It has been half a year since the government embarked upon the 40 per cent nationwide minimum wage increase. Another boost is scheduled for January. Many have expressed concern over the risk of companies relocating production bases. Some have argued in the wage rise's favour due to subsequent productivity improvement.
Thailand's automotive industry _ largely concentrated in the provinces where the minimum daily wage was raised to 300 baht _ has been particularly impacted by the wage rise. Who gained, who suffered, and what adjustments have we seen in light of this policy's implementation?
The ongoing labour shortage together with the positive outlook for car production has somewhat strengthened the bargaining power of workers in the auto industry. Consequently, those initially earning the minimum wage have benefitted from the scheme, but unskilled labour constitutes less than a third of total workers employed in the auto industry, mostly in small- and medium-sized labour-intensive auto parts manufacturers.
However, the lack of clear enforceable guidelines for the wage increase could make these minimum wage earners' gains lower than what the scheme originally intended. Instead of simply bumping up the wage, employers incorporated pre-scheme non-financial benefits such as free lunches, medical welfare and life insurance into the supposed wage increase. Such a practice is not illegal, as the legal minimum benefits consist only of contributions to the Social Security Fund and the Workmen's Compensation Fund.
No sooner had the newly employed started sharing the gain, than companies opted to convert them to part-time workers in order to cut the burden of benefits. In addition, these part-time workers are usually not members of any labour union, thus weakening their negotiating power and offering little incentive for employers to engage them in skills training.
On the whole, existing labour development programmes were cut in an attempt by companies to cope with higher labour costs, effectively impeding the improvement of labour skills necessary for Thailand's auto industry to step up to become a higher-value industry in the future.
Company size is also key to determining the impact of the wage hike. While automotive assembly plants and Tier 1 suppliers _ most of which are large-scale enterprises _ had already been hiring workers at above the minimum wage, the adverse impact mainly weighed on smaller firms such as auto parts suppliers in Tiers 2-3 which are highly labour-intensive and limited by diseconomies of scale. Thai companies that have grown together with their first-generation workforce are often reluctant to replace their ageing labourers with machinery. An auto parts entrepreneur told of a case of his Japanese partner withdrawing ownership from the firm, blaming an inability to reduce the substantial portion of labour costs to below 40% of total production cost. This also shows a more worrisome deficiency in managing costs among SMEs. Not only are costs of energy and electricity deemed uncontrollable, prices of raw materials are also predominantly determined by the global market. They can be pre-agreed only three months in advance. In this regard, the larger enterprises tend to be more adept in managing non-labour costs, let alone the higher potential costs of upgrading to more capital-intensive production.
Fortunately for auto parts suppliers, the rosy medium-term outlook for car demand provides a silver lining for the minimum wage hike. The announced production target of 3 million cars by 2015 will boost demand for auto parts along the value chain including those SMEs in Tiers 2-3 and lower.
Having mentioned the disadvantages of the minimum wage rise on the marginalised workers in small- and medium-sized auto parts manufacturers, one question remains of whether there is a threat of production base relocations.
Yes, and the threat would not only remain if Thailand's competitiveness were to remain stagnant. Global sourcing is not new. Severe meteorological disasters in recent years both in Thailand and abroad underlined the importance of diversifying production bases. Relatively cheap labour had formerly been the comparative advantage of Thai automotive suppliers; it's no longer the case. Yet, cheap labour is not the only factor. If only lower wages counted, there would rarely be successful bidding for Thai suppliers. The adaptive and more advanced skills of Thai workers still hold an edge over lower wages.
This edge may not last, as skilled workforces in our neighbouring countries with markedly lower labour costs are growing fast. Take motorcycle production as an example. Thanks to the less complex production process, a large share of motorcycle production has expanded or even moved completely from Thailand to Vietnam, enjoying nearly 60% lower labour costs. This expansion is partly due to the huge potential for motorcycle sales in Vietnam market. Accordingly, relocation of the production bases by automotive and parts companies to lower-wage countries will depend on how quickly those countries can develop the requisite labour skills for auto manufacturing. Nevertheless, relocation necessitates close relationships and effective logistics among units along the value chain of car production _ not an easy task to achieve for newly open markets.
A downward trend in the profit margins of small- and medium-sized auto parts suppliers is indeed our concern in the longer term. Although the selling price of auto parts to assemblers is contractually specified, assemblers normally ask for a cut after the first year, no longer excusing R&D expenses for designing products to fit the new car model in subsequent years.
While evidence of increased productivity has not been apparent, the minimum wage increase has put additional pressure on profit margins and ended up eroding the competitiveness of the Thai auto parts industry, especially among small suppliers.
Dr Sutapa Amornvivat is Chief Economist and Executive Vice President at Siam Commercial Bank. She has international work experience at IMF, ING Group and Booz, Allen, Hamilton. She received a BA from Harvard and a PhD from MIT.