06Relocating Labor-intensive Industries from Thailand to … · Thailand is also graduating from...
Transcript of 06Relocating Labor-intensive Industries from Thailand to … · Thailand is also graduating from...
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Saowaruj Rattanakhamfu Somkiat Tangkitvanich
Wirot Sukphisan Ploy Thammapiranan
Thailand Development Research Institute
Abstract
As a result of higher wage and labor shortages in
Thailand, Thai companies in labor-intensive industries
are forced to find the new business model to remain
competitive. In the short run, some companies may
choose to relocate their production bases to
neighboring countries with lower wage rates to
maintain their traditional cost comparative advantage.
However, in the long run, they have to move up their
value chain by adding higher value added activities,
such as research and development (R&D), design,
marketing, and branding to stay competitive.
This paper aims at finding out the possibility of
relocating Thai production bases to neighboring
countries, especially CLMV (Cambodia, Lao PDR,
Myanmar and Vietnam), as well as who are likely to
relocate, how and where? It also draws policy
implications regarding the role of the
government in facilitating the relocation process as
well as in increasing the competitiveness of these
industries.
1. Introduction
Labor intensive industries, especially textile and
garment, shoes and leather goods, and gems and
jewelry, have played an important role to Thai
economy as the major export industries as well as the
main employment sources. In terms of exports value in
2012, textile and garment, and gems and jewelry
industries contribute to 3.2 and 2.6 percent,
respectively. In addition, textile and garment industries
employ about 11.8 percent of the total employment in
the manufacturing sector in the same year.
However, the competitiveness in these labor
intensive industries has declined. Figure 1 shows that
their market shares in the world market have decreased
over time.
Relocating Labor-intensive Industries from Thailand to Neighboring Countries 21
Source: UN Comtrade
Figure 1: Market share of export to the world by products and countries
In the past, Thailand enjoyed the comparative
advantage in labor intensive industries due to its cheap
and abundant labor. However, the continual increase
in wages decreases its comparative advantage. In the
short run, one way to stay competitive in labor-
intensive industries is moving the production bases to
low-wage countries. They still have to move up their
value chain by R&D, design, marketing or creating
own brands to be competitive in the long run.
The next section will provide possibility for
relocating Thai manufacturing bases in labor intensive
industries to neighboring countries. The third section
will provide an overview of the companies likely to
relocate, and how they would do so. The fourth
section will describe where to relocate. The fifth
section will provide case studies of companies
relocating to neighboring countries. The cases will not
only highlight why and how they have relocated but
also help us draw lessons on the factors that determine
the successful relocation. The sixth section will
compare the production cost differences in different
locations, namely Bangkok, Ho Chi Minh City, and
Yangon. The last section will summarize and provide
policy recommendations.
2. Possibility for relocating labor-intensive industries to neighboring countries
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The flying geese theory is proposed by Akamatsu
(1962) 1 to explain the phenomenon of industry
development in East Asia. This theory explicates that
the economic development model in Asian countries is
similar to a flying-geese pattern such that more
developed countries move their production bases to
less developed countries, starting from Japan as a
technology leading country to Newly Industrializing
Economies (NIEs) (i.e., South Korea, Taiwan,
Singapore and Hong Kong), then old ASEAN members
(i.e., Malaysia, Thailand, Indonesia and Philippines)
and finally new ASEAN countries (i.e., Vietnam,
Cambodia, Lao PDR, and Myanmar).
The main driver of a change in production pattern
is the internal restructure of leading countries. That is,
an increase in wages in more developed countries
reduces their comparative advantage in labor-intensive
products; therefore they have to relocate low-value
added activities to less developed countries with lower
wages.
The flying geese theory can explain the
production pattern in Southeast Asia well. For
example, in garment industry, the manufacturing base
is moved from Japan to South Korea and Taiwan, later
Thailand, Malaysia, and Indonesia and now Vietnam,
Cambodia, Lao PDR and Myanmar.
In Thailand, most manufacturers are original
equipment manufacturers (OEMs)2. Of them, only 5
percent conduct research and development (R&D)3,
therefore their comparative advantage mainly depends
1 Akamatsu K. (1962). A historical pattern of
economic growth in developing countries. Journal of Developing Economies, 1(1):3–25.
2 In this paper, an original equipment manufacturer (OEM) means a company producing products for another company that sells those products under its own brand name.
3 Source: National Science Technology and Innovation Policy Office
on labor costs. As domestic labor costs have escalated
significantly, these companies, especially in labor-
intensive industries, find it increasingly hard to
continue their operations in Thailand. Some have
relocated their production bases to lower wage
countries, especially Vietnam, Cambodia, and Lao
PDR and lately Myanmar.
In particular, the reduction in competitiveness of
Thai labor-intensive industries is due to the following
reasons.
