Relocating Labor-intensive Industries from
Thailand to Neighboring Countries:
Possibility and Policy Implications
Saowaruj Rattanakhamfu
Somkiat Tangkitvanich
Wirot Sukphisan
Ploy Thammapiranan
Thailand Development Research Institute
Abstract
government in facilitating the relocation process as
well as in increasing the competitiveness of these
As a result of higher wage and labor shortages in
industries.
Thailand, Thai companies in labor-intensive industries
1. Introduction
are forced to find the new business model to remain
competitive. In the short run, some companies may
choose
to
relocate
their
production
bases
Labor intensive industries, especially textile and
to
garment, shoes and leather goods, and gems and
neighboring countries with lower wage rates to
jewelry, have played an important role to Thai
maintain their traditional cost comparative advantage.
economy as the major export industries as well as the
However, in the long run, they have to move up their
main employment sources. In terms of exports value in
value chain by adding higher value added activities,
2012, textile and garment, and gems and jewelry
such as research and development (R&D), design,
industries
marketing, and branding to stay competitive.
percent,
intensive industries has declined. Figure 1 shows that
It also draws policy
role
2.6
However, the competitiveness in these labor
Myanmar and Vietnam), as well as who are likely to
the
and
the manufacturing sector in the same year.
countries, especially CLMV (Cambodia, Lao PDR,
regarding
3.2
employ about 11.8 percent of the total employment in
relocating Thai production bases to neighboring
implications
to
respectively. In addition, textile and garment industries
This paper aims at finding out the possibility of
relocate, how and where?
contribute
of
their market shares in the world market have decreased
the
over time.
20
Relocating Labor-intensive Industries from Thailand to Neighboring Countries 21 Source: UN Comtrade
Figure 1: Market share of export to the world by products and countries
In the past, Thailand enjoyed the comparative
section will describe where to relocate.
The fifth
advantage in labor intensive industries due to its cheap
section will provide case studies of companies
and abundant labor. However, the continual increase
relocating to neighboring countries. The cases will not
in wages decreases its comparative advantage. In the
only highlight why and how they have relocated but
short run, one way to stay competitive in labor-
also help us draw lessons on the factors that determine
intensive industries is moving the production bases to
the successful relocation.
low-wage countries. They still have to move up their
compare the production cost differences in different
value chain by R&D, design, marketing or creating
locations, namely Bangkok, Ho Chi Minh City, and
own brands to be competitive in the long run.
Yangon. The last section will summarize and provide
The next section will provide possibility for
relocating Thai manufacturing bases in labor intensive
industries to neighboring countries. The third section
will provide an overview of the companies likely to
relocate, and how they would do so.
The fourth
The sixth section will
policy recommendations.
2. Possibility for
relocating laborintensive industries to
neighboring countries
22 東協瞭望 009
The flying geese theory is proposed by Akamatsu
(1962)
1
on labor costs. As domestic labor costs have escalated
to explain the phenomenon of industry
significantly, these companies, especially in labor-
development in East Asia. This theory explicates that
intensive industries, find it increasingly hard to
the economic development model in Asian countries is
continue their operations in Thailand. Some have
similar to a flying-geese pattern such that more
relocated their production bases to lower wage
developed countries move their production bases to
countries, especially Vietnam, Cambodia, and Lao
less developed countries, starting from Japan as a
PDR and lately Myanmar.
technology leading country to Newly Industrializing
Economies
(NIEs)
(i.e.,
South
Korea,
Taiwan,
Singapore and Hong Kong), then old ASEAN members
In particular, the reduction in competitiveness of
Thai labor-intensive industries is due to the following
reasons.
(i.e., Malaysia, Thailand, Indonesia and Philippines)
and finally new ASEAN countries (i.e., Vietnam,
Firstly, wages have continuously increased in
Thailand. Recently, a nationwide increase in the daily
Cambodia, Lao PDR, and Myanmar).
minimum wage to 300 baht (or 9.7 USD4) has further
The main driver of a change in production pattern
is the internal restructure of leading countries. That is,
reduced the already thin profit margins of laborintensive industries.
an increase in wages in more developed countries
reduces their comparative advantage in labor-intensive
Continual rise in labor cost has gradually
products; therefore they have to relocate low-value
diminished Thailand’s cost advantages in labor-
added activities to less developed countries with lower
intensive products in the international market. Figure 2
wages.
shows the differences in the average labor wages in
some labor-intensive industries between 2007 and 2013.
The flying geese theory can explain
production pattern in Southeast Asia well.
the
For
example, in garment industry, the manufacturing base
is moved from Japan to South Korea and Taiwan, later
Thailand, Malaysia, and Indonesia and now Vietnam,
Cambodia, Lao PDR and Myanmar.
equipment manufacturers (OEMs) .
intensive industries have increased significantly.
In
particular, in the textile industry, the average wage
increased from 4,867 baht in 2007 to 9,217 baht in
2013, accounting for the growth rate of 89 percent.
