Closer trade Thais in the land of smiles

One common story of the Australian companies I visited in Thailand is that they had all expanded operations in Australia as a result of their Thai forays.

Last week I visited a business park that was the epitome of modern global manufacturing. The factories there all had state-of-the-art technology, the workers were highly skilled, production techniques were sophisticated, and over 60% of production was earmarked for export. Was I in a developed economy like Germany, the USA or Japan? No, I was in Thailand – the “land of smiles” which is better known for its temples and tourism than its manufacturing prowess.

I was visiting the ever-expanding Thai industrial estates on the eastern seaboard, around two hours drive from the centre of Bangkok. Despite the recent coup and mixed signals given about the investment climate, Australia is one of the leading investors in Thailand and many Australians have set up major operations on the eastern seaboard.

According to Sean Riley, Australia’s senior trade commissioner for Thailand and the greater Mekong region: “Over 2500 Australian companies directly export to Thailand, but this underestimates the increasing numbers that are setting up operations in Thailand to support their businesses back in Australia.”

Indeed, many of the companies I interviewed on the eastern seaboard were Australian managed (and in some cases Australian owned). For example, I visited TUTA Healthcare Australia that manufactures specialist medical equipment (such as intravenous drips), the Precision Valve Corporation that produces aerosol valves, ANCA Manufacturing that manufactures high technology computer numerical control (CNC) devices for the machine tools and metal industries, and TriMotive that produces automotive components for one tonne pick-up trucks in Thailand.

Despite the diversity in what these companies produced – everything from simple household goods like nozzles and tow bars to specialist medical equipment and precision instruments – they all had one thing in common. Each company had expanded its operations in Australia as result of its foray into Thailand.

As Robert Saunders, the managing director of TriMotive put it: “Every Australian manufacturer should think globally in order to survive locally.”

Saunders, who runs the international arm of the company from Dandenong in south eastern Melbourne, explains the company philosophy. “You don’t have to make everything yourself that you sell. Much of our business is about managing relationships with other manufacturers who sub-contract to us. As a result, much of the business is in managing the global logistics of the supply chain.

“The establishment of our Thai plant, however, has been good news for our business back in Dandenong as the company’s quality control is in Australia, R&D is all in Australia, as are all our major business relationships,” he explains.

Saunders puts the move to Thailand in terms of market expansion. “Basically, the pick-up truck market is very small in Australia – and we’ve almost reached capacity. The Thai operation is allowing us to tap into the booming market in Asia, and has enabled us to expand our operations both domestically and internationally.

“We’re teaching the Thais to tow and it is paying off for us big time,” he says.

The fact that the major players in the automotive game are based in the same location is a plus for TriMotive.

The region promotes itself as the “Detroit of the east”, with major automotive players nearby as well as training facilities such as the German-Thai Education Institute and similar institutions. The availability of skilled labour in the business park is a major incentive for establishing operations on the eastern seaboard.

According to Mark Patman, general manager of Melbourne-based ANCA, the availability of skilled labour was the biggest surprise to his company when setting up. “We had the perception that we’d have problems getting skilled labour here, which is crucial in our business as we deal with very sophisticated capital equipment but the reality has been quite the opposite. We’ve picked up some great recruits and their Thai capacity to learn is just sensational,” he says.

Patman’s company, which exports 98% of all its production to multiple destinations around the world, has only had its Thai operation in place for two years and this development has spurred further growth for the business in Australia. “The new operation in Thailand has allowed us to create jobs and expand our R&D in Bayswater (in Melbourne) as well. We keep an R&D-to-revenue ratio of around 7:1 in Australia and the Thai plant has now completed its 100^th export order.”

The skilled labour issue was a key issue in the minds of the owners of the business parks on the eastern seaboard. According to David Nardone, president and CEO of Hemaraj Land and Development: “We deliberately placed the factories close to technical colleges so we have a ready supply of skilled labour. We’ve now had 20 years of foreign investment here on the eastern seaboard in automotive and petrochemicals, with at least 12 Australian companies in the Hemaraj business park. Over 60% of production in the business park is re-exported and we’ve seen the number of projects double here in the past couple of years,” he says.

However, the question remains why Thailand would attract much of this investment action instead of better performing economies nearby such as Vietnam or even China.

The Thai investment authorities, however, are increasingly collaborating with their neighbours. “China is not a threat – we look to partner with China,” says Sudjit Inthaiwong, deputy secretary general, Thailand Board of Investment (BOI). According to the BOI, Thailand also provides training to Vietnam and the emerging economies of the Mekong Delta, as they still have a way to go in terms of economic development, particularly in high-skill manufacturing.