Firstly, wages have continuously increased in
Thailand. Recently, a nationwide increase in the daily
minimum wage to 300 baht (or 9.7 USD4) has further
reduced the already thin profit margins of labor-
intensive industries.
Continual rise in labor cost has gradually
diminished Thailand’s cost advantages in labor-
intensive products in the international market. Figure 2
shows the differences in the average labor wages in
some labor-intensive industries between 2007 and 2013.
During this period, the average wages in these labor-
intensive industries have increased significantly. In
particular, in the textile industry, the average wage
increased from 4,867 baht in 2007 to 9,217 baht in
2013, accounting for the growth rate of 89 percent.
Similarly, the average wage in the garment industry
increased from 4,884 baht in 2007 to 7,745 baht in
2013, accounting for the growth rate of 59 percent.
The wage in the shoes and leather goods industries
increased from 5,467 baht in 2007 to 8,150 baht in
2013, accounting for the growth rate of 49 percent.
The wage in the gems and jewelry industries also
increased from 7,219 baht in 2007 to 10,955 baht in
2013, accounting for the growth rate of 52 percent.
4 The average exchange rate in 2013 is 30.73
baht/USD. (source: www.bot.or.th)
Relocating Labor-intensive Industries from Thailand to Neighboring Countries 23
Recently, due to the introduction of new daily
minimum wage policy started in some provinces in
April 2012 and nationwide in 2013, the annual growth
rates of wages in these industries have jumped
enormously to 23 percent in textile industry, 11 percent
in garment industry, 10 percent in shoes and leather
goods industries, and 35 percent in gems and jewelry
industries in 2013.
Source: Labor Force Survey (various years), National Statistics Office
Figure 2: Average monthly wages in labor intensive industries
As a result of higher wages, companies in these
industries have become more sensitive to the external
pressures, such as Thai Baht appreciation 5 .
Furthermore, some of them are at risk of shutting down
their businesses. Based on the data from the Office of
Industrial Economics, our estimation shows that after
5 The exchange rate from Thai baht to USD has
changed from 34.56 baht/USD in 2007 to 30.73 baht/USD in 2013. (Source: www.bot.or.th)
the introduction of new minimum wage policy, the
average profit margin of textile and garment industry is
down to only 1.9 percent. Moreover, companies in the
shoes and leather goods industries as well as those in
the gems and jewelry industries could potentially suffer
a loss (Figure 3).
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Source: Authors, calculated based on the data from the Office of Industrial Economics
Figure 3: Average cost and profit to sales after the introduction of new minimum wage policy
Secondly, labor shortage problem, especially
unskilled labor, becomes increasingly severe in Thailand.
During the past ten years, the unemployment rate has
gradually decreased, so as the absolute number of the
unemployed, as shown in Figure 4. In 2013, there are
less than 300,000 unemployed workers in Thailand, and
the unemployment rate stands at only 0.7 percent.
Source: National Statistics OfficeFigure 4: Number of unemployed and unemployment rate in Thailand
Relocating Labor-intensive Industries from Thailand to Neighboring Countries 25
Looking forward in the future, Thailand is
quickly approaching the aging society. Figure 5 shows
that the shares of people with the age of 60 and above
to the total number of population in Thailand have
exceed 10 percent since 2004, and continued
to increase to almost 13 percent in 20126. According to
the World Population Prospects prepared by the United
Nation, Thailand will reach the stage of aging society
before any other countries in Southeast Asia, excluding
Singapore7.
Thirdly, competition from other countries,
particularly emerging economies, becomes more and
more intense in the world export market. Figure 6
shows that China has sharply increased its market
share of manufacturing products in the world market
since 2003. Currently, Thailand’s main competitor for
the low-end market is China, which has comparative
advantage in cheap labor. Although India has slightly
increased its market share which is still at the low level,
its market share is likely to increase when it gradually
industrializes. It is expected that India will become
another main competitor in labor-intensive products
because India recently started developing its
manufacturing sector, and will become one of the most
attractive manufacturing destinations due to its abundant
supply of cheap labor and large domestic market.
6 Source: National Statistics Office, Thailand 7 http://esa.un.org/wpp/Excel-Data/population.htm
Source: National Statistics Office
Figure 5: Share of people with the age of 60 or above
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Source: UN Comtrade
Figure 6: Market shares of manufacturing products in the world market
Finally, Thailand is facing more difficulties to
access major export markets, compared with its
competitors due to two main reasons. The first reason
is that Thailand’s main trade partners are in the process
of trade negotiations with its main competitors. For
example, Malaysia and Vietnam are not only
participating in the Trans-Pacific Partnership (TPP)
trade negotiation, but also actively negotiating a
bilateral free trade agreement with the EU, while
Thailand is negotiating only with the EU. If their
negotiations are successful, they will have tariff
advantages over Thailand in these major markets.
