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Saowaruj Rattanakhamfu Somkiat Tangkitvanich

Wirot Sukphisan Ploy Thammapiranan

Thailand Development Research Institute

Abstract

As a result of higher wage and labor shortages in

Thailand, Thai companies in labor-intensive industries

are forced to find the new business model to remain

competitive. In the short run, some companies may

choose to relocate their production bases to

neighboring countries with lower wage rates to

maintain their traditional cost comparative advantage.

However, in the long run, they have to move up their

value chain by adding higher value added activities,

such as research and development (R&D), design,

marketing, and branding to stay competitive.

This paper aims at finding out the possibility of

relocating Thai production bases to neighboring

countries, especially CLMV (Cambodia, Lao PDR,

Myanmar and Vietnam), as well as who are likely to

relocate, how and where? It also draws policy

implications regarding the role of the

government in facilitating the relocation process as

well as in increasing the competitiveness of these

industries.

1. Introduction

Labor intensive industries, especially textile and

garment, shoes and leather goods, and gems and

jewelry, have played an important role to Thai

economy as the major export industries as well as the

main employment sources. In terms of exports value in

2012, textile and garment, and gems and jewelry

industries contribute to 3.2 and 2.6 percent,

respectively. In addition, textile and garment industries

employ about 11.8 percent of the total employment in

the manufacturing sector in the same year.

However, the competitiveness in these labor

intensive industries has declined. Figure 1 shows that

their market shares in the world market have decreased

over time.

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

advantage in labor intensive industries due to its cheap

and abundant labor. However, the continual increase

in wages decreases its comparative advantage. In the

short run, one way to stay competitive in labor-

intensive industries is moving the production bases to

low-wage countries. They still have to move up their

value chain by R&D, design, marketing or creating

own brands to be competitive in the long run.

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

section will describe where to relocate. The fifth

section will provide case studies of companies

relocating to neighboring countries. The cases will not

only highlight why and how they have relocated but

also help us draw lessons on the factors that determine

the successful relocation. The sixth section will

compare the production cost differences in different

locations, namely Bangkok, Ho Chi Minh City, and

Yangon. The last section will summarize and provide

policy recommendations.

2. Possibility for relocating labor-intensive industries to neighboring countries

22 東協瞭望 009

The flying geese theory is proposed by Akamatsu

(1962) 1 to explain the phenomenon of industry

development in East Asia. This theory explicates that

the economic development model in Asian countries is

similar to a flying-geese pattern such that more

developed countries move their production bases to

less developed countries, starting from Japan as a

technology leading country to Newly Industrializing

Economies (NIEs) (i.e., South Korea, Taiwan,

Singapore and Hong Kong), then old ASEAN members

(i.e., Malaysia, Thailand, Indonesia and Philippines)

and finally new ASEAN countries (i.e., Vietnam,

Cambodia, Lao PDR, and Myanmar).

The main driver of a change in production pattern

is the internal restructure of leading countries. That is,

an increase in wages in more developed countries

reduces their comparative advantage in labor-intensive

products; therefore they have to relocate low-value

added activities to less developed countries with lower

wages.

The flying geese theory can explain the

production pattern in Southeast Asia well. 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.

In Thailand, most manufacturers are original

equipment manufacturers (OEMs)2. Of them, only 5

percent conduct research and development (R&D)3,

therefore their comparative advantage mainly depends

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

on labor costs. As domestic labor costs have escalated

significantly, these companies, especially in labor-

intensive industries, find it increasingly hard to

continue their operations in Thailand. Some have

relocated their production bases to lower wage

countries, especially Vietnam, Cambodia, and Lao

PDR and lately Myanmar.

In particular, the reduction in competitiveness of

Thai labor-intensive industries is due to the following

reasons.

Firstly, wages have continuously increased in

Thailand. Recently, a nationwide increase in the daily

minimum wage to 300 baht (or 9.7 USD4) has further

reduced the already thin profit margins of labor-

intensive industries.

Continual rise in labor cost has gradually

diminished Thailand’s cost advantages in labor-

intensive products in the international market. Figure 2

shows the differences in the average labor wages in

some labor-intensive industries between 2007 and 2013.