Similarly, the average wage in the garment industry
In Thailand, most manufacturers are original
2
During this period, the average wages in these labor-
increased from 4,884 baht in 2007 to 7,745 baht in
Of them, only 5
2013, accounting for the growth rate of 59 percent.
percent conduct research and development (R&D) 3 ,
The wage in the shoes and leather goods industries
therefore their comparative advantage mainly depends
increased from 5,467 baht in 2007 to 8,150 baht in
1
Akamatsu K. (1962). A historical pattern of
economic growth in developing countries.
Journal of Developing Economies, 1(1):3–25.
2
In this paper, an original equipment
manufacturer (OEM) means a company
producing products for another company that
sells those products under its own brand name.
3
Source: National Science Technology and
Innovation Policy Office
2013, accounting for the growth rate of 49 percent.
The wage in the gems and jewelry industries also
increased from 7,219 baht in 2007 to 10,955 baht in
2013, accounting for the growth rate of 52 percent.
4
The average exchange rate in 2013 is 30.73
baht/USD. (source: www.bot.or.th)
Relocating Labor-intensive Industries from Thailand to Neighboring Countries 23 Recently, due to the introduction of new daily
enormously to 23 percent in textile industry, 11 percent
minimum wage policy started in some provinces in
in garment industry, 10 percent in shoes and leather
April 2012 and nationwide in 2013, the annual growth
goods industries, and 35 percent in gems and jewelry
rates of wages in these industries have jumped
industries in 2013.
Source: Labor Force Survey (various years), National Statistics Office
Figure 2: Average monthly wages in labor intensive industries
As a result of higher wages, companies in these
the introduction of new minimum wage policy, the
industries have become more sensitive to the external
average profit margin of textile and garment industry is
pressures,
such
as
Thai
Baht
appreciation
5
.
down to only 1.9 percent. Moreover, companies in the
Furthermore, some of them are at risk of shutting down
shoes and leather goods industries as well as those in
their businesses. Based on the data from the Office of
the gems and jewelry industries could potentially suffer
Industrial Economics, our estimation shows that after
a loss (Figure 3).
5
The exchange rate from Thai baht to USD has
changed from 34.56 baht/USD in 2007 to 30.73
baht/USD in 2013. (Source: www.bot.or.th) 24 東協瞭望 009
Source: Authors, calculated based on the data from the Office of Industrial Economics
Figure 3: Average cost and profit to sales after the introduction of new minimum wage policy
Secondly, labor shortage problem, especially
unemployed, as shown in Figure 4. In 2013, there are
unskilled labor, becomes increasingly severe in Thailand.
less than 300,000 unemployed workers in Thailand, and
During the past ten years, the unemployment rate has
the unemployment rate stands at only 0.7 percent.
gradually decreased, so as the absolute number of the
Source: National Statistics Office
Figure 4: Number of unemployed and unemployment rate in Thailand
Relocating Labor-intensive Industries from Thailand to Neighboring Countries 25
Looking forward in the future, Thailand is
to increase to almost 13 percent in 20126. According to
quickly approaching the aging society. Figure 5 shows
the World Population Prospects prepared by the United
that the shares of people with the age of 60 and above
Nation, Thailand will reach the stage of aging society
to the total number of population in Thailand have
before any other countries in Southeast Asia, excluding
exceed 10 percent since 2004, and continued
Singapore7.
Source: National Statistics Office
Figure 5: Share of people with the age of 60 or above
Thirdly,
competition
from
other
countries,
increased its market share which is still at the low level,
particularly emerging economies, becomes more and
its market share is likely to increase when it gradually
more intense in the world export market. Figure 6
industrializes. It is expected that India will become
shows that China has sharply increased its market
another main competitor in labor-intensive products
share of manufacturing products in the world market
because India recently started developing its
since 2003. Currently, Thailand’s main competitor for
manufacturing sector, and will become one of the most
the low-end market is China, which has comparative
attractive manufacturing destinations due to its abundant
advantage in cheap labor. Although India has slightly
supply of cheap labor and large domestic market.
6
7
Source: National Statistics Office, Thailand
http://esa.un.org/wpp/Excel-Data/population.htm
26 東協瞭望 009
China
India
Source: UN Comtrade
Figure 6: Market shares of manufacturing products in the world market
Finally, Thailand is facing more difficulties to
Thailand during 2006-2016.
Moreover, it is highly
access major export markets, compared with its
likely that the EU will abolish the GSP privileges for
competitors due to two main reasons. The first reason
all manufacturing products from Thailand in 2017.
is that Thailand’s main trade partners are in the process
3. Who are likely to
relocate, how and why?
of trade negotiations with its main competitors. For
example, Malaysia and Vietnam are not only
participating in the Trans-Pacific Partnership (TPP)
In this section, we provide description of
trade negotiation, but also actively negotiating a
companies that are likely to relocate and the way they
bilateral free trade agreement with the EU, while
are expected to relocate.
Thailand is negotiating only with the EU.
