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Case Study: Thailand Electronics Industry 1. Definition The electrical and electronics industry which needs to be reformed in Thailand comprises of 1. Telecommunication products 2. Computer hardware 3. Electronics components 4. Electrical appliances 5. Software products Linkages among these 5 groups are: 1. Upstream Industry- wafer production, material for PCB production, wire etc.; 2. Midstream Industry- parts and components of electrical and electronics appliances e.g. IC, PCB, and capacitor; 3. Downstream Industry- electrical appliances and electronics products e.g. air conditioner, television, and computer. The supporting industries such as die and mold production, metal and plastic components are playing an vital role in a long term development in the electronics industry. 2. Important of this Industry The electrical and electronics industry has been developed in Thailand for more than 40 years due to the import substitution policy in 1970 s. This industry is one of the most important sector of Thailand in terms of export growth with the average of more than 20% annually in the past 20 years. In 2001 the export value was around $US 14 billion. In connection with the employment, this industry created more than 360,000 jobs in the same year. The estimated value added was $US 3.9 billion. 3. Production 3.1 Telecommunication products The telecom market in Thailand was quite small when compared to the world market, less than 1% of the world trade value. However, its growth rate was remarkably high at 14% per annum. Previously, domestic production depended mainly on imported components. They were assembled with an uncomplicated technology in Thai firms. It is expected that the mobile phone will play an important role in this industry with a very high growth rate for years. 3.2 Computer hardware This industry needed high investment since it needed high and advance technology in production. Mostly, Thai firms produced parts and components or import them to assemble and export around 80% of total production. Like the telecom industry, this industry relied on imported parts and components. 3.3 Electronics parts and components It was a labor intensive industry. Mostly are in forms of joint venture with multi-national firms, subsidiary, and subcontracting. This industry relied heavily on 80% of imported parts and components. IC, PCB, resistor, capacitor, battery, and coil are of importance products in this industry. Regarding the development in this industry, IC and PCB played a vital role since it stipulated special characteristics which determined the development trend in this industry. 3.4 Home electrical appliances 2
This industry has been developed for more than 30 years in Thailand. Generally, manufacturers have improved and increased their capacity in products design by using advance technology. Consequently, their products were well-recognized and accepted by developed markets. Local parts and components have been used increasingly in production. 3.5 Software products The software industry has become more important since the information technology has been improved and developed rapidly. Moreover, in Thailand, lots of firms and companies have invested more to develop their computer systems. This has led to the expansion of this domestic software industry. It is sufficient for improving and developing a high technology for software production. 4. The adjustment issues Thailand electronics industry needs structural adjustment because of both eternal and internal factors. 4.1 External factors Electronics has been one of the most competitive industrial sectors in Thailand. During the 1980s, the import tariff on electronics industry was from 1-45%. However, the AFTA and WTO Uruguay round trade agreement caused the reduction of import tax to 1-5% from produced imported form ASEAN and 5-35% from products imported from WTO member nations. In addition, Thailand join the Information Technology Agreement (ITA), a plurilateral agreement under the WTO framework. As a member of the ITA, Thailand has to reduce import tariff of IT and IT related products such as raw material, machine, and semiconductor parts, to 0% in year 2000 and 2005. In APEC forum, there is an initiative to ask WTO to further liberalize IT product. Now the APEC is in process of producing the list of IT products to propose to WTO for further liberalization under ITA agreement. Further liberalization came from the AFTA agreement. Thailand committed to lower import tariff in all chapter of electrical and electronics product to 0-5% in year 2003. Moreover, as an APEC member Thailand has to liberalize economy by the year 2020 according to APEC Bogor Goal. This suggests that the electronics sector will subject to more open trade and competition in the future. 4.3 Internal factors Because of the relatively low labor cost (and relatively high labor productivity), export of electronics from Thailand has been increasing over time. However, the advantage has been decreasing. Labor cost in Thailand has been increasing and competitiveness has been reducing. Evident can be seen from the slower growth of the industry. When study further to the industry structure, one will see that exportation of this product is mostly from foreign own or joint venture companies. Export from Thai firm is minimal, especially the export of products designed or developed by Thai company. The manufacturing firms in Thailand are hired to product or assemble product under the manufacturing patent from aboard, taking advantage of low labor cost. In other word, Thai firms are OEM (Original Equipment Manufacturing) by nature. The production is controlled by parent companies. When there is no labor cost advantage, the product owner may stop hiring Thai firm and relocate the production to cheaper labor economies. Since the electronics industry is OEM and import high proportion of 3