Furthermore, some agreements are already effective,
such as Economic Partnership Agreement (EPA)
between Japan and Indonesia (effective since 2008),
and EPA between Japan and Vietnam (effective since
2009). The conclusion of these agreements swipes
Thailand’s tariff advantages over its main competitors
in the Japanese market. Thailand is also graduating
from the Generalized System of Preferences (GSP)
granted by the US and the EU. For example, the EU
abolished the GSP privilege for gems importing from
Thailand during 2006-2016. Moreover, it is highly
likely that the EU will abolish the GSP privileges for
all manufacturing products from Thailand in 2017.
3. Who are likely to relocate, how and why?
In this section, we provide description of
companies that are likely to relocate and the way they
are expected to relocate. We select three labor-
intensive industries, namely textile and garment, shoes
and leather goods, and gems and jewelry, for our in-
depth study. Based on data collection from the field
trips and interviews with trade associations and
government agencies in these countries, we find that
large enterprises (LEs) are more likely to relocate or
expand their production bases to low wage neighboring
countries than SMEs due to their ability to take more
risks. In addition, the low value-added, labor-intensive,
and low-tech production processes are likely to be
relocated or expanded to neighboring countries. For
example, for the textile and garment industries, such
production processes are cutting, sewing and making
China
India
Relocating Labor-intensive Industries from Thailand to Neighboring Countries 27
garments, especially sport-specific clothing, non-
fashion apparel, and uniforms. For the shoes and
leather goods industries, such processes are non-
fashion athletic and leather footwear production and
preparation, including replicating, cutting, insole
decorating, assembling and trimming. Similarly, for
the gems and jewelry industries, the unsophisticated
final production processes for medium and low-end
products, particularly costume jewelry, are prone to be
relocated to neighboring courtiers.
From our research, it appears that the common
form of relocation to neighboring countries with
abundant supply of cheap labor is direct investment by
setting up factories. In some cases, Thai enterprises
may choose to have joint investment with local
partners. Another alternative is to outsource their
production to suppliers in those countries. In general,
the main reason to relocate to these low wage countries
is to maintain their cost comparative advantages.
Comparing among these three labor-intensive
industries, many more enterprises in the textile and
garment industries than those in the other two
industries have relocated to neighboring countries.
This is because the size of textile and garment
industries is much bigger than those of the other two.
The share of large enterprises is also much higher in
textile and garment industries. In particular, the share
of large enterprises to total enterprises in the textile and
garment industries is 15.9 percent out of 2,390
enterprises, while that in the shoes and leather goods is
only 10.3 percent out 1,037 enterprises in 2012.
3.1 Textile and garment industries
Comparing to enterprises in textile industry,
enterprises in garment industry are more likely to
relocate their production bases to neighboring countries,
especially CLMV. This is because the production
processes of the textile industry in Thailand are
involved with higher levels of technology and skilled
labor than those in the garment industry. In the latter,
most enterprises are large enterprises and are OEMs
producing sportswear, non-fashion apparel items and
uniforms. The production processes performed in
these low wage countries are cutting, sewing and
making garments.
The main mode of relocation of production in this
sector is foreign direct investment, either by a single
company or by groups of companies in the same cluster.
While the new companies are mainly wholly-owned by
Thai investors, if allowed by the law, some are jointly
owned with local investors. The advantages of joint
investment are better access to local knowledge and
understanding about domestic market demand and
stronger connection with local authorities. The
disadvantage is the risk related to the differences in
views and interests of the shareholders. We also find
that some Thai enterprises choose to invest in
neighboring countries through nominees to avoid some
regulatory limitations or discriminations against
foreign investors. In Myanmar, for example, foreign
and local investors are entitled to different rights in
terms of land ownership.
In sum, the reasons for some Thai companies to
relocate to neighboring countries are as follows.
Firstly, the problems of increased labor costs and
labor shortages, especially unskilled labor, are
becoming severe in Thailand. As a result, some Thai
companies have to find new production bases in
countries with lower wages and larger supply of labor.
Secondly, Thai companies, especially the OEMs
for global brands, are pressured by their buyers to
move to lower wage countries to maintain their cost
advantage.
28 東協瞭望 009
Finally, neighboring countries have trade
preferences from main export markets, such as the US,
the EU and Japan. For example, the EU has lifted the
sanction against Myanmar, and provided it with GSP
effectively since 19 July 2013. Under the EU’s
“Everything but Arm” scheme, Myanmar will enjoy
trade preferences by getting exemption from import
tariffs to the European market for all products, except
for arms and ammunitions. In contrast, Thailand is
likely to graduate from the GSP soon. As a result, Thai
companies have strong incentives to move their
production bases to these neighboring countries.
3.2 Shoes and leather goods industries
Most Thai companies in the shoes and leather
goods industries that have relocated to neighboring
countries are relatively large because larger companies
are more capable than smaller ones to deal with
business risks in neighboring countries. In particular,
they are better equipped to handle regulatory risks and
inefficient financial system. Some of them are original
brand manufacturers (OBMs), while others are OEMs
for global brands.