If their
intensive industries, namely textile and garment, shoes
negotiations are successful, they will have tariff
and leather goods, and gems and jewelry, for our in-
advantages over Thailand in these major markets.
depth study. Based on data collection from the field
Furthermore, some agreements are already effective,
trips and interviews with trade associations and
such as Economic Partnership Agreement (EPA)
government agencies in these countries, we find that
between Japan and Indonesia (effective since 2008),
large enterprises (LEs) are more likely to relocate or
and EPA between Japan and Vietnam (effective since
expand their production bases to low wage neighboring
2009).
The conclusion of these agreements swipes
countries than SMEs due to their ability to take more
Thailand’s tariff advantages over its main competitors
risks. In addition, the low value-added, labor-intensive,
in the Japanese market. Thailand is also graduating
and low-tech production processes are likely to be
from the Generalized System of Preferences (GSP)
relocated or expanded to neighboring countries. For
granted by the US and the EU. For example, the EU
example, for the textile and garment industries, such
abolished the GSP privilege for gems importing from
production processes are cutting, sewing and making
We select three labor-
Relocating Labor-intensive Industries from Thailand to Neighboring Countries 27 garments, especially sport-specific clothing, non-
processes of the textile industry in Thailand are
fashion apparel, and uniforms.
For the shoes and
involved with higher levels of technology and skilled
leather goods industries, such processes are non-
labor than those in the garment industry. In the latter,
fashion athletic and leather footwear production and
most enterprises are large enterprises and are OEMs
preparation, including replicating, cutting, insole
producing sportswear, non-fashion apparel items and
decorating, assembling and trimming. Similarly, for
uniforms.
the gems and jewelry industries, the unsophisticated
these low wage countries are cutting, sewing and
final production processes for medium and low-end
making garments.
products, particularly costume jewelry, are prone to be
relocated to neighboring courtiers.
The production processes performed in
The main mode of relocation of production in this
sector is foreign direct investment, either by a single
From our research, it appears that the common
company or by groups of companies in the same cluster.
form of relocation to neighboring countries with
While the new companies are mainly wholly-owned by
abundant supply of cheap labor is direct investment by
Thai investors, if allowed by the law, some are jointly
setting up factories. In some cases, Thai enterprises
owned with local investors. The advantages of joint
may choose to have joint investment with local
investment are better access to local knowledge and
partners. Another alternative is to outsource their
understanding about domestic market demand and
production to suppliers in those countries. In general,
stronger connection with local authorities.
the main reason to relocate to these low wage countries
disadvantage is the risk related to the differences in
is to maintain their cost comparative advantages.
views and interests of the shareholders. We also find
Comparing among these three labor-intensive
industries, many more enterprises in the textile and
garment industries than those in the other two
industries have relocated to neighboring countries.
This is because the size of textile and garment
industries is much bigger than those of the other two.
The share of large enterprises is also much higher in
textile and garment industries. In particular, the share
of large enterprises to total enterprises in the textile and
garment industries is 15.9 percent out of 2,390
enterprises, while that in the shoes and leather goods is
only 10.3 percent out 1,037 enterprises in 2012.
3.1 Textile and garment
industries
The
that some Thai enterprises choose to invest in
neighboring countries through nominees to avoid some
regulatory
limitations
or
discriminations
against
foreign investors. In Myanmar, for example, foreign
and local investors are entitled to different rights in
terms of land ownership.
In sum, the reasons for some Thai companies to
relocate to neighboring countries are as follows.
Firstly, the problems of increased labor costs and
labor
shortages,
especially
unskilled
labor,
are
becoming severe in Thailand. As a result, some Thai
companies have to find new production bases in
countries with lower wages and larger supply of labor.
Secondly, Thai companies, especially the OEMs
Comparing to enterprises in textile industry,
for global brands, are pressured by their buyers to
enterprises in garment industry are more likely to
move to lower wage countries to maintain their cost
relocate their production bases to neighboring countries,
advantage.
especially CLMV. This is because the production
28 東協瞭望 009
Finally,
neighboring
countries
have
trade
better access to local knowledge and understanding
preferences from main export markets, such as the US,
about
the EU and Japan. For example, the EU has lifted the
connection with local authorities.
sanction against Myanmar, and provided it with GSP
disadvantages are difficulties in finding reliable local
effectively since 19 July 2013.
Under the EU’s
business partners and the risks related to corporate
“Everything but Arm” scheme, Myanmar will enjoy
governance. Finally, the advantage of outsourcing is
trade preferences by getting exemption from import
the reduced investment risks, while the disadvantage is
tariffs to the European market for all products, except
the risk of losing control over production.
for arms and ammunitions. In contrast, Thailand is
likely to graduate from the GSP soon. As a result, Thai
companies have strong incentives to move their
production bases to these neighboring countries.
3.2 Shoes and leather goods
industries
Most Thai companies in the shoes and leather
domestic
market
demand
and
stronger
However, the
Similar to the garment and textile industries, the
main factors for relocating shoes and leather goods
production to neighboring countries are increased labor
cost and labor shortages. According to the Thai
Footwear Association (TFA), the shoe industry in
Thailand still needs more than 10,000 employees for
filling vacant positions.
