Thursday, August 05, 2021

perspective

Urgent reforms needed for Thai industries to be part of new global supply chain


Government and local industries have an urgent agenda to restructure industries in order to make them part of a new global supply chain driven by information and communications technology, environmental concerns and health consciousness, according to experts. 

The Asian financial crisis in 1997 had caused the baht to fall sharply from THB25 per dollar to THB30-40 per dollar.  The weaker baht has contributed to the rise in exports from 30 per cent of gross domestic product (GDP) to 50 per cent of GDP currently. 
“So, now Thailand depends heavily on exports,” said  Supavud Saicheua, adviser of Kiatnakin Financial Group.
The large foreign direct investment (FDI) in automobile and auto parts industries from Japan has contributed to the growth of auto and auto parts manufacturing. 
Meanwhile the liberalisation of the airline industry has encouraged operations by several low-cost airlines, consequently bringing in a large number of tourists from a few million 15 years ago to 40 million in 2019, prior to the Covid-19 outbreak. 
“The influx of tourists had generated income equivalent to 20 per cent of the country's  GDP,” said Supavud.  
These were what happened in the course of 20 years and then Covid-19 struck in 2020.  
      This year Thailand’s exports has recovered to some extent due to the global recovery from the impact of the virus pandemic. “But looking ahead, the automobile industry is going to face difficulties,”  Supavud warned.  
The automobile industry has been seen to adapt themselves too slowly to embrace electricity vehicle production.
Europe intends to ban sale of fossil fuel-powered cars in the next 15 years. This will certainly severely impact the Thai auto industry which has less than 15 years to adapt itself, warned Supavud.   
“Thailand has many auto and auto parts manufacturers and they will be disrupted as the world starts to produce more electric vehicles [EV] because an EV has only 20 moving parts in an electric engine compared with 2,000 parts in an internal combustion engine,” said Supavud. 
The government needs to support the automobile industry to catch up with the EV trend, for example the government may have to promote the automotive-battery industry. 
More investment in the infrastructure of solar cell energy is also needed. 
The government should have solar cells installed in every home in order to reduce dependency on the import of natural gas from Myanmar as gas supplies in the Gulf of Thailand decrease, he suggested.  
Solar cell installation should go hand in hand with the development of the car-battery industry, he said.
When automotive batteries are cheaper than today's prices, the adoption rate of EVs will jump, so it will be an alternative promising industry for Thailand and potentially compensate for the loss of income from falling tourism, he predicted.   
The pandemic has caused a collapse in tourism income from 20 per cent of GDP to about 5 per cent, said Supavud. 
While China  has still not allowed its citizens to travel abroad amid outbreaks of new Covid variants coupled with the slower vaccine rollout in Thailand, it may take 10 years  before the number of tourists rise back to 40 million, he said. 
    The Phuket sandbox experiment to bring in tourists on July 1, may lead to a rise in tourists in the short run.      
Income from tourism may rebound gradually towards 10 per cent of GDP in the years to come.  But it may take five to six years to recover the remaining 10 per cent, which is worth about Bt1.6 trillion, he predicted. 
 “I have not seen what the government has done to create jobs and business to fill this large gap,”  Supavud lamented.     

The next challenge is how Thailand could upgrade the semiconductor industry in order to become a part of an advanced global supply chain related to 5G and 6G mobile technology. The government could invite foreign firms, such as Taiwan Semiconductor Manufacturing Company, to invest in Thailand and provide them adequate water supplies, he said. 
The government also needs in the first phase to subsidise the agricultural sector in order to turn Thailand into a source of organic agricultural output in line with the health-consciousness trend and ageing society, Supavud suggested. 
“The government needs to do these things over the course  of the next 10 years in order to help people have higher income and living standards,” Supavud said. 
Promoting the solar cell and advanced semiconductor industries will keep Thailand in the global supply chain and have both economic and geopolitical influence
 “If the government lacks vision on these issues, the structure of the Thai economy in the next decade will remain weak as it is today,” Supavud added.   
Meanwhile, Naris Sathapholdeja, head of analytics at TMBT Thanachart Bank, argued that six dimensions of transforming the Thai economy needed to be undertaken. 
First is to upgrade small and medium-sized enterprises (SMEs). Currently SMEs employ about 17 million workers, or 46 per cent of the total 38 million work force. While large corporations employ 13 per cent, the agriculture sector hires 32 per cent and the government sector employs 9 per cent. 
“Economic value-addition generated by SMEs represents 40 per cent of GDP. If SMEs cannot survive, the country will be in serious trouble,” warns Naris. 
SMEs, however, make little investment, accounting for just 20 per cent of the THB6 trillion investment per year made by the private sector. Large corporations make up the rest 80 per cent. The challenge is how to promote investment among SMEs in order to support their expansion along with large corporations, he said. 
Thailand also needs to restructure the  export sector, which still depends on the old supply chain and has not changed much in the last 10 years.  Thailand’s electronic products and electronic parts  are for example  air-conditioners and clothes washing machines.    
In comparison, the share of Vietnam's electronic products exports soared from 7 per cent to 30 per cent and electronic parts from 5 per cent to 12 per cent over the past 10 years, said Naris. 
 It is because Vietnam has started to make advanced semiconductors used in smart phones. Vietnam has become a part of the advanced global supply chain.  Thailand needs to enter the new  economy and the new global supply chain just like Vietnam, he suggested.  
Thailand also needs to accelerate investment in digital infrastructure. Thailand’s infrastructure investment was driven by construction of new roads and railways in the past and recently by investments in double-track railways, high-speed railway and ports. Those are physical infrastructure. 
According to the 12th national economic and social development plan( 2017-2021), public investment is set at Bt 2.1 trillion, accounting for 18.7 per cent of total government spending. Of this, 70 per cent was road and rail investment while just 1.3 per cent was allocated to digital infrastructure investment, Naris said.  
   The next challenge is how to decentralise economic development, making it spread throughout the country from a concentrated development in few provinces currently. Four provinces -- Rayong, Bangkok, Chonburi, and Ayutthaya -- have generated income as high as 50 per cent of GDP, with not much change over the past 10 years. And 75 per cent of the national income is concentrated in just 17 provinces out of 77.
In comparison, China's giant-sized economic development is spread throughout its regions unlike Thailand’s. 
 The spreading of China’s economic prosperity has resulted in a more even distribution of per capita income, said Naris.   
  The Thai bureaucracy and red tape have hindered economic development, therefore the country needs to seriously reform outdated laws and regulations. The country had taken some actions in regulatory Guillotine efforts  but the Covid-19 pandemic partly disrupted it. The government needs to continue the efforts to encourage FDIs, Naris said.  

Lastly, Thailand needs to expand its tax base to solve rising public debt and to reduce the burden of people and corporations who are already in the tax system. 
Out of the 38 million labour force, 29 per cent are in personal income tax system; 4.5 million have paid annual personal income tax while 6.5 million have filed tax returns but not needed to pay taxes. A large number of people, or about 27 million, are outside the personal income tax system. 
Among corporations, just 10 per cent of them pay corporate income tax. There are about 3.1 million corporations, 340,000 of them pay taxes, including 300,000 SMEs, and large companies make up the rest, which suggests that few large corporations pay taxes, he pointed out.    
 “Restructuring of Thailand's economy for the next 10 years needs more coordinated efforts from both the government and private sectors. The government may be currently busy with combating the Covid outbreak but after the situation improves, the government needs to continue its efforts to reform the economy,” Naris added

Published : June 30, 2021

By : The Nation