Thailands manufacturing sector, where is the next opportunity in 2021?
This week a key supplier to Apple Inc. along with several other large manufacturing tech suppliers announced plans to split their supply chain between China and the US. This announcement follows hot on the heels of The UK government’s decision to ban Hua Wei from its 5G telecom network, citing that the US trade sanctions had created too much uncertainty around the company’s supply chain. Indeed, Hon Hai Precision (more commonly known as Foxconn), the manufacturer of many base components for tech gadgets such as the iPhone & Nintendo Switch, is walking the talk by already increasing its capacity outside China from 25% to 30% of total output in the past twelve months.
So what has this got to do with a humble Thailand-based recruiter?
Those who have read my previous articles will hopefully understand that I approach these situations with a (potentially naive) optimism with regards to Thailands manufacturing sector mid to long term economic future.
It would be crass to assume that these examples are the “post-COVID” effect. The recent pandemic has served to demonstrate the fragility of Thailands manufacturing sector supply chains established over the last decade following the 2009 global financial crisis. The fixation on the “just in time” model has led to over-reliance on unique geographies, with China in particular in the spotlight.
During a recent conversation with a regional business leader in the food industry, he cited the (Pre-COVID) dramatic rise in labour costs in China as an alternate reason why companies were already looking to diversify reliance on China in preference of neighbouring countries such as Thailand, Vietnam and Myanmar. In addition to this, the political and security aspects of running supply chains in China are under heavy scrutiny, especially for tech-based industries where IP protection is paramount.
However, how realistic is the de-prioritisation of the world’s largest manufacturing economy, a country which makes approximately one-third of all products on earth?
Another of our clients, the Thailand-based Managing Director of a leading multinational 3PL logistics company, believes the divestment cannot feasibly move far from the availability of materials and parts. The vast majority of these still originating in China.
The idea of building a “just in case” supply chain across several nearby locations to minimise the “eggs in one basket” approach is sensible in theory, but in reality, the total supply chain needs to be mobile both downstream and upstream, not just the finished goods element. This approach also fails to mitigate the risk posed by future tariff changes if the US (or Europe) decide to widen the scope of penalties to other “low cost” jurisdictions. For the time being, it may simply be the best available option for companies searching for a tariff-avoidance band-aid.
As yet we have failed to see the stampede away from China as they are a very tough act to replace in terms of high value and high-volume manufacturing, pools of resources and direct access to raw components and materials. The floodgates are far from bursting but the Foxconn decision may indicate any migration of capacity is set to benefit the China +1 region, with SE Asia at the front of the queue.
Thailands manufacturing sector late 90’s “tom yum gung” crisis
All data points to the Chinese economy overtaking the US on GDP at some point in the next decade. Additionally, the Chinese economy still continues to grow despite the pandemic while the rest of the world is rapidly contracting. Just this week Thailand announced a contraction of 12.2% of GDP – the biggest quarterly y-o-y reduction since the late 90’s “tom yum gung” crisis. This compares to 3.2% reported GDP growth for China in the same time frame. With the US elections looming, this poses further known unknowns.
So where does this leave Thailands manufacturing sector?
We are certainly at the point where we can no longer consider Thailand as a cheap manufacturing or assembly hub. Conversely, while Thailand’’ medium-term strategy is to promote technology innovation and R&D capability the country still lags behind other “+1” competitors such as Taiwan, Malaysia and Hong Kong in this respect. So Thailand is effectively at an impasse.
Encouragingly the 2019 IMD World Competitiveness Report ranked Thailand as 25th in the world, an increase from 30th place in 2018. Digging deeper reveals that Thailands manufacturing sector and scientific infrastructure is still the biggest area of potential for improvement, ranking only 49th compared to global competitors. It is here the battle for the next stage in economic development will be won or lost. At the risk of divergence, I will certainly cover the topic of Thai skills development & education in more depth in a future article.
Thailands manufacturing sector does benefit from the significant depth of resources and expertise in industries such as electronics, automotive and food & agriculture innovation. A robust infrastructure of ports and airports as well as strong ground connectivity to and from China and some of the world’s leading subcontract manufacturing operations. Indeed the latter category of these businesses may well be the first type of company to benefit from any Chinese migration.
Subcontractors are usually set up to be agile and can fill the gaps across various other value chains. The Thai government is firmly behind this plan and had set up the BoI Unit for Industrial Linkage (BUILD) to target 12 industries with great potential for subcontracting companies in Industries such as aerospace, medical devices, electric vehicles, smart electronics and rail systems. This created a business worth 38 billion baht (US$ 1.2bn), pre-pandemic in 2019 and is a reason to be optimistic for Thailand’s manufacturing industries heading into 2021.
For this humble recruiter, the fundamentals are in place for Thailand's manufacturing sector to benefit from the fallout of the US/China trade war. RLC is already seeing numerous clients picking up programmes for their Thailand operations which are being diverted from the mainland. Following the seismic economic effect of the COVID-19 assisted retraction, there is more than ample resources to pick up the slack with a far greater focus on efficiency and optimization in a few key industries.