During this period, the average wages in these labor-

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



The wage in the shoes and leather goods industries



The wage in the gems and jewelry industries also



4 The average exchange rate in 2013 is 30.73

baht/USD. (source: www.bot.or.th)


Recently, due to the introduction of new daily

minimum wage policy started in some provinces in

April 2012 and nationwide in 2013, the annual growth

rates of wages in these industries have jumped

enormously to 23 percent in textile industry, 11 percent

in garment industry, 10 percent in shoes and leather

goods industries, and 35 percent in gems and jewelry

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

industries have become more sensitive to the external

pressures, such as Thai Baht appreciation 5 .

Furthermore, some of them are at risk of shutting down

their businesses. Based on the data from the Office of

Industrial Economics, our estimation shows that after

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)

the introduction of new minimum wage policy, the

average profit margin of textile and garment industry is

down to only 1.9 percent. Moreover, companies in the

shoes and leather goods industries as well as those in

the gems and jewelry industries could potentially suffer

a loss (Figure 3).

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

unskilled labor, becomes increasingly severe in Thailand.

During the past ten years, the unemployment rate has

gradually decreased, so as the absolute number of the

unemployed, as shown in Figure 4. In 2013, there are

less than 300,000 unemployed workers in Thailand, and

the unemployment rate stands at only 0.7 percent.

Source: National Statistics OfficeFigure 4: Number of unemployed and unemployment rate in Thailand


Looking forward in the future, Thailand is

quickly approaching the aging society. Figure 5 shows

that the shares of people with the age of 60 and above

to the total number of population in Thailand have

exceed 10 percent since 2004, and continued

to increase to almost 13 percent in 20126. According to

the World Population Prospects prepared by the United

Nation, Thailand will reach the stage of aging society

before any other countries in Southeast Asia, excluding

Singapore7.

Thirdly, competition from other countries,

particularly emerging economies, becomes more and

more intense in the world export market. Figure 6

shows that China has sharply increased its market

share of manufacturing products in the world market

since 2003. Currently, Thailand’s main competitor for

the low-end market is China, which has comparative

advantage in cheap labor. Although India has slightly

increased its market share which is still at the low level,

its market share is likely to increase when it gradually

industrializes. It is expected that India will become

another main competitor in labor-intensive products

because India recently started developing its

manufacturing sector, and will become one of the most

attractive manufacturing destinations due to its abundant

supply of cheap labor and large domestic market.

6 Source: National Statistics Office, Thailand 7 http://esa.un.org/wpp/Excel-Data/population.htm

Source: National Statistics Office

Figure 5: Share of people with the age of 60 or above

26 東協瞭望 009

Source: UN Comtrade

Figure 6: Market shares of manufacturing products in the world market

Finally, Thailand is facing more difficulties to

access major export markets, compared with its

competitors due to two main reasons. The first reason

is that Thailand’s main trade partners are in the process

of trade negotiations with its main competitors. For

example, Malaysia and Vietnam are not only

participating in the Trans-Pacific Partnership (TPP)

trade negotiation, but also actively negotiating a

bilateral free trade agreement with the EU, while

Thailand is negotiating only with the EU. If their

negotiations are successful, they will have tariff

advantages over Thailand in these major markets.

Furthermore, some agreements are already effective,

such as Economic Partnership Agreement (EPA)

between Japan and Indonesia (effective since 2008),

and EPA between Japan and Vietnam (effective since

2009). The conclusion of these agreements swipes

Thailand’s tariff advantages over its main competitors

in the Japanese market. Thailand is also graduating

from the Generalized System of Preferences (GSP)

granted by the US and the EU. For example, the EU

abolished the GSP privilege for gems importing from

Thailand during 2006-2016. Moreover, it is highly

likely that the EU will abolish the GSP privileges for

all manufacturing products from Thailand in 2017.

