Are Thai industries under threat of a massive collapse, given rapid changes in technology, fierce competition from China and the planned hike in daily minimum wage?
Two Japanese carmakers, Subaru and Suzuki, have announced that they will shut down their manufacturing sites in Thailand at the end of this year and next year respectively, amid shrinking demand for their vehicles.
More factories closing down
In a reflection of the direness of the situation, 1,700 factories are reported to have shut down since early last year running up to the first quarter of this year.
Many local factories risk going out of business because of the sluggish economic conditions, fast-changing technology, slower-than-expected recovery of the global economy and fierce competition from Chinese firms.
“When large firms close their businesses, thousands of suppliers would be affected,” Tanit Sorat, vice chairman of the Employers’ Confederation of Thai Trade and Industry said, referring to the pull out by the Japanese automakers, and other large firms in industrial real estates closing operations in Thailand.
Manufacturing activities have seen a long period of contraction as reflected in the Manufacturing Production Index (MPI) of the Office of Industrial Economics in the period December 2022 to March 2024.
Kiatnakin Phatra financial group’s KKP Research is worried about the rising number of factories going out of business, which accelerated in the second half of last year. The number of factories shutting down were 57 per month on average in 2021, rising to 87 in 2022, and nearly doubling to 159 in the second half of 2023.
“Between early last year to the first quarter of this year, 1,700 factories closed down and 42,000 workers were laid off,” says KKP Research.
Although it is not possible to gauge the actual situation only by the number of businesses closing down, the number of new factories that have opened also indicate a slower pace of growth than in the past.
The net of new factories (factories opening minus those closing) dropped to 50, a sharp fall from 150 per month, according to KKP.
This data suggests that the Thai industry is not in good shape. Some industries, such as leather, rubber products, agro-industry, wooden products, and machine production, are in deep trouble.
Most of the factories that are closing down are large operations, while new factories that are opening are small ones.
“Usually small factories have fragile financial positions, while large factories have a higher capital base,” says KKP. “The closing down of large factories point to structural defects in Thai industry,” according to the research house.
The factory closures go hand in hand with rising bad debt, formally known as non-performing loans, in the balance sheet of financial institutions. The rising bad debt indicates that contraction in manufacturing is not a temporary issue.
Who will survive?
Looking into the foreseeable future, some industries may survive while others may not. KKP Research has divided Thai industries into three groups.
The first comprises production that moves along with business cycles, which means they could recover if demand rebounds. This group contributes about 47 per cent of valued-added manufacturing.
The second group is bogged down by unusually high inventory, and it would recover only when inventory decreases.
The third group is a victim of structural issues, for example the manufacturing of hard disk drives has been replaced by solid state drive technology, or steel production has been hurt by cheaper imports from China.
The group accounts for a sizable 35 per cent of the value-added manufacturing sector, according to KKP Research.
What the government has done
To address some of these issues, the government has imposed value-added tax on Chinese products costing less than 1,500 baht a piece, which could earlier be bought online without being subject to tax.
The government and the Bank of Thailand have tried to enable access to bank loans for small and medium-sized enterprises (SMEs) via the state-run Thai Credit Guarantee Corporation, a credit guarantee facility
Many businesses have still not fully recovered in the aftermath of COVID-19. Their previous loans turned into bad debts and they have not been able to borrow new loans due to their unsound credit record.
The tug of war over minimum wage
Local business leaders are worried about the government’s plans to increase the daily minimum wage to 400 baht nationwide from October from over 300 baht currently.
They have warned that implementing the wage hike could lead to many small businesses going out of business.
Poj Aramwattananont, vice chairman of the Thai Chamber of Commerce, argues that SMEs will not be able to shoulder the burden, which can lead to the closure of businesses or downsizing, triggering lay-offs.
Lae Dilokvidhyarat, an economics lecturer at Chulalongkorn University, views the wage hike differently from business leaders. The current wage is not adequate to cope with the rising cost of living. Workers are forced to work overtime in order to make ends meet, he says.
Economic development should not focus only on growth of gross domestic product or exports, but should make people the center of economic development.
Workers should be viewed as both consumers and labour, he said, and called on the government to provide sufficient subsidies to upskill and reskill workers.
Nuttanan Wichitaksorn, visiting researcher advisor at the Thailand Development Research Institute, believes the wage hike to 400 baht has been long overdue and the government should take into account industries and regions and ensure workers, especially in the informal sector, get 400 baht.
He, however, said the government also needs to address the impact of the higher cost on SMEs.
Lopsided recovery
The Thai services sector has almost fully recovered post-COVID-19, thanks to the rising number of foreign visitors. But critics say the service sector has limited capacity to drive the economy. The country needs to also get its manufacturing engine pumping, as this sector accounts for about 35 per cent of GDP.
The MPI in April has turned positive, expanding at 3.43 per cent year on year. But it is just a month of growth in over a year.
KKP Research is worried about the impact of technological changes, as seen in the move away from internal combustion engine (ICE) cars to electric cars.
Cheap EVs from Chinese automakers have resulted in the decline of the ICE car sales in Thailand. In addition to Chinese EV cars, Thailand imports a large volume of other products and consumer goods, resulting in a high trade deficit with China and a negative impact on local industries.
The ongoing trade tensions between the United States and China has impacted global trade. As the US increases tariff rates and other barriers against Chinese products, China is dumping its goods in other markets, including Asean.
This could cut into Thailand’s exports and adversely affect the Thai manufacturing sector.
By Thai PBS World’s Business Desk