Many of the Australian companies have been attracted to the areas because of the BOI program. “The combination of the Thai-Australia Free Trade Agreement (TAFTA) investment incentives from BOI, and Thailand’s strategic location in the Mekong Delta are driving this investment – particularly from Australia,” says Sean Riley. Saunders at TriMotive agrees: “The investment incentives in this country are magnificent,” he says.

But what clouds are on the Thai horizon? After all, the land of smiles has been the land of coups in recent years and the political situation is constantly on the risk radar of potential foreign investors. According to a leading private sector economist and a former diplomat, Supavud Saicheua, the managing director of Phatra Securities: “You can’t separate the economics from the politics. The Thai people are very anxious that there be a return to democracy. But you have to understand that for every two elections there has been at least one coup historically, so in many ways the current situation is one of normalcy in terms of our modern history.”

In fact, most of Supavud’s concerns are economic rather than just political. He explains that there is a “Thai paradox” at the moment whereby private investment is falling, despite that fact that capacity utilisation is at record highs. “The capacity utilisation data would normally indicate a strong climate for investment, but several measures are sending “mixed signals” to investors.

Supuvud mentions the Foreign Business Act (which may soon be withdrawn from the legislature) the Foreign Employment Act, the Retail Act, Telecommunications legislations and the Bank of Thailand regime of Capital Controls (where foreign investors have to deposit 30% of their investment with the central bank in a model adapted from Chile’s “speed humps” to deter speculation) as measures affecting investment.

In addition, Supavud believes that the strength of the Thai sharemarket, which is providing a 7%-plus average rate of return, plus an aversion to debt financing after the experience of the financial crisis of 1997-99, means that leveraging has become a dirty word in Thai business circles. He also believes that risk aversion may also be influenced by the recent sub-prime mortgage difficulties occurring off-shore in the US housing market. “Asia is financing the US’s current account deficit with exotic financial instruments, so the sub-prime mortgage issue could have implications for Asia,” he says.

Fear of a financial crisis – whether US-based or regional – is strongly implanted in the Thai psyche. This is partially a legacy of the financial crisis of 1997-99, says Twatchai Yongkittikul, secretary-general of the Thai Bankers Association and member of the APEC Business Advisory Council and a regular visitor to Australia.

“Many Thais would prefer a 4.5% to 5% rate of economic growth with no debt, than 7% to 8% with debt,” he says. “There is lots of support in Thailand for the ‘sufficiency economy’, especially after the debt levels of the 1990s. Whatever the future politically, there will be no more white elephant projects, which is a welcome legacy of 1997-99.”

Christopher Bruton, managing director of Data Consult and a Thailand watcher for over 30 years who has special expertise in the Mekong region, explains the sufficiency economy concept. “The ‘sufficiency economy’ clearly means different things to different people.

“The economic nationalists have interpreted it to mean ‘self-sufficiency’ hence legislation like the Foreign Business Act etc, whilst others believe sufficiency to mean subsistence, or at least modest or frugal living. But there are ‘two Thailands’ really. In the country, the farmer aspires to buy a motorcycle or a pick-up truck, whilst in the city, the urban Thai is forking out for a Rolex or an upmarket piece of jewellery,” he says.

And the demand for tow trucks in rural Thailand is helping manufacturing companies like TriMotive build their global business operations.

Despite the political situation, most Australian companies are bullish about their prospects. As Mark Patman puts it: “The political issues don’t affect us in manufacturing, we look more at economic issues like the baht (the Thai exchange rate) and logistics.” In addition, the availability of skilled labour has helped.

As Paul Coffey, general manager of TUTA Healthcare Australia, says: “TAFTA has helped us, as have the Board of Investment incentives and the Thai Government in terms of education and training to help increase skill levels. In my experience, the Thais are honest; they have integrity and are passionate about what they do. In our business it really has been the land of smiles.”

Some key facts:

• Australian goods exports to Thailand: $A4279 million (key sectors: aluminium, crude petroleum) 2006.
• Australian services exports to Thailand: $A692 million (key sectors: education, architecture, professional business services).
• Australian-Thailand, two-way trade: $A10,538 million, 2006 (goods).
• Key growth sectors: agribusiness, education, resources, professional services, passenger motor vehicles.
• Number of Australian businesses exporting goods to Thailand: 2544 exporters.

Source: DFAT, ABS, Austrade.

*Tim Harcourt is the chief economist of the Australian Trade Commission and the author of BEYOND OUR SHORES: www.austrade.gov.au/economistscorner

For more Gone Global blogs, click here.