The production processes likely to be moved to
neighboring countries are those that are highly labor-
intensive, produce low value added, and use low
technology level. Examples of such processes are
production and preparation of non-fashion athletic and
leather footwear, including replicating, cutting, insole
decorating, assembling and trimming.
The modes of relocation of production in this
sector vary from setting up wholly-owned investment,
joint venture with local partners, and outsourcing to
local suppliers. The upside of wholly-owned
investment is getting full control of the company
decisions while the downside is higher regulatory risks.
On the contrary, the advantages of joint investment are
better access to local knowledge and understanding
about domestic market demand and stronger
connection with local authorities. However, the
disadvantages are difficulties in finding reliable local
business partners and the risks related to corporate
governance. Finally, the advantage of outsourcing is
the reduced investment risks, while the disadvantage is
the risk of losing control over production.
Similar to the garment and textile industries, the
main factors for relocating shoes and leather goods
production to neighboring countries are increased labor
cost and labor shortages. According to the Thai
Footwear Association (TFA), the shoe industry in
Thailand still needs more than 10,000 employees for
filling vacant positions. Furthermore, OEMs for
global brands are pressured by their buyers to move to
lower wage countries to maintain their cost advantage.
In addition, for some OBMs, the domestic market is
quite saturated and facing fierce price competition from
Chinese products; therefore they turn to expand their
markets in neighboring countries which have rapid
economic growth, increased purchasing power and
similar preferences for products.
3.3 Gems and jewelry industries
Similar to the above two industries, the low value-
added, highly labor-intensive, and low-tech production
processes of unsophisticated final production processes
for medium and low-end products, especially costume
jewelry, are prone to be relocated to neighboring
courtiers. However, very few Thai companies in gems
and jewelry industries relocate to neighboring countries.
Some of them are large companies and OBMs,
therefore their main reasons for relocation are
expanding their markets as well as accessing the
abundant supply of cheap labor in order to keep their
price comparative advantage. They also tend to directly
Relocating Labor-intensive Industries from Thailand to Neighboring Countries 29
invest in these new markets by setting up production
bases and distribution channels. In contrast, some of
them are companies interested in raw materials in rich
natural resource countries; therefore they have joint
investment with local partners who have strong
connection with related government officials. Some
also choose to invest in neighboring countries through
nominees to avoid some discrimination against foreign
investors. In Myanmar, for example, foreign investors
have different rights from local ones in terms of the
exploitation of natural resources, such as jewelry
mining rights.
However, relocating gems and jewelry production
bases to neighboring countries is relatively more
challenging than relocating apparel or shoes production
bases because labor in gems and jewelry industries are
rather skilled or semi-skilled which require investing
heavily in training.
4. Where to relocate?
Regarding target countries for relocation, Thai
companies are likely to move to CLMV due to their
large supply of cheap labor and their geographical
advantages. Among CLMV, the country with the
lowest monthly wage for factory worker is Myanmar
(USD 53 in Yangon), followed by Cambodia (74 USD
in Phnom Penh), Lao PDR (132 USD in Vientiane) and
Vietnam (148 USD in Ho Chi Minh City)8. In terms
of labor force, the country with the largest number of
labor force is Vietnam (52.9 million), followed by
Myanmar (33.3 million), Cambodia (8.4 million) and
Lao PDR (3.3 million)9.
In addition, the location of CLMV is close to
Thailand. The north of Thailand is bordered to
Myanmar and Lao PDR, and the northeast is bordered
to Lao PDR and Cambodia. Formerly, the production
linkages between Thailand and its neighboring
countries were quite difficult due to poor connectivity
among these countries. However, the current
development plan for road and rail transportation in
Greater Mekong Subregion (GMS) countries and the
emerging economic corridors are connecting Thailand
with these countries. Under the GMS development
program, three economic corridors are intersected in
Thailand: the East-West Economic Corridor
(connecting Vietnam, Lao PDR, Thailand and
Myanmar), the North-South Economic Corridor
(connecting the Southern provinces of China, Myanmar,
Lao PDR, Thailand, and Malaysia) and the Southern
Economic Corridor (connecting the Dawei deep sea
port of Myanmar, the Laem Chabang deep sea port of
Thailand, and Cambodia), as shown in Figure 7. It is
expected that the economic corridors will play a key
role to link production and trade in the region.
8 Source: JETRO. The 23nd Survey of Investment
Related Costs in Asia and Oceania (2013). 9 Source: World Bank database (2013)
30 東協瞭望 009
In addition, CLMV have advantages in terms
of trade privileges granted by major markets, as shown
in Table 1. For example, the EU provides duty free
and quota free, with the exception of armaments, for
import from Cambodia, Lao PDR, and Myanmar, as
they are least developed countries under the Everything
but Arms (EBA) initiative.
