Japan's 'Thailand-Plus-One' revisited: opportunity in the Mekong subregion

Japan's 'Thailand-Plus-One' revisited: opportunity in the Mekong subregion

Rising wages and labour shortages in Thailand have lately prompted some Japanese manufacturing companies to turn to the CLMV (Cambodia, Laos, Myanmar and Vietnam) economies for new low-cost production sites in Asean. This is not entirely bad news for Thailand.

Though labour-intensive processes are shifting to the CLMV, Japanese companies still choose to keep their main production bases in Thailand. This is known as the "Thailand-Plus-One" strategy in which Japanese companies extend the supply chain network developed in Thailand to neighbouring countries.

Two elements are helping to turn this strategy into reality. The first is progress in achieving political stability and improved economic conditions in the CLMV. The other is the active effort made by the CLMV governments to invite foreign direct investment (FDI) as they have established many special economic zones (SEZs) offering various investment incentives in areas around their capitals and border regions. As a result, FDI from Japan to Thailand and the CLMV, collectively known as the Mekong subregion, has grown from US$4 billion in the early 2000s to more than $10 billion recently.

Examples of Japanese businesses moving into the CLMV on the back of the Thailand-Plus-One strategy have been increasing in recent years. In Cambodia, Minebea Corp, a major producer of machinery components and electronic devices, invested $60 million to establish a motor factory in the Phnom Penh SEZ in 2011. Existing factories in Thailand now supply parts for the Cambodian factory's production.

Nidec Corp, a Japanese electronics company, invested $37.5 million in 2012 to establish a factory in Poi Pet, Cambodia to make parts for computer hard drives (base plates) and supply them to a factory in Ayutthaya. This subsidiary in Cambodia is now dedicated to further developing the company's base plate business.

In Laos, Toyota Boshoku Corp, a maker of automotive components, built a $5.6-million factory in 2014, which is being used to manufacture automobile seat covers for a factory in Thailand. For Myanmar, as a result of joint efforts with the Japanese government and businesses to open mega-industrial parks in Dawei (the first phase of the project cost $1.7 billion) and the Thilawa SEZ (a $510-million Japanese investment), Japan's FDI to the country rose sharply in 2015.

Vietnam, though not included in the Thailand-Plus-One model, is drawing a lot of attention from Japanese businesses as the new frontier in the Mekong subregion with great potential to meet Japanese supply chain needs. With Vietnam being one of the world's largest markets for motorcycles, Japanese producers such as Yamaha and Honda, along with parts and components suppliers, have been investing in the country for decades. A notable example is that Honda has made its production facilities in Vietnam a base for exporting to Thailand, Laos, Cambodia and Malaysia.

The Thailand-Plus-One strategy should benefit all parties involved. For Japanese companies, it helps reduce costs and increase profits, while allowing them to continue to operate in a familiar environment. For the CLMV countries, accepting fragments of a production block is crucial for their industrial development, in addition to job creation.

Japanese FDI often involves cutting‐edge technologies and fosters supporting industries; thus, local players can expect positive productivity spillovers from technological transfer and superior managerial know-how.

As for Thailand, the strategy is beneficial as the country's production base will be raised to more advanced levels. Major Japanese automotive and parts industries, such as tires and batteries, are already supporting such upgrades by announcing their intention to expand R&D functions in Thailand. EIC thinks that the strategy should also help to mitigate labour shortage problems as the demand for unskilled workers will decrease.

Nevertheless, Thailand's labour quality must be improved comprehensively through additional training and intensive education to be ready for the increased sophistication of new Japanese FDI to Thailand as a result of this strategy.

Moreover, to move up the value chain in manufacturing via this strategy, EIC believes that other value-added industries, such as manufacturing design, distribution, warehousing, and logistics management should be encouraged.

To better prepare the country for the Thailand-Plus-One strategy, policymakers should perceive Thailand as the core of regional production. Both human resources and cross-border infrastructure must be ready to embrace future changes and new breed of FDI.

Eventually, to compensate for the transfer of labour-intensive businesses from Thailand to the CLMV countries, the industrial focus in Thailand needs to be on becoming technology-intensive and ultimately innovation-driven as the country is increasing its significant presence as the production hub of the Mekong subregion.

(This article is the third and the last in a three-part series that summarises the progress of Thailand-plus-one strategy and provides the recent analysis of Japan's FDI strategies in CLMV.)

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

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