Despite more challenges from both international and domestic factors, in particular the increase of the minimum wage to 300 baht, Thai small and medium enterprises should not only prepare to handle the challenges, but they also need to look beyond their current horizons.
Specifically, they need to take advantage of liberalisation as the formation of the Asean Economic Community (AEC) in late 2015 draws near. By expanding trade and investment in nearby countries with abundant resources and lower manufacturing costs, Thai businesses can help increase their competitiveness.
The best trade and investment opportunities for Thai SMEs are Indonesia and the CLMV (Cambodia, Laos, Vietnam and Myanmar) group. However, to determine which markets they should target for investment, SMEs need to determine which advantages their business want to build on.
Indonesia and Vietnam both benefit from having large markets thanks to their large populations. It is easier and faster to start businesses there compared with Laos, Myanmar or Cambodia. However, for labour-intensive industries, the best destinations should be Cambodia and Myanmar. Vietnam, which used to attract investments focused on low labour cost, is not as attractive as it used to be. Due to labour shortages, Vietnam had to increase its minimum wage by 25-30% in 2012, making wages 1.5 times higher than in Myanmar and Cambodia.
Besides the attractive factors mentioned above, SMEs should also consider other factors such as the market needs, tax systems, and investment regulations that restrict certain kinds of businesses. For example, Indonesia has rules against SME ownership in some sectors, such as a ban on foreign ownership of small retail businesses.
Meanwhile, SMEs should consider other costs such as land rents, especially in big cities like Ho Chi Minh, Hanoi, Yangon and Mandalay. SMEs should invest in manufacturing operations outside of cities, or locate in industrial estates where rent is not as high. Industrial estates in Myanmar charge rents that are around the same rate as at Laem Chabang in Thailand, which has vastly superior infrastructure.
The growth in household spending in CLMV countries is an opportunity for SMEs in the trading business. Household spending in Cambodia and Vietnam is continually rising both for food and beverages and other household goods. Meanwhile, increasing use of cars and motorcycles has resulted in increasing spending on maintenance as well as higher demand for vehicle parts. There is also growing demand for residential construction, which supports demand for construction materials; household products; and construction and design services.
The CLMV countries’ growth in household spending is an opportunity for Thai SMEs to engage in trade businesses, such as selling consumer goods or construction materials, operating small retail businesses, garages, car-care centres and restaurants, because Thai goods and services are well known, in good standing and popular in these countries.
The business model that is appropriate for SMEs that are just beginning market diversification and are inexperienced is to find business partners both from Thailand and from the countries they plan to invest in. SMEs in the trade business should join up with various manufacturers to create product diversity and to find local business partners. This is important because there are already lots of SMEs in the trading sector in these countries, and competition with local enterprises is high.
Thai SMEs that join together to expand their markets will not only increase their bargaining power, but will also reduce management costs. Furthermore, once goods have started to create a market base, operators may expand their business into other forms of investment, such as establishing trade and investment representative offices, selling franchises to local operators or joint ventures.
Businesses involving tourism, hotels and restaurants in CLMV countries are growing rapidly, which is an opportunity for SMEs to penetrate the market. Even though the numbers of tourists visiting the CLMV countries are still smaller than those visiting Thailand, the figure is growing. In particular, the numbers of foreign tourists going to Cambodia and Laos rose by an average of 18% and 25% per year from 2000-11 respectively.
While the number is still small for Myanmar, the opening up of that country will generate more tourists. The number of foreign tourists was expected double in 2012 to 1.5 million, because Myanmar has many interesting destinations. However, there is an insufficient supply of accommodations for such a growing market.
The CLMV countries still have low numbers of accommodation, in particular hotels, with an average of just one place of accommodation for every 1,500 foreign tourists, compared to Thailand’s figure of one for every 250.
Tourist spending is increasing, especially in Cambodia and Laos, which saw 18% and 39% increases per year respectively from 2000-10, reflecting the opportunity for SME operators to invest in hotels, in which Thais have an advantage and expertise, as well as in other related businesses such as restaurants, tours and souvenirs.
SMEs in the manufacturing sector having links with a value chain for exports are also interesting. Exports in the CLMV countries have been growing continuously at around 20% per year over the past 10 years.
Even though the ratio of direct exports by SMEs in CLMV countries is still considerably lower than Thailand’s, the CLMV countries have increased productions that indirectly connect with exports, especially among medium-sized companies in Vietnam and Laos. This shows the ability of SMEs to build production networks, especially in the form of subcontracting for multinational corporations. This specialisation seems likely to increase, resulting in more clustering of SMEs in industries with sizeable exports.
High-tech industries in Vietnam have high potential to grow substantially. The rise in the minimum wage has reduced the attraction of labour-intensive industries. Foreign investors have therefore switched to invest in high-tech industries, notably in the south, which has attracted the most multinational corporations. As of mid-2012, 85% of the investment projects registered in Dong Nai province involved high-tech industries.
Thai SMEs can use this opportunity to find business allies. This might involve joint ventures with Vietnamese SMEs or large Thai manufacturers in order to manufacture in industrial estates that contain clusters of producers.
Despite many investment opportunities for SMEs, there are some obstacles that Thai SMEs must consider before engaging in business in neighbouring countries. The main obstacles faced by SMEs in these countries are similar to those faced by Thai SMEs. The problems include a lack of skilled labour, limits in the ability to develop technology, lack of management skills, and problems in marketing and distribution channels.
Comparing the abilities of Thai SMEs to those in CLMV countries, Thai SMEs are still much stronger in terms of product quality, ability to produce goods and services to respond to the demands of target customers, the ability to adjust to changing business environments, or better general management skills.
If a Thai SME has already made a careful assessment of the risks and opportunities, it should not hesitate to invest in the CLMV countries. These countries are open to plenty more foreign investment.
However, another factor that will lead to success aside from considering market potential and cost factors is to choose the right type of business to match the nation’s investment policy. For example, Cambodia is encouraging investment into food processing industries, textiles, machinery, and tourism. Vietnam is encouraging export manufacturers and goods that require technology and skilled workers, having set up a Special Economic Zone to handle such investment.
If SMEs choose to invest in businesses that enjoy state backing, the obstacles will be reduced and returns on investment will increase accordingly.
EIC, a unit of Siam Commercial Bank Public Company Limited, offers in-depth macroeconomic outlook and sectoral impact analyses. For more information, please visit www.scbeic.com or contact eic@scb.co.th