Table 1: Trade preferential from major markets
Major markets Cambodia Lao PDR Myanmar Vietnam
US Zero tariff rates and no quotas No GSP benefit
Under the process of easing economic sanction
Under the TPP negotiation
EU Under EBA scheme, zero tariff rates and no quotas
Under EBA scheme, zero tariff rates and no quotas
Abolish the economic sanction since April 2012, and provide GSP since 19 July 2013 under EBA scheme.
• Textile and garment: non-zero tariff rates and quotas
• Leather goods and shoes: no GSP due to export quantities over the quota
• gems: most tariff rates are zero under GSP and there are quotas
Note: Data covered only products under GSP and EBA schemes.
Source: http://www.npu.ac.th Figure 7: Economic corridors connecting Thailand and neighboring countries
Relocating Labor-intensive Industries from Thailand to Neighboring Countries 31
In spite of the aforementioned strengths, Thai
companies planning to relocate to CLMV should be
aware of some pitfalls. For example, Vietnam still
faces some problems waiting to be solved. These
include the sharp increases in wage rate, unclear law
and ineffective enforcement, inefficient infrastructure
and unstable macroeconomic conditions, especially
high inflation, high level of non-performing loans
(NPLs) in the banking sectors, and low confidence in
the local currency.
Similarly, Myanmar has some disadvantages as an
investment destination. The main difficulty is
inefficient infrastructure, especially electricity and
transportation system. It also suffers from other
problems such as the skyrocketing land prices,
difficulties in finding sizable land lots, under-
developed banking system, the lack of market
information, uncertainty of laws and regulations as
well as political instability.
5. Some case studies of Thai companies relocating to neighboring countries
This section provides some case studies of Thai
companies in labor intensive industries relocating to
neighboring countries to draw lessons why and how
they have relocated and how they have been so far
successful. Three case studies include a Thai garment
factory in Vietnam, and a Thai shoes factory
subcontracting to a local supplier in Myanmar, and a
Thai wholly-owned jewelry factory in Vietnam.
5.1 Case study of a Thai garment factory in Vietnam
One of Thai companies successful in relocating to
Vietnam is Alliance One Apparel, a company under the
Liberty Garment Group. Alliance One Apparel used to
have three factories in Thailand, but there is currently
only one domestic factory. The company executives
decided to relocate to Vietnam since 4-5 years ago due
to increases in wages, and the difficulties in hiring
unskilled labor in Thailand. The main factors to set up
manufacturing facilities in Vietnam are abundant
supply of cheap labor, high growth rate of population,
and existing trading partners. The first factory in
Vietnam is located in Giao Long Industrial estate in
Ben Tre province, with the area of 100,000 square
meters, and 5,000 employees. The production there is
mainly to serve its clients who are the owners of global
sports brands. The purchase orders are usually of small
volume with frequent design changes, and sports
jackets. The second factory is currently built nearby
the first factory.
The advantages of setting up factories in Ben Tre
province over Ho Chi Minh City are lower wages (80
USD difference per worker per month) and easier to
find workers. The company can usually recruit 100
workers within one week. In spite of cheaper labor
costs in Vietnam, there are other costs in setting-up
business. For example, the company has to invest
more on human capital development by provide
training courses to local workers in order to assure their
quality of production. This is because labor
productivity of Vietnamese workers at the moment is
comparatively lower than that of Thai workers.
Furthermore, the costs of learning the country’s laws
and regulations and dealing with different law
interpretation by different government officials are
another item of business cost that cannot be ignored.
5.2 Case study of a Thai shoes factory subcontracting to a supplier in Myanmar
In contrast to setting up a new factory in
neighboring countries to supply to a global brand, a
32 東協瞭望 009
Thai company in the leather shoes industry chooses to
keep its cost comparative advantage by relocating some
production lines to Myanmar. The company outsources
CMP (Cut-Make-Pack) operations to a Myanmese sub-
contractor. To assure the quality and standard of
production, the Thai company provides some
technological assistance (such as giving advice on
machines to be used for production, and dispatching
Thai technicians to monitor and control the production
in Myanmar). The company also provides raw
materials (such as cow skins and pig skins) for its
Myanmese subcontractors.
In spite of low labor cost, there are significant
extra costs of production in Myanmar. In particular,
Myanmar still has poor quality of infrastructures,
especially electricity and road. The electricity shortage
in Myanmar causes higher production cost because the
state can provide electricity about 5 hours a day on
average, and producers have to use their own electricity
generators to continue their production lines. In
addition, complicated export and import laws and
regulations cause slow customs process, resulting in
higher operating cost.