Furthermore, OEMs for
goods industries that have relocated to neighboring
global brands are pressured by their buyers to move to
countries are relatively large because larger companies
lower wage countries to maintain their cost advantage.
are more capable than smaller ones to deal with
In addition, for some OBMs, the domestic market is
business risks in neighboring countries. In particular,
quite saturated and facing fierce price competition from
they are better equipped to handle regulatory risks and
Chinese products; therefore they turn to expand their
inefficient financial system. Some of them are original
markets in neighboring countries which have rapid
brand manufacturers (OBMs), while others are OEMs
economic growth, increased purchasing power and
for global brands.
similar preferences for products.
The production processes likely to be moved to
neighboring countries are those that are highly laborintensive, produce low value added, and use low
technology level.
3.3 Gems and jewelry
industries
Similar to the above two industries, the low value-
Examples of such processes are
added, highly labor-intensive, and low-tech production
production and preparation of non-fashion athletic and
processes of unsophisticated final production processes
leather footwear, including replicating, cutting, insole
for medium and low-end products, especially costume
decorating, assembling and trimming.
jewelry, are prone to be relocated to neighboring
The modes of relocation of production in this
sector vary from setting up wholly-owned investment,
joint venture with local partners, and outsourcing to
local suppliers.
The upside of wholly-owned
investment is getting full control of the company
decisions while the downside is higher regulatory risks.
On the contrary, the advantages of joint investment are
courtiers. However, very few Thai companies in gems
and jewelry industries relocate to neighboring countries.
Some of them are large companies and OBMs,
therefore their main reasons for relocation are
expanding their markets as well as accessing the
abundant supply of cheap labor in order to keep their
price comparative advantage. They also tend to directly
Relocating Labor-intensive Industries from Thailand to Neighboring Countries 29 invest in these new markets by setting up production
Vietnam (148 USD in Ho Chi Minh City)8.
bases and distribution channels.
In contrast, some of
of labor force, the country with the largest number of
them are companies interested in raw materials in rich
labor force is Vietnam (52.9 million), followed by
natural resource countries; therefore they have joint
Myanmar (33.3 million), Cambodia (8.4 million) and
investment with local partners who have strong
Lao PDR (3.3 million)9.
connection with related government officials. Some
also choose to invest in neighboring countries through
nominees to avoid some discrimination against foreign
investors. In Myanmar, for example, foreign investors
have different rights from local ones in terms of the
exploitation of natural resources, such as jewelry
mining rights.
In terms
In addition, the location of CLMV is close to
Thailand.
The north of Thailand is bordered to
Myanmar and Lao PDR, and the northeast is bordered
to Lao PDR and Cambodia. Formerly, the production
linkages between Thailand and its neighboring
countries were quite difficult due to poor connectivity
among these countries.
However, the current
However, relocating gems and jewelry production
development plan for road and rail transportation in
bases to neighboring countries is relatively more
Greater Mekong Subregion (GMS) countries and the
challenging than relocating apparel or shoes production
emerging economic corridors are connecting Thailand
bases because labor in gems and jewelry industries are
with these countries.
rather skilled or semi-skilled which require investing
program, three economic corridors are intersected in
heavily in training.
Thailand:
4. Where to relocate?
(connecting
Vietnam,
Myanmar),
the
the
Under the GMS development
East-West
Lao
North-South
Economic
PDR,
Corridor
Thailand
Economic
and
Corridor
Regarding target countries for relocation, Thai
(connecting the Southern provinces of China, Myanmar,
companies are likely to move to CLMV due to their
Lao PDR, Thailand, and Malaysia) and the Southern
large supply of cheap labor and their geographical
Economic Corridor (connecting the Dawei deep sea
advantages.
Among CLMV, the country with the
port of Myanmar, the Laem Chabang deep sea port of
lowest monthly wage for factory worker is Myanmar
Thailand, and Cambodia), as shown in Figure 7. It is
(USD 53 in Yangon), followed by Cambodia (74 USD
expected that the economic corridors will play a key
in Phnom Penh), Lao PDR (132 USD in Vientiane) and
role to link production and trade in the region.
8
Source: JETRO. The 23nd Survey of Investment
Related Costs in Asia and Oceania (2013).
9
Source: World Bank database (2013)
30 東協瞭望 009
Source: http://www.npu.ac.th
Figure 7: Economic corridors connecting Thailand and neighboring countries
In addition, CLMV have advantages in terms
import from Cambodia, Lao PDR, and Myanmar, as
of trade privileges granted by major markets, as shown
they are least developed countries under the Everything
in Table 1. For example, the EU provides duty free
but Arms (EBA) initiative.
and quota free, with the exception of armaments, for
Table 1: Trade preferential from major markets
Major
markets
Cambodia
US
Zero tariff rates and no
quotas
Lao PDR
No GSP benefit
Myanmar
Vietnam
Under the process of
easing
economic
sanction
Under the TPP negotiation
• Textile
EU
Under EBA scheme,
zero tariff rates and no
quotas
Under EBA scheme,
zero tariff rates and
no quotas
Abolish the economic
sanction since April
2012, and provide GSP
since 19 July 2013
under EBA scheme.