parts from abroad, the value added in this industry is mainly from domestic labor. Thus the value added for this industry is estimated at only 2-5%. The electronics and electrical manufacturing also depends heavily on imported raw material, part and component. The import component of electronics manufacturing is averaged 90%, while the electrical appliance is averaged at 70%. Thus, the industry is very vulnerable to the fluctuation of exchange rate and labor wage. Electronic product life cycle is very short, so that the manufacturers need a advance technology to cope with such rapid change. However, Thailand still depends on imported production and product design technology. R&D in this industry is still low both in public and private sector. Because of both external factor from the liberalization pressure and internal factors from high labor cost and industry structure, the electronics industry need an adjustment program from government. 5. Interest groups and policy development It was in 1997, when there was the Asian crisis, the government sector of Thailand started to realize the problems. Thus, the Ministry call upon related organization both public and private to investigate the competitiveness of this industry along with other 12 key industries. In this process, the problems of electronics industry have been identified by the stakeholders. The output of this initiative was Thailand Industrial Restructuring Plan. Other consultation process also occurred from year 1997 until very recently. When the OIE recognized any important matters related to the industry sector, they called for the meeting with agencies concerned both from government e.g. Ministry of Commerce and Ministry of Finance and private sector e.g. Federation of Thai Industries and Thai Chamber of Commerce to identify cause of the problem and how to solve it. Example of the need of consolation are the more liberalization requirement for the industry under AFTA, WTO, APEC and all bilateral agreement such as US-Thai, Australia-Thai, Peru-Thai Bilateral trade agreement. Stakeholders called to this meeting are as follows. 5.1 Public sector Ministry of Commerce (Department of Trade Negotiation (DTN)). DTN is responsible for trade liberalization policy. DTN will bring to issue of liberalization pressure from both multilateral trade agreements such as WTO and AFTA to bilateral trade negotiation like US-Thai, Australia-Thai, Peru-Thai bilateral agreement. If there is a request for more liberalization in industrial sector, DTN will either consult with Ministry of Industry or directly with private sector (or consult with Ministry of Agriculture and Cooperatives in case of processed agricultural products). Ministry of Industry (Office of Industrial Economics (OIE)). Ministry of industry, on the other hand, is responsible for domestic aspect of industrial development/adjustment issues. OIE duties are to study both the development/problem of industrial sector and impact of trade liberalization to every industrial sector and recommend policies or measures to deal with such issues. Ministry of Finance. This ministry is responsible for the tariff reduction. 5.2 Private sector Federation of Thai Industry (FTI). The FTI is an association of manufactures in Thailand. The FTI consist of about 15 industrial clubs. Thai Chamber of Commerce (TCC). TCC is an organization of all 4
businessmen in Thailand. The member includes manufacturing, trading and service sector. These two private agencies are normally recognized as a representative of private/business sector in Thailand. Noted that labor union of Thailand has a low influence on the liberalization negotiation process. 6. Adjustment assistances Thailand has established a social security program for a couple of years. This program is aiming to assist employees in terms of pension when retired and reimbursement of a limited amount of health care expenses. Presently, it has been developed to include an unemployment assistance. After the economic crisis in 1997, this industry had self-adjustments such as resizing workforce, and scale reduction with some support from the Thai government. Moreover, Thailand also has Industrial Promotion Department to be training center. Still, these assistant programs need more development and improvement in terms of activities and operation so as to better serve the needy group properly. In case of specific adjustment assistance, Thailand did not have such a program implementing at that time. They will be initiated and put in place in this coming reform. Electrical and Electronics Institution, an independent agency, has been established to take care of technological development as well as product development, R&D and training. Loan is made available for SMEs who need to improve their productivity and invest more in new equipment. Consulting services are provided to needy firms. 7. Outsourcing support In connection with the advisory bodies, Thailand does not have such a mechanism. Ministry of Industry by the OIE will seek some supports from the independent advisory think-tank namely, Thailand Development Research Institute (TDRI) and Thammasart University to conduct a research on impact of trade liberalization and RCA of every industry including the electronics industry. When the research is completed, the OIE will organize meetings among agencies concerned and other stakeholders to inform the result and brainstorm some ideas from them so as to identify stakeholders needs and transform them into measures. To make this process run smoothly, all information related to this matter will be available on the website of OIE for further suggestions from the public. The process of outsource and research took a long time. Therefore, these research findings were invalid and inadequate in terms of research topics. 8. How to adjust this industry in the future In the government s viewpoint, we realize this industry as a potential player in Thai economy in terms of export earning. Due to our diminishing of competitiveness in labor cost, the adjustment will be as follows: investment on new technologies; improving productivity of labor, more capital and technology intensive, and resizing in scale of production units to help this industry develop into a more complicated production. 5
retraining for displaced labor. accommodated technology transfer by well-established universities; joint R&D centre namely, the electrical and electronics centre funded by both government and private sector. 9. Policy recommendations Due to the fact that this industry relies substantially on imported raw materials, tariff reduction should be introduced so as to increase competitiveness in the world market. Thailand should be emphasized on high value-added products by: -using advance technology in production; -strengthening R&D; -encouraging product innovations and designs. Further study on quantitative analysis should be conducted concerning how to improve the status quo of this industry in terms of competitiveness, employment, wages, production, and export. Furthermore, a short-term and long-term recommendation will be needed in this research. Workforce retraining programs should be organized in an effective manner and adequate.. 6