5.3 Case study of a Thai jewelry factory in Vietnam
Pranda Jewelry Public Company Limited, a Thai
leading manufacturer of medium-to high-end quality
jewelry, has established four factories in Thailand and
expanded its manufacturing bases into other countries,
including Vietnam, Indonesia, and Germany. Pranda
Vietnam Company Limited has been operating in Dong
Nai Industrial Zone since 1995. The main reasons to
set up a factory there are low wage, high potential
domestic market and GSP privileges from the EU,
which is one of Pranda’s main markets.
Currently there are about 200-300 workers in the
Pranda Vietnam’s factory. Although still low
comparing to Thailand’s, the wage in Vietnam is
quickly increasing. For example, wages have increased
three times in a single year of 2012, resulting in an
average monthly wage of 120 USD. The quoted wage
rates are exclusive of social security contribution at
17% in 2013 and recently increased to 18% in 2014.
Although its factory in Vietnam has an advantage
of lower labor cost over the Thai counterparts, the
company still has to import raw materials from aboard.
Therefore, the net production cost in Vietnam is
merely7-8 percent lower than that in Bangkok due to
the recent wage increases.
For Pranda, 90 percent of total production in
Vietnam is mainly for exports with the rest 10 percent
for domestic market. The main export markets are
Germany, France and UK. Because the EU provides
GSP to imported products from Vietnam, the tariff
charged for jewelry exported from Vietnam is 2.5
percent lower than that from Thailand. For domestic
market, the company sells the products under its own
brand name “Prima Gold” to serve the medium-low
end customers. As distribution channel is key to
expand its sales, Pranda plans to increase its retail
outlet in Vietnam from 4 in 2012 to 16 in the near
future.
While labor cost is on the rise, business
environment in Vietnam has improved during the past
five years. In terms of public utilities, both roads and
electricity system have been upgraded, even though
power blackouts are still the problem in Vietnam,
especially in the dry season. The government has also
amended laws and regulations to be friendlier to
foreign investors. However inconsistency in law
interpretations among government agencies remains a
problem. In addition, bureaucratic red tapes add more
cost in doing business in Vietnam.
Relocating Labor-intensive Industries from Thailand to Neighboring Countries 33
6. Cost structure analysis
This section compares the differences in the ex-
factory production cost in some cities in neighboring
countries, namely Yangon and Ho Chi Minh City,
comparing with that of Bangkok. The costs in the two
cities are obtained by imputing the production cost of
factories in Bangkok, adjusted for the differences in
labor and facility costs among the three cities. The
production cost of Bangkok factories in the three
industries are obtained from data collected by the
Office of Industrial Economics.
Based on aforementioned methodology, Table 2
shows that for all three industries, the factory costs in
Bangkok are the highest among these three locations,
followed by those in Ho Chi Minh City and Yangon.
Comparing among the three industries, the gap of the
ex-factory cost is the least in the gems and jewelry
industry. The key factor contributing to the cost
differences among these three locations is the cost of
labor. It is noted that Yangon has the lowest cost of
labor, but the highest electricity cost among these three
locations. However, in general, Yangon is still the
location with the lowest ex-factory cost of products in
all the three industries.
Table 2: Factory costs of products in the three industries in different locations
Industry Bangkok Ho Chi Minh City
Yangon
Garment 100.00 90.16 86.19
Shoes and leather goods
100.00 92.21 83.95
Gems and jewelry
100.00 95.98 93.73
Source: Authors, based on field-trip data and the Office of Industrial Economics’s survey
6.1 Textile and garment industries
Based on our estimation, if the ex-factory
production cost in the garment industry in Bangkok is
normalized to 100, the production costs in Ho Chi
Minh City and Yangon are 90.16 and 86.18,
respectively (Table 3). The main factor contributing to
the different production costs is the gaps in labor cost.
The city with the highest labor cost is Bangkok,
followed by Ho Chi Minh City and Yangon,
respectively. Although Yangon has relatively cheaper
labor cost, it has severe electricity shortages. Factories
there need to have their own electricity generators to
ensure their operation, resulting in high effective
electricity cost.
Table 3: Comparison of garment production costs in Bangkok, Ho Chi Minh City and
Yangon
cost Bangkok Ho Chi Minh City
Yangon
raw material 47.05 47.05 47.05
labor* 22.91 18.46 9.39
office cost 6.83 3.54 1.92
electricity 4.15 2.05 8.74
water 0.05 0.04 0.09
others 19.01 19.01 19.01 Total production cost at factories **
100.00 90.16 86.19
Source: Authors
Note: * labor cost includes labor wage, and employers’ payment for social security contribution
** exclusive of logistics and transportation cost from factories to ports
6.2 Shoes and leather goods industries
Similar to the garment production cost, our
estimation shows that among three cities, the ex-
34 東協瞭望 009
factory production cost of shoes and leather goods in
Bangkok is the highest, while that in Yangon is the
lowest. In particular, if the production cost of shoes
and leather goods is normalized to 100 in Bangkok, the
production costs would be 92.21 and 83.95 in Ho Chi
Minh City and Yangon, respectively (Table 4). Again,
the main factor contributing to the difference in
production costs is labor cost. The city with the
highest labor cost is Bangkok, followed by Ho Chi
Minh City and Yangon, respectively. Unlike the
garment production cost, the differences in electricity
cost in the shoes and leather goods production in
Bangkok and Yangon are not much because the
production process of shoes and leather goods requires
lower share of electricity usage than that of the garment
products.