Note: Data covered only products under GSP and EBA schemes.
and garment:
non-zero tariff rates and
quotas
• Leather goods and shoes:
no GSP due to export
quantities over the quota
• gems: most tariff rates
are zero under GSP and
there are quotas
Relocating Labor-intensive Industries from Thailand to Neighboring Countries 31 In spite of the aforementioned strengths, Thai
have three factories in Thailand, but there is currently
companies planning to relocate to CLMV should be
only one domestic factory. The company executives
aware of some pitfalls.
decided to relocate to Vietnam since 4-5 years ago due
For example, Vietnam still
faces some problems waiting to be solved.
These
to increases in wages, and the difficulties in hiring
include the sharp increases in wage rate, unclear law
unskilled labor in Thailand. The main factors to set up
and ineffective enforcement, inefficient infrastructure
manufacturing facilities in Vietnam are abundant
and unstable macroeconomic conditions, especially
supply of cheap labor, high growth rate of population,
high inflation, high level of non-performing loans
and existing trading partners.
(NPLs) in the banking sectors, and low confidence in
Vietnam is located in Giao Long Industrial estate in
the local currency.
Ben Tre province, with the area of 100,000 square
Similarly, Myanmar has some disadvantages as an
investment destination.
The main difficulty is
inefficient infrastructure, especially electricity and
transportation system. It also suffers from other
problems such as the skyrocketing land prices,
difficulties in finding sizable land lots, under-
The first factory in
meters, and 5,000 employees. The production there is
mainly to serve its clients who are the owners of global
sports brands. The purchase orders are usually of small
volume with frequent design changes, and sports
jackets. The second factory is currently built nearby
the first factory.
developed banking system, the lack of market
The advantages of setting up factories in Ben Tre
information, uncertainty of laws and regulations as
province over Ho Chi Minh City are lower wages (80
well as political instability.
USD difference per worker per month) and easier to
5. Some case studies of
Thai companies
relocating to
neighboring countries
find workers. The company can usually recruit 100
workers within one week. In spite of cheaper labor
costs in Vietnam, there are other costs in setting-up
business.
For example, the company has to invest
more on human capital development by provide
This section provides some case studies of Thai
training courses to local workers in order to assure their
companies in labor intensive industries relocating to
quality
neighboring countries to draw lessons why and how
productivity of Vietnamese workers at the moment is
they have relocated and how they have been so far
comparatively lower than that of Thai workers.
successful. Three case studies include a Thai garment
Furthermore, the costs of learning the country’s laws
factory in Vietnam, and a Thai shoes factory
and regulations and dealing with different law
subcontracting to a local supplier in Myanmar, and a
interpretation by different government officials are
Thai wholly-owned jewelry factory in Vietnam.
another item of business cost that cannot be ignored.
5.1 Case study of a Thai
garment factory in
Vietnam
5.2 Case study of a Thai shoes
factory subcontracting to
a supplier in Myanmar
One of Thai companies successful in relocating to
Vietnam is Alliance One Apparel, a company under the
Liberty Garment Group. Alliance One Apparel used to
of
production.
This
is
because
labor
In contrast to setting up a new factory in
neighboring countries to supply to a global brand, a
32 東協瞭望 009
Thai company in the leather shoes industry chooses to
comparing to Thailand’s, the wage in Vietnam is
keep its cost comparative advantage by relocating some
quickly increasing. For example, wages have increased
production lines to Myanmar. The company outsources
three times in a single year of 2012, resulting in an
CMP (Cut-Make-Pack) operations to a Myanmese sub-
average monthly wage of 120 USD. The quoted wage
contractor.
To assure the quality and standard of
rates are exclusive of social security contribution at
production,
the
17% in 2013 and recently increased to 18% in 2014.
Thai
company
provides
some
technological assistance (such as giving advice on
machines to be used for production, and dispatching
Thai technicians to monitor and control the production
in Myanmar). The company also provides raw
materials (such as cow skins and pig skins) for its
Myanmese subcontractors.
Although its factory in Vietnam has an advantage
of lower labor cost over the Thai counterparts, the
company still has to import raw materials from aboard.
Therefore, the net production cost in Vietnam is
merely7-8 percent lower than that in Bangkok due to
the recent wage increases.
In spite of low labor cost, there are significant
extra costs of production in Myanmar. In particular,
Myanmar still has poor quality of infrastructures,
especially electricity and road. The electricity shortage
in Myanmar causes higher production cost because the
state can provide electricity about 5 hours a day on
average, and producers have to use their own electricity
generators to continue their production lines.
In
addition, complicated export and import laws and
regulations cause slow customs process, resulting in
higher operating cost.