3. Who are likely to relocate, how and why?

In this section, we provide description of

companies that are likely to relocate and the way they

are expected to relocate. We select three labor-

intensive industries, namely textile and garment, shoes

and leather goods, and gems and jewelry, for our in-

depth study. Based on data collection from the field

trips and interviews with trade associations and

government agencies in these countries, we find that

large enterprises (LEs) are more likely to relocate or

expand their production bases to low wage neighboring

countries than SMEs due to their ability to take more

risks. In addition, the low value-added, labor-intensive,

and low-tech production processes are likely to be

relocated or expanded to neighboring countries. For

example, for the textile and garment industries, such

production processes are cutting, sewing and making

China

India


garments, especially sport-specific clothing, non-

fashion apparel, and uniforms. For the shoes and

leather goods industries, such processes are non-

fashion athletic and leather footwear production and

preparation, including replicating, cutting, insole

decorating, assembling and trimming. Similarly, for

the gems and jewelry industries, the unsophisticated

final production processes for medium and low-end

products, particularly costume jewelry, are prone to be

relocated to neighboring courtiers.

From our research, it appears that the common

form of relocation to neighboring countries with

abundant supply of cheap labor is direct investment by

setting up factories. In some cases, Thai enterprises

may choose to have joint investment with local

partners. Another alternative is to outsource their

production to suppliers in those countries. In general,

the main reason to relocate to these low wage countries

is to maintain their cost comparative advantages.

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

Comparing to enterprises in textile industry,

enterprises in garment industry are more likely to

relocate their production bases to neighboring countries,

especially CLMV. This is because the production

processes of the textile industry in Thailand are

involved with higher levels of technology and skilled

labor than those in the garment industry. In the latter,

most enterprises are large enterprises and are OEMs

producing sportswear, non-fashion apparel items and

uniforms. The production processes performed in

these low wage countries are cutting, sewing and

making garments.

The main mode of relocation of production in this

sector is foreign direct investment, either by a single

company or by groups of companies in the same cluster.

While the new companies are mainly wholly-owned by

Thai investors, if allowed by the law, some are jointly

owned with local investors. The advantages of joint

investment are better access to local knowledge and

understanding about domestic market demand and

stronger connection with local authorities. The

disadvantage is the risk related to the differences in

views and interests of the shareholders. We also find

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

for global brands, are pressured by their buyers to

move to lower wage countries to maintain their cost

advantage.

28 東協瞭望 009

Finally, neighboring countries have trade

preferences from main export markets, such as the US,

the EU and Japan. For example, the EU has lifted the

sanction against Myanmar, and provided it with GSP

effectively since 19 July 2013. Under the EU’s

“Everything but Arm” scheme, Myanmar will enjoy

trade preferences by getting exemption from import

tariffs to the European market for all products, except

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

goods industries that have relocated to neighboring

countries are relatively large because larger companies

are more capable than smaller ones to deal with

business risks in neighboring countries. In particular,

they are better equipped to handle regulatory risks and

inefficient financial system. Some of them are original

brand manufacturers (OBMs), while others are OEMs

for global brands.

The production processes likely to be moved to

neighboring countries are those that are highly labor-

intensive, produce low value added, and use low

technology level. Examples of such processes are

production and preparation of non-fashion athletic and

leather footwear, including replicating, cutting, insole

decorating, assembling and trimming.

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

better access to local knowledge and understanding

about domestic market demand and stronger

connection with local authorities. However, the

disadvantages are difficulties in finding reliable local

business partners and the risks related to corporate

governance. Finally, the advantage of outsourcing is

the reduced investment risks, while the disadvantage is

the risk of losing control over production.

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

global brands are pressured by their buyers to move to

lower wage countries to maintain their cost advantage.

In addition, for some OBMs, the domestic market is

quite saturated and facing fierce price competition from

Chinese products; therefore they turn to expand their

markets in neighboring countries which have rapid

economic growth, increased purchasing power and

similar preferences for products.

3.3 Gems and jewelry industries

Similar to the above two industries, the low value-

added, highly labor-intensive, and low-tech production

processes of unsophisticated final production processes

for medium and low-end products, especially costume

jewelry, are prone to be relocated to neighboring

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


invest in these new markets by setting up production

bases and distribution channels. In contrast, some of

them are companies interested in raw materials in rich

natural resource countries; therefore they have joint

investment with local partners who have strong

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.