Table 4: Comparison of shoes and leather goods production costs in Bangkok, Ho Chi
Minh City and Yangon
cost Bangkok Ho Chi Minh City
Yangon
raw material 46.10 46.10 46.10
labor* 20.13 17.77 9.16
office cost 9.58 4.97 2.69
electricity 1.58 0.78 3.33
water 0.08 0.06 0.14
others 22.53 22.53 22.53
Total production cost at factories **
100.00 92.21 83.95
Source: Authors
Note: * labor cost includes labor wage, and employers’ payment for social security contribution
** exclusive of logistics and transportation cost from factories to ports
6.3 Gems and jewelry industries
Likewise, the production costs of gems and
jewelry are different in three cities, although the gaps
are not as significant as in the two industries previously
discussed. In particular, if the ex-factory production
cost in Bangkok is normalized to 100, the production
costs would be 95.98 and 93.73 in Ho Chi Minh City
and Yangon, respectively (Table 5). Unlike the other
two products, the costs of gems and jewelry production
in these three cities are not significantly different
because the share of labor cost in this industry is only
about 12 percent, only about half of those in the other
two industries. Similar to the other two industries, the
main factor contributing to the differences in
production cost among the three cities is labor cost.
The city with the highest labor cost is Bangkok,
followed by Ho Chi Minh City and Yangon.
Table 5: Comparison of gems and jewelry production costs in Bangkok, Ho Chi Minh
City and Yangon
cost Bangkok Ho Chi Minh City
Yangon
raw material 64.11 64.11 64.11
labor* 12.17 9.55 5.54
office cost 1.54 0.80 0.43
electricity 1.26 0.62 2.65
water 0.10 0.08 0.18
others 20.82 20.82 20.82
Total production cost at factory **
100.00 95.98 93.73
Source: Authors
Note: * labor cost includes labor wage, and employers’ payment for social security contribution
** exclusive of logistics and transportation cost from factories to ports
7. Conclusion and policy recommendations
Relocating Labor-intensive Industries from Thailand to Neighboring Countries 35
In conclusion, due to wage pressure and labor
shortages, companies in labor-intensive industries have
to adjust in order to survive and grow. The best
solution is to upgrade to higher value-added activities
to increase their competitiveness. However, some
companies may not be able to do so, and choose to
relocate their production bases to neighboring countries
with lower wage rates. In this case, the off-shoring
production activities should be limited to low value-
added ones, such as cutting and making, while keeping
high value-added activities, such as design and
marketing, in Thailand. Companies may consider
keeping their local production to serve customers that
require short-time delivery, which needs close
monitoring and engagement.
Most importantly, it is necessary to recognize that
relocating to poorer countries with cheaper labor would
increase competitiveness of the companies only in the
short term. Companies in labor-intensive industries
should strive to upgrade their technical capabilities by
using information and communication technologies
(ICTs) to manage their supply chain and increase the
linkages with their buyers. In order to increase their
long-term competitiveness, they have no choices but to
move up the value chain to higher value-added
activities, by transforming themselves to preferred
OEMs, ODMs or OBMs.
Our study provides the following policy
recommendations for the government to support Thai
companies to relocate to neighboring countries as well
as to promote the industrial development in the labor-
intensive sectors.
7.1 Policy recommendations on supporting Thai companies to invest in neighboring countries
Firstly, the government should establish a one-
stop service unit which can provide both basic and in-
depth information necessary for making decision to
invest in neighboring countries (see Figure 8). The
basic information includes trade and tax rates,
incentives for foreign investors, laws and regulations
on foreign investment, availability and quality of
infrastructure, spatial and industrial information,
procedures and documents required for business
establishment. The in-depth information includes
information on market conditions and consumer tastes.
In addition to providing information, the one-stop
service unit should also facilitate Thai companies in
doing business in neighboring countries as well as
support them to build the business linkages with local
companies in neighboring countries. The Japan
External Trade Organization (JETRO), considered one
of the best practices in supporting and facilitating
companies in investing abroad, can provide a model.
Secondly, the government should consider
establishing special economic zones (SEZs) in the
border areas. The laws and regulations for these SEZs
should provide some privileges to investors, such as
special minimum wage rates and facilitating them in
hiring foreign workers. The establishment of SEZs in
border areas will be beneficial to Thai companies,
especially SMEs, because they will be able to keep
operating their production in Thailand where they are
accustomed to local laws and regulations, and to avoid
the risks from investment abroad, such as regulatory,
business and cultural uncertainties.