For Pranda, 90 percent of total production in
Vietnam is mainly for exports with the rest 10 percent
for domestic market.
The main export markets are
Germany, France and UK. Because the EU provides
GSP to imported products from Vietnam, the tariff
charged for jewelry exported from Vietnam is 2.5
percent lower than that from Thailand. For domestic
market, the company sells the products under its own
brand name “Prima Gold” to serve the medium-low
end customers.
As distribution channel is key to
expand its sales, Pranda plans to increase its retail
5.3 Case study of a Thai
jewelry factory in Vietnam
outlet in Vietnam from 4 in 2012 to 16 in the near
Pranda Jewelry Public Company Limited, a Thai
While labor cost is on the rise, business
leading manufacturer of medium-to high-end quality
environment in Vietnam has improved during the past
jewelry, has established four factories in Thailand and
five years. In terms of public utilities, both roads and
expanded its manufacturing bases into other countries,
electricity system have been upgraded, even though
including Vietnam, Indonesia, and Germany. Pranda
power blackouts are still the problem in Vietnam,
Vietnam Company Limited has been operating in Dong
especially in the dry season. The government has also
Nai Industrial Zone since 1995. The main reasons to
amended laws and regulations to be friendlier to
set up a factory there are low wage, high potential
foreign investors.
domestic market and GSP privileges from the EU,
interpretations among government agencies remains a
which is one of Pranda’s main markets.
problem. In addition, bureaucratic red tapes add more
Currently there are about 200-300 workers in the
Pranda Vietnam’s factory.
Although still low
future.
However inconsistency in law
cost in doing business in Vietnam.
Relocating Labor-intensive Industries from Thailand to Neighboring Countries 33 6. Cost structure
analysis
6.1 Textile and garment
industries
This section compares the differences in the ex-
Based on our estimation, if the ex-factory
factory production cost in some cities in neighboring
production cost in the garment industry in Bangkok is
countries, namely Yangon and Ho Chi Minh City,
normalized to 100, the production costs in Ho Chi
comparing with that of Bangkok. The costs in the two
Minh City and Yangon are 90.16 and 86.18,
cities are obtained by imputing the production cost of
respectively (Table 3). The main factor contributing to
factories in Bangkok, adjusted for the differences in
the different production costs is the gaps in labor cost.
labor and facility costs among the three cities. The
The city with the highest labor cost is Bangkok,
production cost of Bangkok factories in the three
followed by Ho Chi Minh City and Yangon,
industries are obtained from data collected by the
respectively. Although Yangon has relatively cheaper
Office of Industrial Economics.
labor cost, it has severe electricity shortages. Factories
there need to have their own electricity generators to
Based on aforementioned methodology, Table 2
shows that for all three industries, the factory costs in
Bangkok are the highest among these three locations,
followed by those in Ho Chi Minh City and Yangon.
Comparing among the three industries, the gap of the
ensure their operation, resulting in high effective
electricity cost.
Table 3: Comparison of garment production
costs in Bangkok, Ho Chi Minh City and
Yangon
cost
Bangkok
Ho Chi
Minh
City
Yangon
differences among these three locations is the cost of
raw material
47.05
47.05
47.05
labor. It is noted that Yangon has the lowest cost of
labor*
22.91
18.46
9.39
labor, but the highest electricity cost among these three
office cost
6.83
3.54
1.92
locations. However, in general, Yangon is still the
electricity
4.15
2.05
8.74
location with the lowest ex-factory cost of products in
water
0.05
0.04
0.09
all the three industries.
others
19.01
19.01
19.01
Table 2: Factory costs of products in the three
industries in different locations
Total
production
100.00
cost at
factories **
Source: Authors
90.16
86.19
ex-factory cost is the least in the gems and jewelry
industry.
Industry
The key factor contributing to the cost
Bangkok
Ho Chi
Minh
City
Yangon
Garment
100.00
90.16
86.19
Shoes and
leather
goods
Note: * labor cost includes labor wage, and
employers’ payment for social security
contribution
100.00
92.21
83.95
** exclusive of logistics and transportation
cost from factories to ports
Gems and
jewelry
100.00
95.98
93.73
Source: Authors, based on field-trip data and the
Office of Industrial Economics’s survey
6.2 Shoes and leather goods
industries
Similar to the garment production cost, our
estimation shows that among three cities, the ex-
34 東協瞭望 009
factory production cost of shoes and leather goods in
Likewise, the production costs of gems and
Bangkok is the highest, while that in Yangon is the
jewelry are different in three cities, although the gaps
lowest. In particular, if the production cost of shoes
are not as significant as in the two industries previously
and leather goods is normalized to 100 in Bangkok, the
discussed. In particular, if the ex-factory production
production costs would be 92.21 and 83.95 in Ho Chi
cost in Bangkok is normalized to 100, the production
Minh City and Yangon, respectively (Table 4). Again,
costs would be 95.98 and 93.73 in Ho Chi Minh City
the main factor contributing to the difference in
and Yangon, respectively (Table 5). Unlike the other
production costs is labor cost.
