Authors:
- Kazutoshi Tominaga, Managing Director and Senior Partner, Boston Consulting Group
- Hitesh Tak, Managing Director and Partner, Boston Consulting Group
Leaders of multinational companies face unprecedented uncertainty in shaping their supply chain strategies and reconfiguring network footprints in response to global geopolitical upheaval.
Dynamics between manufacturing powerhouse China and several major trading partners have accelerated pre-existing production shifts. Technology and relative labour costs are changing. Covid-19 demonstrated the need for more resilient supply chains, at a time when geopolitical tensions have created more complex considerations for global trade partners.
CEOs must also assess how to establish an ESG-compliant supply base, while identifying which geographical location will be the engine of economic growth in coming years. These complex considerations are why over 90% of global manufacturers intend to redesign their supply footprints in the next five years according to a survey by Boston Consulting Group (BCG).
Resilient companies are twice as likely to outperform non-resilient peers in long-term total shareholder return (TSR) performance. What’s more, a successful footprint transformation can improve companies’ resilience and sustainability and cut global manufacturing and supply-chain costs by 20% to 50%.
With companies looking to manage supply costs and mitigate risks, Thailand’s low-cost manufacturing reputation and welcoming business environment offers a platform for success in this dynamic landscape.
Hitesh Tak, Managing Director and Partner, Boston Consulting Group
Southeast Asia: A New Centre of Global Manufacturing
Southeast Asia’s attractive proposition is framed by the compelling cost-competitiveness of its manufacturing landscape. Baseline manufacturing costs in Southeast Asia are now up to 15% lower than China—even before applying potential logistics and tariff costs—in a region boasting large volumes of skilled, low-cost labour.
Southeast Asia has already benefited from significant shifts away from China, with exports to the US soaring by 65% from 2018 through 2022, while US goods imports from China declined by 10%.
Domestic consumption in Southeast Asia is projected to reach US$4 trillion by 2031. Rapid regional growth has also fashioned a large domestic market, with a GDP of US$3.6 trillion in 2022, with the share of middle- and high-income households on track to reach 84% of households by 2031.
Regionally, the Association of Southeast Asian Nations (ASEAN) has implemented a range of supportive policies in recent years, with measures to enhance free flow of goods and services among member states. Expansion and modernisation of ports has been complemented by investment in energy, transport, and digital infrastructure. The Indonesia-Malaysia-Thailand Growth Triangle, Singapore-Kunming rail project, and ASEAN Highway Network all offer potent examples of this evolving ecosystem. These initiatives align with the wider ASEAN Economic Community Blueprint, which looks to embed a deeply integrated and mutually beneficial regional economy, with seamless movement of goods and people.
Major trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CP-TPP) offer competitive trade access with countries that together account for 40% or more of global GDP.
Globally, the value-add of Southeast Asia’s manufacturing industry will double from US$748 billion in 2022 to US$1.4 trillion by 2028. The projected compound annual growth rate (CAGR) of 11% puts Southeast Asia at the forefront of global manufacturing growth, outpacing competitors India (8.4%), China (3.6%), and Mexico (3.3%). In fact, according to our latest report ‘Jobs, National Security, and the Future of Trade’, cumulative ASEAN trade is forecast to grow US$1.2 trillion in the next 10 years.
Thailand’s compelling but complex manufacturing opportunity
Southeast Asia’s manufacturing market is dominated by six key countries, with unique considerations as to the opportunities they present. Thailand, Indonesia, Malaysia, Philippines, Singapore, and Vietnam boast diverse manufacturing opportunities across a broad range of industries.
Thailand attracted over US$10 billion of foreign direct investment (FDI) in 2021, down from US$14.6 billion in 2020. It has positioned itself as a leading supplier to China, being the Asian juggernaut’s largest trading partner for almost a decade. Bilateral trade volumes in 2021 grew 33% year-on-year (YoY) reaching US$131.18 billion.
Automobiles are a major manufacturing subsector—with Thailand long-recognised as ASEAN’s leading automobile manufacturing hub—alongside electronics and electronic parts, computers and components, rubber products, plastic pellets, and chemical products. Thailand’s automobile industry produces over two million vehicles annually, and exports over half of its output to more than 100 countries.
Thailand boasts numerous competitive advantages, key amongst them its low labour costs, with manufacturing costs almost one-third that of trade partner China. Labor productivity growth also improved 13% YoY as of September 2023.
A welcoming business environment sees Thailand ranked 21st in the World Bank’s Ease of Doing Business index—significantly ahead of regional neighbours Vietnam (70th), Indonesia (73rd), and Philippines (95th).
Thailand’s manufacturing ecosystem is not without challenges. Labor-intensive manufacturing is constrained by rising labour costs relative to historic levels. Daily minimum wage rates increased on average 5% in 2022. This is compounded by an ageing workforce and growing worker expectations—without significant evidence of improving skill levels.
The ageing workforce is one facet of a wider ageing population, with the population predicted to stagnate by 2028. The median age of Thai citizens is 40.1 years as of 2022, notably higher than some neighbouring markets.
While demographic realities are hard to address, key policies have been launched to power up the national economy. The Board of Investment (BOI) Thailand—the national investment promotion agency—launched a five-year strategic plan in 2023, targeting five critical areas of economic transformation including green transformation, technology development, talent development and attraction, cluster-based investment, and ease of investment.
This strategic plan aims to upgrade existing industries in parallel with strategic development of new, high-potential sectors. This is underpinned by accelerating transition to green and smart industries. The plan also seeks to position Thailand as a hub for international trade, simultaneously strengthening SMEs and startups while building investment across domestic regions to promote community and social development. Promoting overseas investment is a core facet of this plan.
Thailand’s Eastern Economic Corridor (EEC) initiative also aims to expand the automotive value chain with a focus on integration design and prototyping, as well as to enhance the manufacturing process for electronic accessories and automotive parts. Qualifying manufacturers enjoy lucrative incentives including exemption from corporate income tax for up to 15 years, financial incentives for R&D, innovation or human resources development, permit to own land used for BOI-promoted projects, and facilitation support for visa and work permits.
Southeast Asia, including Thailand, is an attractive destination for supply chain relocation thanks to persistent geopolitical trends, regional policy measures, and a growing domestic market. While the regional opportunity is ripe, understanding the local context is vital to realising this opportunity. Those who tread this path successfully are poised to position themselves at an exciting new heart of global manufacturing potential.
Special thanks:
The authors would like to thank Michael McAdoo (Partner and Director, Global Trade & Investment, Boston Consulting Group) for contributing his insights to this article.