36 東協瞭望 009
Facilitating Thai investors in doing
business in neighboring
countries
Supporting SMEs to build business
linkages with local enterprises in neighboring
countries
One-stop service
Providing useful and updated information
Trade and tax privileges
Incentives for foreign investors
Availability and quality of infrastructure
Laws and regulations on foreign investment
Procedures and required documents for establishment
Spatial and industrial information
Marketing information
7.2 Policy recommendations on promoting industrial upgrading
The government should support and promote Thai
companies to upgrade their production capabilities to
higher value-added activities. The strategies for
sustainable competitiveness are varied according to
their production approach, as follows:
˙ Assemblers (e.g., garment makers)
In the short term, the assemblers may
offshore their production base to areas with
cheaper labor cost. They should also aim at
upgrading their production capabilities to be OEM
suppliers in the long term. In this regard, the
government should support their upgrading efforts
by facilitating access to capital and equipping them
with necessary skills concerning procurement and
logistics.
˙ Original Equipment Manufacturers (OEMs)
The OEMs might consider sub-contracting or
off-shoring their production bases to the areas with
cheaper labor costs in the short term. In addition,
they should strive to become preferred OEM
suppliers by complying with international labor
and environmental standards. In the long term, they
should upgrade their production to become ODMs.
Thus, the role of the government is to equip them
with technological knowledge and skills on design,
research and development as well as management.
˙ Original Design Manufacturers (ODMs)
In the short term, the ODMs should
strengthen their design and production capacities to
be more efficient. At the same time, they should
strive to become original brand manufacturers
(OBMs) in the long term. In this respect, the
government should support them to gain
knowledge and skills on branding, marketing and
customer services.
˙ Original Brand Manufacturers (OBMs)
Figure 8: One-Stop Service Unit
Relocating Labor-intensive Industries from Thailand to Neighboring Countries 37
The OBMs might consider upgrading their
domestic brands to regional ones in order to
expand their markets. Correspondingly, the role of
government is to support their activities in
marketing and building international networks by
supporting them to expose themselves in regional
trade exhibitions and roadshows.
In general, to support Thai companies to upgrade
along value chains and to increase their competiveness,
the government should play the following roles.
Firstly, it should facilitate SMEs’ access to capital.
SMEs, especially in labor intensive industries, usually
have difficulties in getting the bank loan because some
labor intensive industries, such as textile and garment
and shoes and leather goods, are considered as sunset
industries. To promote greater access to capital,
government’s specialized financial institutions, such as
the Export-Import Bank and the Thai Credit Guarantee
Corporation, should play a leading role.
Secondly, government agencies should provide
support for SMEs to develop and strengthen linkages
among themselves as well as among them and large
companies. In this regards, the Department of Industry
Promotion should partner with related industry
associations to strengthen its cluster support programs.
Thirdly, public universities and specialized
institutes should provide support in terms of education
and training in order to equip companies with essential
skills, such as technical, management, product
development, design, and marketing research skills,
with subsidy from the Ministry of Industry and the
Skill Development Fund.
Fourthly, government agencies should support
SMEs to expand their marketing and networking by
providing useful and up-to-date information, such as
information on potential markets and technology. In
particular, the Department of Foreign Trade Promotion
should support them to attend international trade shows
and events.
Fifthly, the Ministry of Industry should encourage
the upgrading of SMEs’ technological capabilities by
focusing on technology development and technology
transfer through various activities, such as providing
industrial experts, promoting industrial network, and
strengthening the linkages between industry and the
academia.
Finally, relevant government agencies, especially
the Ministry of Industry, should encourage SMEs to
improve their manufacturing process in order to
achieve international standards, such as ISO 9000 and
ISO 14000. Manufacturers should also be promoted to
adopt lean manufacturing to make their operation more
cost efficient.
The government should declare this decade to be
“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 predictable and 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 the key to successful
upgrading.
38 東協瞭望 009
Dr. Saowaruj Rattanakhamfu, the first author of this
paper, is currently a research fellow in Science and
technology development program at Thailand
development research institute. She earned her PhD in
economics at the University of Melbourne, Australia.
Her research specialties include applied economics,
development economics, science and technology
upgrading, and productivity upgrading.
Dr. Somkiat Tangkitvanich, the second author of this
paper, is currently the president of Thailand
development research institute. He earned is PhD in
computer science at the Tokyo institute of technology,
Japan. His specialties include trade policy, industrial
policy, ICT policy, and Media policy.
References
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Economies, 1(1):3–25.
JETRO. (2013) The 23nd Survey of Investment Related Costs in Asia and Oceania.
Thailand Development Research Institute. (2013) Relocating Labor-intensive Industries to Neighboring Countries:
Case Studies of Textile and Garment, Shoes and Leather Goods, Gems and Jewelry. (in Thai)
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