The city with the
two products, the costs of gems and jewelry production
highest labor cost is Bangkok, followed by Ho Chi
in these three cities are not significantly different
Minh City and Yangon, respectively.
Unlike the
because the share of labor cost in this industry is only
garment production cost, the differences in electricity
about 12 percent, only about half of those in the other
cost in the shoes and leather goods production in
two industries. Similar to the other two industries, the
Bangkok and Yangon are not much because the
main factor contributing to the differences in
production process of shoes and leather goods requires
production cost among the three cities is labor cost.
lower share of electricity usage than that of the garment
The city with the highest labor cost is Bangkok,
products.
followed by Ho Chi Minh City and Yangon.
Table 4: Comparison of shoes and leather
goods production costs in Bangkok, Ho Chi
Minh City and Yangon
Table 5: Comparison of gems and jewelry
production costs in Bangkok, Ho Chi Minh
City and Yangon
Yangon
cost
Bangkok
Ho Chi
Minh
City
Yangon
raw material
64.11
64.11
64.11
12.17
9.55
5.54
cost
Bangkok
Ho Chi
Minh
City
raw material
46.10
46.10
46.10
labor*
20.13
17.77
9.16
labor*
office cost
9.58
4.97
2.69
office cost
1.54
0.80
0.43
electricity
1.58
0.78
3.33
electricity
1.26
0.62
2.65
water
0.08
0.06
0.14
water
0.10
0.08
0.18
others
22.53
22.53
22.53
others
20.82
20.82
20.82
83.95
Total
production
cost at
factory **
100.00
95.98
93.73
Total
production
cost at
factories **
100.00
92.21
Source: Authors
Source: Authors
Note: * labor cost includes labor wage, and
employers’ payment for social security
contribution
Note: * labor cost includes labor wage, and employers’
payment for social security contribution
** exclusive of logistics and transportation
cost from factories to ports
6.3 Gems and jewelry
industries
** exclusive of logistics and transportation cost
from factories to ports
7. Conclusion and policy
recommendations
Relocating Labor-intensive Industries from Thailand to Neighboring Countries 35 In conclusion, due to wage pressure and labor
shortages, companies in labor-intensive industries have
to adjust in order to survive and grow.
The best
solution is to upgrade to higher value-added activities
7.1 Policy recommendations
on supporting Thai
companies to invest in
neighboring countries
However, some
Firstly, the government should establish a one-
companies may not be able to do so, and choose to
stop service unit which can provide both basic and in-
relocate their production bases to neighboring countries
depth information necessary for making decision to
with lower wage rates. In this case, the off-shoring
invest in neighboring countries (see Figure 8). The
production activities should be limited to low value-
basic information includes trade and tax rates,
added ones, such as cutting and making, while keeping
incentives for foreign investors, laws and regulations
high value-added activities, such as design and
on foreign investment, availability and quality of
marketing, in Thailand.
Companies may consider
infrastructure, spatial and industrial information,
keeping their local production to serve customers that
procedures and documents required for business
require
establishment. The in-depth information includes
to increase their competitiveness.
short-time
delivery,
which
needs
close
monitoring and engagement.
information on market conditions and consumer tastes.
Most importantly, it is necessary to recognize that
relocating to poorer countries with cheaper labor would
increase competitiveness of the companies only in the
short term.
Companies in labor-intensive industries
should strive to upgrade their technical capabilities by
using information and communication technologies
(ICTs) to manage their supply chain and increase the
linkages with their buyers.
In order to increase their
long-term competitiveness, they have no choices but to
In addition to providing information, the one-stop
service unit should also facilitate Thai companies in
doing business in neighboring countries as well as
support them to build the business linkages with local
companies in neighboring countries.
The Japan
External Trade Organization (JETRO), considered one
of the best practices in supporting and facilitating
companies in investing abroad, can provide a model.
Secondly,
the
government
should
consider
move up the value chain to higher value-added
establishing special economic zones (SEZs) in the
activities, by transforming themselves to preferred
border areas. The laws and regulations for these SEZs
OEMs, ODMs or OBMs.
should provide some privileges to investors, such as
Our
study
provides
the
following
policy
recommendations for the government to support Thai
companies to relocate to neighboring countries as well
as to promote the industrial development in the laborintensive sectors.
special minimum wage rates and facilitating them in
hiring foreign workers. The establishment of SEZs in
border areas will be beneficial to Thai companies,
especially SMEs, because they will be able to keep
operating their production in Thailand where they are
accustomed to local laws and regulations, and to avoid
the risks from investment abroad, such as regulatory,
business and cultural uncertainties.
