Will Thailand Lose in SE Asia’s New Economic Community.

[Nobby]

Will Thailand Lose in SE Asia’s New Economic Community.

Reuters
Construction workers walk on the site of a new condominium being built in central Bangkok.Thailand’s finance minister has a message for all the naysayers who believe his country will be a major loser if plans for a new regional economic community come together in 2015: Don’t bet on it.

Economists have long debated whether Southeast Asia’s second-largest economy will struggle once the new regional bloc – known as the Asean Economic Community (AEC)—gathers momentum in the next few years, potentially bringing more-integrated financial markets, freer flows of labor, streamlined customs procedures and better transportation links to a region of 600 million people. The fear among some investors in Thailand is that those and other steps to tie Southeast Asian economies more closely together will make smaller or less-developed countries such as Cambodia, Laos and Myanmar more attractive, allowing them to suck away some of the investment that once went to Thailand.

Those worries surfaced again late last month, when the Japanese Chamber of Commerce (JCC) and Japan External Trade Organization (Jetro) in Bangkok released a survey which found that half of Japanese corporations based in Thailand are considering destinations elsewhere in Southeast Asia for future production bases once the AEC comes into play, as is now expected in 2015. In its coverage of the survey, Thai newspaper The Nation noted that Thailand “will need to ramp up its performance in several areas” to make the country more attractive to foreign firms or “else face a decline in investment and even relocations.”

But Thai Finance Minister Kittiratt Na-Ranong dismissed those worries in an interview, saying that if Japanese companies had wanted to leave, they would have done so already after last year’s devastating floods that temporarily shut down much of Thailand’s industrial sector. He said 99.5% of the companies involved remain in Thailand, and that Japanese investment continues to rise.

In the past seven months, he said, the number of investment applications filed from Japanese companies increased 51% from the previous year.

“Thailand remains the center of Japanese investment in Southeast Asia,” he said. As for the AEC, “I don’t think Thailand will lose out,” he said. “We will retain almost all of our investors in Thailand.”

Of the 374 Japanese firms in Thailand that were surveyed for the joint JCC-Jetro report, 49% said they anticipated no change to their production plans in Thailand in response to the AEC. But 29% said they would consider Myanmar for future production bases, and 21% said they would look to Indonesia.

Mr. Kittiratt said it was only normal that some investors would have their eyes on Myanmar, which has a market of 60 million people and is undergoing a major reform process to modernize its economy after decades of harsh military rule. “It’s the same in Indonesia—it’s a new market of 250 million people that’s opening up,” he said.

Whatever happens, it’s clear that the plans of Japanese firms will be crucial to Thailand’s future. Japanese companies have long been among the dominant investors in Thailand, using the country as a major production base for vehicles and other products sold locally and around the world. In 2011, the investments of Japanese corporations comprised 57% of all foreign investment approved by the Thai Bureau of Investment (BOI); in the first six months of 2012, the Japanese share grew to 62%, according to BOI figures released in July.

Despite last year’s floods, which the World Bank says caused an estimated THB1.4 trillion (USD45.7 billion) in economic damages and losses, most Japanese firms still have a positive outlook on growth in Thailand for the second half of 2012, with 83% reporting that they expect pre-tax profits and 70% saying that business sentiment is improving.

In April, Toshiba Corp. announced plans to relocate their chip manufacturing facilities from north of Bangkok, which was inundated with water last year, to Prachinburi province, about 100 miles northeast of the capital, in an area with no major waterways. Canon Inc. is also currently constructing new manufacturing facilities in the province.

But many Japanese investors have said privately that they were frustrated over what they perceived to be an inadequate Thai response to the massive floods last year, and many analysts have predicted that at least some of them will leave once Southeast Asian countries become more integrated and it becomes easier to set up shop elsewhere.

The JCC-Jetro survey found other issues of concern for the country, notably labor constraints. An overall shortage of workers and rising labor costs due to recent and upcoming minimum wage hikes were the most significant problems mentioned by Japanese enterprises in the survey—65% of respondents noted a negative impact on their businesses and profits due to these factors.

“Thailand has very good infrastructure, supporting industries, and government incentives,” said Jetro president Setsuo Iuchi. “But shortage of labor and the rise in costs are big issues.”

Some Japanese businesses have already moved the labor-intensive segments of their supply chains and manufacturing processes to Cambodia, according to Mr. Iuchi. “At the same time, other Japanese companies are looking to other destinations in the region for their future expansion,” he added.

To be sure, not everyone is convinced the AEC will fully come together as planned, and Thai authorities may well respond with more incentives of their own to sweeten the pot for foreign firms. Either way, Mr. Kittiratt says he’s convinced the AEC will be good for Thailand in the long run.

“The reason we’re integrating is because there will be a benefit for all countries,” he said. “We will all win once we become the AEC, by being a wider, bigger market with greater purchasing power.”