Thailand is staring at a crisis caused by the rising number of factory closures in recent years, partly attributed to an influx of cheaper Chinese products. This trend is expected to continue this year, raising fears of an irreversible decline in local manufacturing and its consequences for Thai workers.
According to Kasikorn Research Center (KResearch), the number of factory closures exceeded 100 per month last year for the second consecutive year. This trend is particularly pronounced among small-scale factories operated by small and medium-sized enterprises (SMEs).
During 2023-2024, a total of 3,045 factories shut shop, a sharp increase from 1,818 in 2021-2022. Although 4,302 new factories opened in 2023-2024, they were down from 4,855 in 2021-2023. The net gain—factories opened minus those closed—has seen a significant decline. In 2023-2024, this net gain was only 25 factories per month, compared to 127 per month in 2021-2022, according to KResearch.
This data highlights the pressing challenges faced by the local manufacturing sector and underscores the need for strategies to support SMEs and bolster industries amidst increasing competition from foreign products.
Piyasak Manason, head of economic research at InnovestX Securities, expressed worry over the wave of factory closures. “This is an issue of deep concern, as the country’s competitiveness has been on a declining trend, and consumption remains weak, as reflected in the sales of large items such as cars and houses,” he said.
He noted that government stimulus measures, such as the 10,000-baht cash transfer scheme, have done little to boost consumption, as many vulnerable individuals are using the funds to pay off debts rather than purchasing goods or services.
Piyasak is pessimistic about the ability of local industries to compete with cheap imports from China. He pointed out that the Chinese government provides a lot of support to its manufacturing sector, including offering soft loans, which reduces their funding costs compared to Thai companies.
Chinese industries, particularly those manufacturing solar panels, electric cars and steel, are highly competitive.
In contrast, many Thai SMEs struggle to access bank loans. The Bank of Thailand has been implementing restrictive monetary policies through responsible lending guidelines imposed on commercial banks, according to Piyasak.
Additionally, the central bank is focused on debt deleveraging as it attempts to reduce household and small business debt.
Manufacturing production contracts
Manufacturing contracted 2.7 per cent and 0.5 per cent in 2023 and 2024 respectively, according to the National Economic and Social Development Council (NESDC), a state-owned think tank. Capital and technology industry decreased by 5.4 per cent in the fourth quarter of last year after a 2.9 per cent fall in Q3/2024.
The decrease was notable in the manufacturing of motor vehicles, trailers and semi-trailers, electrical equipment and other transport equipment, according to the NESDC. Thailand’s export of goods last year grew 4.3 per cent, after contracting 2.6 per cent in 2023.
Piyasak noted that while manufacturing production is contracting, exports are growing. This suggests that Chinese companies may be choosing Thailand as an alternative route to export their products to the United States.
These firms might make minor modifications to their products before re-exporting them to the US market. As a result, Thailand is running a large trade deficit with China while maintaining a trade surplus with the United States.
Recently, US President Donald Trump signed a reciprocal tax plan aimed at increasing tariff rates against any country that imposes tariffs on US-made products. He also said that the US would not allow any country to serve as a conduit for others to export their products to the US market.
US tariffs could have both direct and indirect impacts on Thai exports, putting additional pressure on local manufacturing. Thailand currently has an effective tariff rate of 8 per cent on US products, while the US imposes a 2 per cent effective tariff rate on Thai products, according to Piyasak.
Commercial banks have been cautious about lending to consumers who apply for loans to purchase cars and homes. Lending to the automobile, steel and real estate sectors has contracted, indicating a challenging situation for local manufacturing and real estate.
Solution for SMEs
Given that local industries are unlikely to compete effectively with Chinese firms, the focus should be on helping them survive during this transition period. They should receive loan support, and the central bank needs to review its restrictive monetary policies, Piyasak suggests. Meanwhile, KResearch has suggested the restructuring of local industries, a task that is not easy.
Potential impact of SME closures
The mass closure of factories could adversely impact the labor market. While workers might find new jobs due to a slight labor shortage, most would likely end up in low-paid positions, resulting in lower overall income, according to Piyasak.
Research has revealed that businesses are cutting working hours and overtime to reduce production costs. If this trend continues, it could significantly impact workers' incomes, leading to decreased consumer spending.
