Economic Mid-Year 2001

Flagships trapped
in the doldrums

Soonruth Bunyamanee

INDUSTRY

Key heavy industries have been affected by a major shift in government priorities and a downturn in global economic growth. At the same time, though, there are brighter prospects for expansion of light industries such as food processing and jewellery production

For most Thai industries this year is one of adjustment to new realities. The slowdown in global economic growth has becalmed some flagship industries, with exports to the United States and Iapan slipping from previously anticipated targets.

Large heavy industries have to adapt to the government's revised incentives that shift the focus toward encouraging small and medium-scale enterprises and a greater reliance on use of local content.

As well, the stagnation of domestic consumption as people opt to save rather than spend is preventing industries from utilising their full production capacity, although some sectors are expanding their factories, anticipating a turnaround on the more distant horizon.

Stubbornly high prices for oil, natural gas and electricity have put a brake on both production and consumer spending, and the situation is Iikely to prevail for the rest of this year. According to the Bank of Thailand, factories operated at 54.9% of their capacity, on average, in the first four months of this year. Industries that topped 90% were pulp and paper products, and basic petrochemicals, helped by rising prices on the world market.

Manufacturing expanded slightly from the same period last year. Industries experiencing satisfactory growth included vehicles and parts by 20.2%, while jewellery and ornaments expanded by 5.6% on the back of higher demand from the United States and some manufacturers shifting their production bases to Thailand from Israel.

Most others faced a decline, with the Manufacturing Production Index expanding by 1.02%, down from 8.12% in the same period last year.

Textile production increased by 3.3% in line with exports of garments, thread and crochet work, helped by the weak baht.

Beverage production of all brands posted an increase, especially liquor which expanded by 46.3% in the first quarter. This was because Bang Yi Khan distillery increased its production after cutting back last year while it cleared large stocks.

Production of petroleum products increased by 2%, with the Star Petroleum and Rayong refineries closed for maintenance in February.

Steel and steel products posted a 5.7% increase matching that of related industries.

On the downside, output of electronic and electrical products declined by 17.4%, with production of integrated circuits and television sets weakening in line with exports the US and Japan.

Food production declined by 7.2 with sugarcane affected by disea and exports dented by anti-dumpi measures in the US and the reduction of trade privileges by the Europeon Union.

Despite steps intended to sp industrial production, for example by increasing consumer demand, there has been little sign of recovery in the past six months.

With the government preaccupied upied with applying its populist policies in other areas, industry took a back seat until a workshop in May where key ministries were told to set a new tack for industrial
development, a take that will probably take six months.

Efforts to jump-start production are unlikely to show tangible results until September, when policy should kick-in, or until bad debtl held by financial institutions transferred to the Thai Asset Management Corporation in amounts large enough to encourage them to result lending.

The government has made assistance for small and medium-sized businesses a major platform, but was not until June that a work shop aimed at strengthening their role organised. That means it will take another three to six months to put any policies that result into practice.

At the same time, the task of reviving products has become more demanding because of a slowdown in exports, particularly of electronics, computers and petrochemical products, all major contributors to the economy.

With the government's industrial strategy and policy on investment promotion under revision, local and foreign investors have adopted a wait-and-see attitude toward investment in the country.

ELECTRONIC GOODS

The production of electronics and electrical appliances in 2000 continued its high growth from the previous year. The output for export outnumbered that for local distribution because domestic demand was weak.

Assistance by foreign strategic partners in expanding the export market and a shift in production bases to Thailand also boosted exports, which increased in value by 23.4% in US dollars from the 1999 level.

Domestic demand for the products was projected to increase slightly this year, given the economic slowdown and high competition.

Even so, exports are likely to continue to expand but at a slower pace because of lower demand, particularly in the United States where economic growth has weakened and the personal computer market has become saturated.

The export value of products in the first quarter of this year totalled US$6.28 billion, up 1.6% from the same period last year.

The increase was good as exports of the same products by other countries in the region, South Korea, Taiwan, Singapore and the Philippines, had dropped by between 1.5% and 5% in the same quarter.

However, given a steady increase in the import content, the industry needs to accelerate restructuring production to reduce its dependence on imported raw materials and to boost its added value.

STEEL
The local steel industry has been in a slump since 1998. With the sharp fall in construction activity and the overall economy, several steelmakers have been operating at only 40% to 50% of their capacity.

Not only have most producers suffered from the sharp drop in local demand, but they have also faced dumping of steel by foreign proucers, particularly from Eastern Europe, and subsidies and trade barriers imposed in key steel-making countries.

Worse still, the United States and Japan, which are main export destinations, have seen a weakening of economic growth.

Steel-rod makers appear to have borne the brunt of the slump as the number of producers nationwide has dropped to about 20 from just over 100, with the annual output falling from seven million tonnes to between 1.6 million and 1.8 million.

Five major steelmakers, Sahaviriya teel Industry, Nakornthai Strip Mill, ,iam Strip Mill, LPN Plate Mill, and Sahaviriya Plate Mill, have called on the government for help including tax reductions, capital assistance and industry protection.

The slump is a chronic problem for he government as the industry involves huge investment and debt, as well as a large number of workers.

State agencies, including the Board of Investment, have made several attempts to tackle the problem, but to no avail.

PETROCHEMICALS AND PLASTICS

Domestic demand for petrochemical and plastic products is forecast to grow by up to 8% this year on the back of increasing use of the materials in vehicles, electrical and electronic goods and everyday consumer products.

However, petrochemical prices are declining because of an increase in supplies worldwide.

Petrochemical and plastic producers in the Asia-Pacific region are expanding their production to prepare for huge demand in China, India and Asean.

Petrochemical prices are expected to continue to weaken with the expansion of production plants in Thailand, Singapore and Taiwan, mainly driven by rapid expansion in the automobile and electronic industries. An oversupply of ethylene and propylene, upstream products, is expected this year.

Upstream petrochemical production last year totalled 4.88 million tons, intermediate 2.18 million tons and downstream 5.82 million tons.

NEW STRATEGIC INDUSTRIES

According to the workshop in May, the industries that deserve government support must not only enjoy strong global demand for their products but also generate more value-added and local uses.

The gem and jewellery industry could add 70-80% to the value of its products, even though it relies on a high import content.

The food industry, which relies on local raw materials in large amounts, also has potential.

The electronics and electrical appliance industry, which has led the country's exports for several years, relies on 80-90% imported content, while generating only 5-10% in added value.

Gem and jewellery exports in the first quarter of this year totalled US$431.4 million, up 13.7% from the same period last year.

The industry's prospect still look promising this year because of increased demand in key export destinations including the US, Israel, Belgium and other European countries.

However, the industry needs to change Thais' preference for imported products. Imports in the first quarter jumped by 71% year-on-year to $636 million.

The increase, mostly in form of ornaments and gold, resulted in a $204 million trade deficit for the sector in the quarter.