INDUSTRY

Back on track

Manufacturing numbers are now above pre-crisis levels, but can the frenzied pace be sustained? And can the government deliver on promises to help smaller producers thrive and compete?

By SOONRUTH BUNYAMANEE

As one of the core growth-driving policies, several measures have been adopted to promote and develop SMEs.

The revival of the country's industrial sector has been arguably one of the government's greatest success stories. But the jury is still out on whether the long-term outlook for the sector is favourable or not.

Prime Minister Thaksin Shinawatra's "think new, act new" policy platform for economic development has placed a special emphasis on the development of small and medium-sized enterprises (SMEs) by injecting huge amounts of cash into state-supported projects, mainly through state-owned financial institutions.

This, coupled with the establishment of the Small and Medium Enterprise Development Bank of Thailand (SME Bank), has sparked enthusiasm for the development of SMEs and has enhanced the growth potential of such enterprises considerably.

However, the approach to developing SMEs appears to many to be somewhat less than comprehensive.

The government has sunk billions of baht into financing entrepreneurs through the SME Bank and other state-owned banks led by Krung Thai Bank and the Government Savings Bank. The Industry Ministry has set aside a further one billion baht in capital support for them through the SME Promotion Office.

But at the same time, the government has failed to develop clear marketing channels, management supports and an accounting system suitable for SMEs. Without comprehensive development _ though the number of SMEs has mushroomed in recent years _ their viability rate has been less than 50% after three years of operation.

Phinij: no pipe dreams

At the same time, the government has stepped up its efforts to develop the country into a regional manufacturing hub for automobiles, energy, fashion and food processing.

As well, it wants local industries to be able to compete in world markets. To this end, it has encouraged the formation of industrial clusters and has attempted to restructure fundamental sectors such as petrochemicals and steel by integrating downstream and upstream players to boost production efficiency.

Another ambitious aim is to transform low-margin original equipment manufacturers into brand name owners. Investment promotion schemes offer various incentives for such projects, with state assistance programmes to help with original product design development, R&D and human resources development in specific fields.

To accommodate the industrial development policy, the administration has offered a stunning array of incentives to the industries that it has championed.

A number of programmes eagerly promoted by the current government focus on developing Thailand into a regional production hub, with the "Detroit of Asia" initiative appearing most likely to bear fruit. Already many giant carmakers have set up shop in Thailand.

It cannot be denied that many economic policies adopted by the current government _ in particular the drive to boost local consumption _ have contributed to an investment boom in the country's automobile industry.

Bragging rights do not belong exclusively to the current government since the industry's strong fundamentals had been put in place and refined by several previous administrations.

Other major projects including Bangkok Fashion City and the regional energy trading hub initiative have yet to show tangible progress.

Whether these projects will turn out to be anything more than pipe dreams will depend on the willingness of the private sector to participate and how competently they are implemented by state officials.

Industry Minister Phinij Jarusombat defended the government's track record, pointing to the improved numbers recorded by the industrial sector and the overall economy.

He also pointed out that the manufacturing sector had shown continuous improvement since the Thaksin government took office. Growth in 2001, which stood at about 5-6%, climbed to 8% in 2002, 13% in 2003 and is expected to reach 14.5% this year.

The government's new strategy for industrial sector development was to create a comprehensive database of all industrial operations, promote research and development, innovations and quality improvements in the sector and back the development of higher standards.

Mr Phinij called the measures vital amid the feverish pace of competition in the business world, adding that upgrading the production technology of SMEs was critical to helping them survive in the long run.

Undeniably, the industrial sector has shown continuous improvement over the past three years, due in no small part to Mr Thaksin's dual-track policy, which aims to simultaneously stimulate both local consumption and exports.

Growth in the manufacturing production index and the capacity utilisation rate shown in statistics released by the Bank of Thailand, the industrial sector enjoyed a strong recovery under the Thai Rak Thai Party's watch.

The Manufacturing Production Index (MPI) has continued to climb, hitting 138.4 in 2003 and 156.3 in the first quarter of this year, up from 112.1 in 2000.

Capacity utilisation has edged up more gradually, reaching 75.6% in the first quarter, up from 66.3% in 2003 and 53.5% in 2001.

Both leading industrial indicators now stand at a higher point than they were in the pre-crisis period, proof that Thailand's production activities have not only fully recovered, but exceeded previous records.

While industrial sector growth has been driven mainly by local consumption and higher exports on the back of the global economic recovery, capital and budget constraints will eventually see state-sponsored stimulus measures fading out in the near future.

Given this reality, the government is counting on private investment to sustain economic growth for the duration of its next term in office.

According to Bank of Thailand data, the private sector will soon be forced to invest in expanded production capacity, as several key industries have been operating at nearly full capacity since the first quarter of this year.

However, the decision to expand will depend on potential future demand in both the local and overseas market.

After learning the hard way about the perils of over-investment from the 1997 crisis, manufacturers are expected to consider the economic outlook very carefully before going ahead with any major new investments.

Can it last? Will the private sector be prepared to step in and drive economic growth once the government's stimulus measures slow to a trickle?

Just as significantly, is the public confident enough in their financial stability to keep on consuming?

The answers to those questions will become clearer in the very near future.