However, relocating gems and jewelry production

bases to neighboring countries is relatively more

challenging than relocating apparel or shoes production

bases because labor in gems and jewelry industries are

rather skilled or semi-skilled which require investing

heavily in training.

4. Where to relocate?

Regarding target countries for relocation, Thai

companies are likely to move to CLMV due to their

large supply of cheap labor and their geographical

advantages. Among CLMV, the country with the

lowest monthly wage for factory worker is Myanmar

(USD 53 in Yangon), followed by Cambodia (74 USD

in Phnom Penh), Lao PDR (132 USD in Vientiane) and

Vietnam (148 USD in Ho Chi Minh City)8. In terms

of labor force, the country with the largest number of

labor force is Vietnam (52.9 million), followed by

Myanmar (33.3 million), Cambodia (8.4 million) and

Lao PDR (3.3 million)9.

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

development plan for road and rail transportation in

Greater Mekong Subregion (GMS) countries and the

emerging economic corridors are connecting Thailand

with these countries. Under the GMS development

program, three economic corridors are intersected in

Thailand: the East-West Economic Corridor

(connecting Vietnam, Lao PDR, Thailand and

Myanmar), the North-South Economic Corridor

(connecting the Southern provinces of China, Myanmar,

Lao PDR, Thailand, and Malaysia) and the Southern

Economic Corridor (connecting the Dawei deep sea

port of Myanmar, the Laem Chabang deep sea port of

Thailand, and Cambodia), as shown in Figure 7. It is

expected that the economic corridors will play a key

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

In addition, CLMV have advantages in terms

of trade privileges granted by major markets, as shown

in Table 1. For example, the EU provides duty free

and quota free, with the exception of armaments, for

import from Cambodia, Lao PDR, and Myanmar, as

they are least developed countries under the Everything

but Arms (EBA) initiative.

Table 1: Trade preferential from major markets

Major markets Cambodia Lao PDR Myanmar Vietnam

US Zero tariff rates and no quotas No GSP benefit

Under the process of easing economic sanction

Under the TPP negotiation

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.

• Textile 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

Note: Data covered only products under GSP and EBA schemes.

Source: http://www.npu.ac.th Figure 7: Economic corridors connecting Thailand and neighboring countries


In spite of the aforementioned strengths, Thai

companies planning to relocate to CLMV should be

aware of some pitfalls. For example, Vietnam still

faces some problems waiting to be solved. These

include the sharp increases in wage rate, unclear law

and ineffective enforcement, inefficient infrastructure

and unstable macroeconomic conditions, especially

high inflation, high level of non-performing loans

(NPLs) in the banking sectors, and low confidence in

the local currency.

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-

developed banking system, the lack of market

information, uncertainty of laws and regulations as

well as political instability.

5. Some case studies of Thai companies relocating to neighboring countries

This section provides some case studies of Thai

companies in labor intensive industries relocating to

neighboring countries to draw lessons why and how

they have relocated and how they have been so far

successful. Three case studies include a Thai garment

factory in Vietnam, and a Thai shoes factory

subcontracting to a local supplier in Myanmar, and a

Thai wholly-owned jewelry factory in Vietnam.

5.1 Case study of a Thai garment factory in Vietnam

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

have three factories in Thailand, but there is currently

only one domestic factory. The company executives

decided to relocate to Vietnam since 4-5 years ago due

to increases in wages, and the difficulties in hiring

unskilled labor in Thailand. The main factors to set up

manufacturing facilities in Vietnam are abundant

supply of cheap labor, high growth rate of population,

and existing trading partners. The first factory in

Vietnam is located in Giao Long Industrial estate in

Ben Tre province, with the area of 100,000 square

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.

The advantages of setting up factories in Ben Tre

province over Ho Chi Minh City are lower wages (80

USD difference per worker per month) and easier to

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

training courses to local workers in order to assure their

quality of production. This is because labor

productivity of Vietnamese workers at the moment is

comparatively lower than that of Thai workers.

Furthermore, the costs of learning the country’s laws

and regulations and dealing with different law

interpretation by different government officials are

another item of business cost that cannot be ignored.

