked at the possibility of liberalising the logistics industry under the World Trade Organisation (WTO). Foreign ownership is currently capped at a maximum of 49% for logistics service operators in Thailand.
COMPETITIVENESS
Steady growth for printing and packaging industry
KRISSANA PARNSOONTHORN
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| Kriengkrai: Otop demand helps |
Printing and packaging companies were busy and enjoyed solid growth during the first half of this year despite surging oil and newsprint prices affecting their operation costs.
So far, the printing and paper packaging sector grew by 10-15% without much help from the Samak-led government, which prioritised the rice and sugar industries and tackling the impact from rising fuel prices.
Kriengkrai Thiennukul, chairman of the Federation of Thai Industries' Printing and Paper Packaging Industry Club, said the sector performed well and its outlook remained bright for the year.
Sector growth came from two areas. The first was from Thais gradually changing their behaviour to read more books. Secondly, the paper packaging segment, which represents half of the industry, is being driven by robust demand from agricultural and food-processing companies as well as Otop (One Tambon, One Product) goods, which require striking packages to attract consumers.
Last year, Thai paper consumption was 45-48 kilogrammes per person, up from 26 kg in 2000. The total consumption of paper in 2007 was worth more than 300 billion baht, of which 50% each was for printing and packaging.
"Packaging is a key tool to help many businesses gain more sales. It will also include direct mails, sale and shopping catalogues and product instruction manuals. This area has growth potential. When more Thai products are exported, it means that packaging firms have more work to do as well," said Mr Kriengkrai, who is also managing director of the printing firm New Waitek.
At the same time, product manufacturers, which are focusing mainly on local sales, have not overlooked the importance of packaging.
Companies are reluctant to raise product prices while their production costs are rising due on skyrocketing prices for oil and other raw materials. They might do something with their product packaging to boost sales.
For example, they might resize their packages. Some producers might silently reduce the sizes to avoid consumer resistance and some might make simple packages to save costs.
"I think these changes will make printing and packaging companies busy year round and that's good for us," Mr Kriengkrai said.
Another area with potential is the export of printing products from Thailand. Last year, the export value of Thai printing products stood at US$840 million or 28 billion baht, jumping 715% from $103 million in 2006.
During the first quarter of this year, the export growth for Thai printing products remained high at 50% growth.
Mr Kriengkrai said Thailand was close to its goal to become a printing hub in Southeast Asia. The export target of 30 billion baht will be achieved before 2010 as planned initially.
Presently, the standard of printing quality here is second to none and could surpass established centres such as Hong Kong and Singapore, he said. Thailand ranked first in the Asian Print Awards in 2007 and leading printing exhibitions such as Packprint International 2007 have already moved to Thailand.
Despite the story of sharp growth, printing and packaging companies have faced similar problems to many sectors as their operating costs have been rising because of higher oil prices and newsprint, which has already risen by 30% since the start of this year.
"In general, our costs have risen 10-15% on average and we are trying hard to improve our production efficiency and save costs. We will adjust our prices by 10-15% for the whole year of 2008," he said.
Plastic packaging producers have been facing more serious problems than paper packaging firms as plastic pallets have had higher prices on the back of soaring oil prices.
Currently, plastic pallet prices stood at $1,700 per tonne, up from $1,300 to 1,400 per tonne in early January. Crude oil prices rose from $90 per barrel in early January to about $130 per barrel by mid-June.
"Overall, the plastic packaging business is growing in line with the country's economic expansion. But production costs have risen sharply and the producers are trying hard to negotiate with clients to raise their prices," said Veerasak Kositpaisal, chairman of the FTI's Plastic Industry Club.
Moreover, plastic packaging makers should avoid fixing long-term prices as the costs of plastic pallets are fluctuating. At the same time, they should improve efficiency, reduce loss in the production and manage material inventory.
In fact, the local supply of key raw materials such as polyethylene, polypropylene and PVC is self-sufficient for plastic packaging.
Packaging technologies are changing all the time as manufacturers are demanding improvement to help them save costs and improve image and quality.
Mr Veerasak suggested consumers and manufacturers focus on reducing, re-using and recycling plastic packaging to help the world tackle global warming.
DEVELOPMENT
Southern Seaboard may finally take shape
VICHAYA PITSUWAN
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| Congestion on the Eastern Seaboard has intensified the need for a new industrial zone to meet demand for new investment. |
Two decades and several governments since the idea was first raised, the ambitious Southern Seaboard project may finally be gaining enough momentum to materialise under the current administration.
The project's researcher, the National Economic and Social Development Board (NESDB), is hopeful to see a commitment from the government along with changes in Board of Investment incentives, which will be the key to attracting big-ticket investment.
According to Arkhom Termpittayapaisith, the NESDB deputy secretary-general, the Southern Seaboard Development plan first arose 19 years ago, in an outline presented to the administration of Gen Chatchai Choonhavan in 1989. The plan has since gone through countless revisions but none of its key elements have ever materialised.
Developing more industrial infrastructure and employment opportunities in the southern provinces has obvious economic benefits, promoters of the plan say.
As well, the need has grown more urgent in the past two years to alleviate pressure on the heavily industrialised Eastern Seaboard.
Finally, improved economic conditions in the South could help to reduce the sectarian violence that has claimed some 3,000 lives since it flared anew in 2004 in the three troubled provinces bordering Malaysia.
Mr Arkhom says there may be hope at last. He points to the recent establishment of a Southern Seaboard investment mobilising committee, chaired by Prime Minister Samak Sundaravej, as a positive sign.
"The establishment of such a committee shows that the government wants this project to continue so this could be the light at the end of the tunnel," Mr Arkhom said.
As the Eastern Seaboard faces concerns about pollution and is running out of space to accommodate industrial expansion, the government has reconsidered the Southern Seaboard project as means to sustain economic development.
Mr Arkhom said the project would entail building two deep-sea ports, one on the Andaman side and one on the Gulf side, with industrial estates near the latter, and a landbridge with multi-modal logistics links between the two ports.
According to the plan, the landbridge should consist of underground natural gas pipelines, rail links and road links.
Ideally, the seaports on both coasts would support oil-based industries as imported crude can arrive from the Middle East on the Andaman side and be transported to refineries on the Gulf side via the landbridge, added Mr Arkhom.
Industrial estates close to the refineries would form the basis of an upstream petrochemical industry.
Amid the prevailing oil price crisis, the Southern Seaboard project would greatly reduce logistics costs as goods shipments between the east and the west would not have to pass through the longer route of the congested Malacca straits, Mr Arkhom pointed out.
The NESDB has suggested two options for ports and the related landbridge infrastructure: Sichon in Nakhon Si Thammarat with links to Krabi, or Pak Bara in Satun with a link to Pattani province. It has also proposed strategic locations for each industry to the investment mobilising committee.
The NESDB said the geographical advantages of long beaches and deep watercoursse in the upper southern region would make Surat Thani and Nakhon Si Thammarat ideal locations for the petrochemical industry, while Chumphon and Prachuap Khiri Khan provinces are ideal for steel plants.
It would reserve the Andaman seacoast provinces for tourism with the lower southern provinces a manufacturing hub for rubber and palm products to support biofuel industry development.
"The next step we need is to see the industrial sector start making investment plans in this region and this requires the Board of Investment (BoI)," Mr Arkhom said.
He suggests that the BoI provide the right incentive packages to persuade investors to consider the region and create industrial clusters.
Apart from tax incentives, Mr Arkhom suggests the BoI could provide financial incentives for foreign institutions to build human resources training centres in the Southern Seaboard location.
