Thailand's path to economic development in the previous years has been relatively pleasant - as seen from the rapid expansion of the manufacturing sector and a marked increase in exports. The country's export-led industrialization was made happen thanks primarily to the move of labor from low productivity jobs in agricultural sector to higher productivity jobs in manufacturing sector. The Thai manufacturing sectors have also been successful in integrating themselves into international production networks and diversifying their export products and markets.
This long journey, however, has just begun. The road ahead is forecast to be rough and challenging. Thailand will have to face exhausting resources and declining competitiveness, unless it can increase productivity and create more value.
Only technological upgrading - process upgrading, product upgrading, and functional upgrading - can help Thailand avoid the bottlenecks and dreaded dead-end of the middle-income trap faced by many countries. Upgrading initiatives have taken among small but growing number of manufacturing companies in Thailand.
Process upgrading is the simplest and quickest of the three. Many large companies in Thailand have opted for this approach to reduce waste, energy use and costs of production while increasing productivity. Just to give one example, Sabina, Thailand’s top three best-selling lingerie manufacturers, has adopted various forms of lean manufacturing, including Kaizen and multi-task training. The results are less working space, shorter lead-time, and 40 percent less production labor while outputs sharply increase. By continually increasing its productivity, Sabina manages to survive the rise in minimum wages and even expand its operation into the ASEAN market.
Our estimate finds that if implemented throughout the entire manufacturing industries, full-scale lean manufacturing could save at least 14 billion baht per year, or 3.8 percent of the labor wages. Thus process improvement to reduce cost is the lowest hanging fruit waiting to be taken.
Energy saving can produce another quick win, as exemplified by the case of SCG Paper. Long committed to environmental concerns, SCG Paper recently installed a biomass dryer in a project by its subsidiary Phoenix Pulp & Paper. This 50-million-baht investment has saved 4 million liters of fuel oil, amounting to 43 million baht. The payback period is as short as a little over one year.
More difficult than such process upgrading are product upgrading, producing new or improving existing products, and functional upgrading, adding designing, product distribution, branding, and marketing to mere manufacturing of goods.
Key to product and functional upgrading is research and development (R&D). Among Thai manufacturers that produce to order without designing, only 5 percent conduct R&D, while the percentages of those engaging in design and owning brands are 16 and 22, respectively.
While most Thai companies are not investing in R&D, our research has identified many that are. In fact, those that are undertaking R&D are doing better. Some manage to develop innovative products and thus enjoy higher margins.
For example, high value-added products resulting from SCG Building Materials’s intensive research command 20 percent higher profit than its commodity products. Due to R&D, Saijo Denki, a Thai leading manufacturer and exporter of air conditioners, has transformed itself from a low-margin contract manufacturer to one with its own profitable brand. Its branded products earn 24 percent more profit than the unbranded ones. Even small companies, such as Silicon Craft Technology, can be innovative. Some of Silicon Craft’s radio-frequency identification (RFID) chips for animal tracking perform better than those of Texas Instruments, the U.S. giant.
While highly profitable, there are many obstacles that prohibit most of Thai companies from undertaking R&D. The manufacturing sector is in dire need of supports from the government in forms of research funding and R&D personnel as well as tax incentives to encourage more investment.
It is also evident that increasing productivity greatly benefits businesses and the industry as a whole. Unfortunately, the private sector’s efforts by themselves are not enough to drive industry upgrading and sustained growth.
As soon as the current political conflicts are resolved, the new government should declare “the Decade of Productivity Improvement” to set a clear direction in which all relevant stakeholders will follow. The government, business and workers are advised to get together and set up policies that accommodate continual wage increase and productivity improvement. Collaboration between the government and private sector organizations, especially the Thai Chamber of Commerce and the Federation of Thai Industries, is key.
Thailand has traveled far from an agricultural-based economy yet there is still a long way ahead to become a developed country. Unless we actively improve our productivity and invest more in technological innovations, we will be stuck in the middle-income trap, waiting to be overtaken by other emerging economies.