5.2 Case study of a Thai shoes factory subcontracting to a supplier in Myanmar

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

keep its cost comparative advantage by relocating some

production lines to Myanmar. The company outsources

CMP (Cut-Make-Pack) operations to a Myanmese sub-

contractor. To assure the quality and standard of

production, the 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.

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.

5.3 Case study of a Thai jewelry factory in Vietnam

Pranda Jewelry Public Company Limited, a Thai

leading manufacturer of medium-to high-end quality

jewelry, has established four factories in Thailand and

expanded its manufacturing bases into other countries,

including Vietnam, Indonesia, and Germany. Pranda

Vietnam Company Limited has been operating in Dong

Nai Industrial Zone since 1995. The main reasons to

set up a factory there are low wage, high potential

domestic market and GSP privileges from the EU,

which is one of Pranda’s main markets.

Currently there are about 200-300 workers in the

Pranda Vietnam’s factory. Although still low

comparing to Thailand’s, the wage in Vietnam is

quickly increasing. For example, wages have increased

three times in a single year of 2012, resulting in an

average monthly wage of 120 USD. The quoted wage

rates are exclusive of social security contribution at

17% in 2013 and recently increased to 18% in 2014.

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.

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

outlet in Vietnam from 4 in 2012 to 16 in the near

future.

While labor cost is on the rise, business

environment in Vietnam has improved during the past

five years. In terms of public utilities, both roads and

electricity system have been upgraded, even though

power blackouts are still the problem in Vietnam,

especially in the dry season. The government has also

amended laws and regulations to be friendlier to

foreign investors. However inconsistency in law

interpretations among government agencies remains a

problem. In addition, bureaucratic red tapes add more

cost in doing business in Vietnam.


6. Cost structure analysis

This section compares the differences in the ex-

factory production cost in some cities in neighboring

countries, namely Yangon and Ho Chi Minh City,

comparing with that of Bangkok. The costs in the two

cities are obtained by imputing the production cost of

factories in Bangkok, adjusted for the differences in

labor and facility costs among the three cities. The

production cost of Bangkok factories in the three

industries are obtained from data collected by the

Office of Industrial Economics.

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

ex-factory cost is the least in the gems and jewelry

industry. The key factor contributing to the cost

differences among these three locations is the cost of

labor. It is noted that Yangon has the lowest cost of

labor, but the highest electricity cost among these three

locations. However, in general, Yangon is still the

location with the lowest ex-factory cost of products in

all the three industries.

Table 2: Factory costs of products in the three industries in different locations

Industry Bangkok Ho Chi Minh City

Yangon

Garment 100.00 90.16 86.19

Shoes and leather goods

100.00 92.21 83.95

Gems and jewelry

100.00 95.98 93.73

Source: Authors, based on field-trip data and the Office of Industrial Economics’s survey

6.1 Textile and garment industries

Based on our estimation, if the ex-factory

production cost in the garment industry in Bangkok is

normalized to 100, the production costs in Ho Chi

Minh City and Yangon are 90.16 and 86.18,

respectively (Table 3). The main factor contributing to

the different production costs is the gaps in labor cost.

The city with the highest labor cost is Bangkok,

followed by Ho Chi Minh City and Yangon,

respectively. Although Yangon has relatively cheaper

labor cost, it has severe electricity shortages. Factories

there need to have their own electricity generators to

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

raw material 47.05 47.05 47.05

labor* 22.91 18.46 9.39

office cost 6.83 3.54 1.92

electricity 4.15 2.05 8.74

water 0.05 0.04 0.09

others 19.01 19.01 19.01 Total production cost at factories **

100.00 90.16 86.19

Source: Authors

Note: * labor cost includes labor wage, and employers’ payment for social security contribution

** exclusive of logistics and transportation cost from factories to ports

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

Bangkok is the highest, while that in Yangon is the

lowest. In particular, if the production cost of shoes

and leather goods is normalized to 100 in Bangkok, the

production costs would be 92.21 and 83.95 in Ho Chi

Minh City and Yangon, respectively (Table 4). Again,

the main factor contributing to the difference in

production costs is labor cost. The city with the

highest labor cost is Bangkok, followed by Ho Chi

Minh City and Yangon, respectively. Unlike the

garment production cost, the differences in electricity

cost in the shoes and leather goods production in

Bangkok and Yangon are not much because the

production process of shoes and leather goods requires

lower share of electricity usage than that of the garment

products.