36 東協瞭望 009
Trade and tax privileges
Facilitating Thai
investors in doing
business in
neighboring
countries
One-stop
service
Supporting SMEs to
build business
linkages with local
enterprises in
neighboring
countries
Incentives for foreign investors
Laws and regulations on foreign
investment
Availability and quality of
infrastructure
Procedures and required
documents for establishment
Spatial and industrial
information
Marketing information
Providing useful
and updated
information
Figure 8: One-Stop Service Unit
7.2 Policy recommendations
on promoting industrial
upgrading
The OEMs might consider sub-contracting or
off-shoring their production bases to the areas with
cheaper labor costs in the short term. In addition,
The government should support and promote Thai
they should strive to become preferred OEM
companies to upgrade their production capabilities to
suppliers by complying with international labor
higher value-added activities. The strategies for
and environmental standards. In the long term, they
sustainable competitiveness are varied according to
should upgrade their production to become ODMs.
their production approach, as follows:
Thus, the role of the government is to equip them
˙ Assemblers (e.g., garment makers)
with technological knowledge and skills on design,
research and development as well as management.
In the short term, the assemblers may
˙ Original Design Manufacturers (ODMs)
offshore their production base to areas with
cheaper labor cost. They should also aim at
In the short term, the ODMs should
upgrading their production capabilities to be OEM
strengthen their design and production capacities to
suppliers in the long term. In this regard, the
be more efficient. At the same time, they should
government should support their upgrading efforts
strive to become original brand manufacturers
by facilitating access to capital and equipping them
(OBMs) in the long term. In this respect, the
with necessary skills concerning procurement and
government
logistics.
knowledge and skills on branding, marketing and
˙ Original Equipment Manufacturers (OEMs)
should
support
them
customer services.
˙ Original Brand Manufacturers (OBMs)
to
gain
Relocating Labor-intensive Industries from Thailand to Neighboring Countries 37 The OBMs might consider upgrading their
Fourthly, government agencies should support
domestic brands to regional ones in order to
SMEs to expand their marketing and networking by
expand their markets. Correspondingly, the role of
providing useful and up-to-date information, such as
government is to support their activities in
information on potential markets and technology. In
marketing and building international networks by
particular, the Department of Foreign Trade Promotion
supporting them to expose themselves in regional
should support them to attend international trade shows
trade exhibitions and roadshows.
and events.
In general, to support Thai companies to upgrade
Fifthly, the Ministry of Industry should encourage
along value chains and to increase their competiveness,
the upgrading of SMEs’ technological capabilities by
the government should play the following roles.
focusing on technology development and technology
Firstly, it should facilitate SMEs’ access to capital.
SMEs, especially in labor intensive industries, usually
have difficulties in getting the bank loan because some
labor intensive industries, such as textile and garment
transfer through various activities, such as providing
industrial experts, promoting industrial network, and
strengthening the linkages between industry and the
academia.
and shoes and leather goods, are considered as sunset
Finally, relevant government agencies, especially
industries. To promote greater access to capital,
the Ministry of Industry, should encourage SMEs to
government’s specialized financial institutions, such as
improve their manufacturing process in order to
the Export-Import Bank and the Thai Credit Guarantee
achieve international standards, such as ISO 9000 and
Corporation, should play a leading role.
ISO 14000. Manufacturers should also be promoted to
Secondly, government agencies should provide
support for SMEs to develop and strengthen linkages
adopt lean manufacturing to make their operation more
cost efficient.
among themselves as well as among them and large
The government should declare this decade to be
companies. In this regards, the Department of Industry
“the Decade of Productivity Improvement” to set a
Promotion should partner with related industry
clear direction in which all relevant stakeholders will
associations to strengthen its cluster support programs.
follow. The government, business and workers are
Thirdly,
public
universities
and
specialized
institutes should provide support in terms of education
and training in order to equip companies with essential
skills,
such
as
technical,
management, product
development, design, and marketing research skills,
with subsidy from the Ministry of Industry and the
Skill Development Fund.
advised to get together and set up policies that
accommodate predictable and continual wage increase
and productivity improvement. Collaboration between
the government and private sector organizations,
especially the Thai Chamber of Commerce and the
Federation of Thai Industries, is the key to successful
upgrading.
38 東協瞭望 009
Dr. Saowaruj Rattanakhamfu, the first author of this
Dr. Somkiat Tangkitvanich, the second author of this
paper, is currently a research fellow in Science and
paper,
technology
Thailand
development research institute. He earned is PhD in
development research institute. She earned her PhD in
computer science at the Tokyo institute of technology,
economics at the University of Melbourne, Australia.
Japan. His specialties include trade policy, industrial
Her research specialties include applied economics,
policy,
development
program
at
is
currently
ICT
the
policy,
president
and
of
Media
Thailand
policy.
development economics, science and technology
upgrading, and productivity upgrading.
References
Š Akamatsu K. (1962) A historical pattern of economic growth in developing countries. Journal of Developing
Economies, 1(1):3–25.
Š JETRO. (2013) The 23nd Survey of Investment Related Costs in Asia and Oceania.
Š Thailand Development Research Institute. (2013) Relocating Labor-intensive Industries to Neighboring Countries:
Case Studies of Textile and Garment, Shoes and Leather Goods, Gems and Jewelry. (in Thai)
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