INDUSTRY

Electrical and electronics sector upbeat

Government policies and measures have benefited local manufacturers in a big way

NAREERAT WIRIYAPONG

Suraporn

The government has been given the thumbs-up by local electrical appliance manufacturers by implementing the long-delayed restructuring of import taxes, while the electronics sector has received a boost from incentives offered for the hard-disk drive industry by the Board of Investment.

Overall, the electrical and electronics sector has contributed about one-third of the country's export revenue over the past five years. Thailand has become the largest production base for the electrical appliance industry in Asean with many international manufacturers engaged in expansion programmes. The country is also the second largest hard-disk drive exporter in the world after Singapore.

This large and fast-growing sector is currently dominated by foreign brands and manufacturers. Consequently, the government has taken steps to ensure that the investment climate remains favourable.

As of yet, a restructuring of the tax system related to this sector, an area cited as an obstacle to doing business in Thailand, has not been completed. Nevertheless, the government has taken steps to deal with this issue that have been well-received by the manufacturers.

It started by proposing to cut duties on "fast-track" items including televisions and fibre-optics two years ago. This measure was implemented in response to the planned relocation of some foreign manufacturers with substantial investments in Thailand led by Japan's Toshiba, to lower-cost countries.

Under the tariff scheme, the rates are 1% on raw materials, 5% on intermediate parts and 10% for finished products for those items imported from non-Asean members, while within the Asean Free Trade Area (Afta), the rates, which are now 0-5%, will all be cut to zero by 2010.

The award-winning 4GB 1-inch microdrives used in and mobile devices are produced at Hitachi Global Storage Technologies' Prachin Buri plant.

Manufacturers also praised a resolution from the cabinet earlier this month to cut tariffs on raw materials and components used for producing electrical and electronic products. Import tariffs on 76 items would be waived or reduced to less than 5%, benefiting producers of refrigerators, fans, washing machines, microwave ovens and rice cookers.

The government expects to lose about one billion baht per year as a result of these tax cuts. On the other hand, the benefits are projected to help serve as an incentive for companies to keep their manufacturing operations in Thailand as well as boost the country's competitiveness and attract new investments from abroad.

"The tariff cuts should have been implemented a year ago (when Afta took effect in the beginning of 2003), but due to the cabinet reshuffles in which two industry ministers were replaced, they were delayed," said Suraporn Simakulthorn, president of the Electrical, Electronics and Allied Industries Club of the Federation of Thai Industries.

With the signing of a number of bilateral free-trade area agreements, especially the pact with China, the market will open up considerably and the government will need to establish some industrial standards to cope with the rising imports.

As well, the Thaksin administration should do more to support the local electrical industry in its plans to establish a national brand sometime later this year.

The members of the Federation for the Electrical Industry have jointly set up a company to work toward building Thailand's first home appliance brand. Government support for this project is needed in terms of funding the marketing budget to build up brand awareness and providing incentives for upgrading human resources and research and development.

In the electronics industry, the BoI's HDD package, launched earlier this year, has drawn investment worth more than 30 billion baht from three major players to Thailand. This will definitely benefit local electronics part makers. US-based Western Digital (WD), for example, plans to outsource 60 billion baht worth of locally produced materials to serve its six-billion-baht new investment in the country.

With the new incentive package aimed at promoting cluster production in Thailand, HDD manufacturers have been offered up to eight years of tax incentives if they meet the criteria for R&D input and technology transfer to their part suppliers.

By luring investors to Thailand, the government is hoping to overtake Singapore as the world's number one HDD exporter by 2006. Though it believes that reaching this target is possible, WD has concerns over the lack of specific engineering skills in Thailand.

Still, most of the electronic parts manufacturers are subcontracting to electronics manufacturers, the facets of the business that require huge investments but generate very low margins.

Foreign brand owners still control design and marketing activities that consume less resources and generate higher margins.

The government should take more steps to support subcontract manufacturers by encouraging them to upgrade into more value-added products by building up their own design and marketing capabilities.

As long as parts makers and supporting industries remain financially sound and technologically advanced, Thailand will remain attractive in the eyes of international manufacturersand consequently the electronics industry will become an increasingly more valuable sector to the economy.