Table 4: Comparison of shoes and leather goods production costs in Bangkok, Ho Chi

Minh City and Yangon


Yangon

raw material 46.10 46.10 46.10

labor* 20.13 17.77 9.16

office cost 9.58 4.97 2.69


water 0.08 0.06 0.14

others 22.53 22.53 22.53

Total production cost at factories **

100.00 92.21 83.95

Source: Authors



6.3 Gems and jewelry industries

Likewise, the production costs of gems and

jewelry are different in three cities, although the gaps

are not as significant as in the two industries previously

discussed. In particular, if the ex-factory production

cost in Bangkok is normalized to 100, the production

costs would be 95.98 and 93.73 in Ho Chi Minh City

and Yangon, respectively (Table 5). Unlike the other

two products, the costs of gems and jewelry production

in these three cities are not significantly different

because the share of labor cost in this industry is only

about 12 percent, only about half of those in the other

two industries. Similar to the other two industries, the

main factor contributing to the differences in

production cost among the three cities is labor cost.

The city with the highest labor cost is Bangkok,

followed by Ho Chi Minh City and Yangon.

Table 5: Comparison of gems and jewelry production costs in Bangkok, Ho Chi Minh

City and Yangon


Yangon

raw material 64.11 64.11 64.11

labor* 12.17 9.55 5.54

office cost 1.54 0.80 0.43


water 0.10 0.08 0.18

others 20.82 20.82 20.82

Total production cost at factory **

100.00 95.98 93.73

Source: Authors



7. Conclusion and policy recommendations


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

to increase their competitiveness. However, some

companies may not be able to do so, and choose to

relocate their production bases to neighboring countries

with lower wage rates. In this case, the off-shoring

production activities should be limited to low value-

added ones, such as cutting and making, while keeping

high value-added activities, such as design and

marketing, in Thailand. Companies may consider

keeping their local production to serve customers that

require short-time delivery, which needs close

monitoring and engagement.

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

move up the value chain to higher value-added

activities, by transforming themselves to preferred

OEMs, ODMs or OBMs.

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 labor-

intensive sectors.

7.1 Policy recommendations on supporting Thai companies to invest in neighboring countries

Firstly, the government should establish a one-

stop service unit which can provide both basic and in-

depth information necessary for making decision to

invest in neighboring countries (see Figure 8). The

basic information includes trade and tax rates,

incentives for foreign investors, laws and regulations

on foreign investment, availability and quality of

infrastructure, spatial and industrial information,

procedures and documents required for business

establishment. The in-depth information includes

information on market conditions and consumer tastes.

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

establishing special economic zones (SEZs) in the

border areas. The laws and regulations for these SEZs

should provide some privileges to investors, such as

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

Facilitating Thai investors in doing

business in neighboring

countries

Supporting SMEs to build business

linkages with local enterprises in neighboring

countries

One-stop service

Providing useful and updated information

Trade and tax privileges

Incentives for foreign investors

Availability and quality of infrastructure

Laws and regulations on foreign investment

Procedures and required documents for establishment

Spatial and industrial information

Marketing information

7.2 Policy recommendations on promoting industrial upgrading

The government should support and promote Thai

companies to upgrade their production capabilities to

higher value-added activities. The strategies for

sustainable competitiveness are varied according to

their production approach, as follows:

˙ Assemblers (e.g., garment makers)

In the short term, the assemblers may

offshore their production base to areas with

cheaper labor cost. They should also aim at

upgrading their production capabilities to be OEM

suppliers in the long term. In this regard, the

government should support their upgrading efforts

by facilitating access to capital and equipping them

with necessary skills concerning procurement and

logistics.

˙ Original Equipment Manufacturers (OEMs)

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,

they should strive to become preferred OEM

suppliers by complying with international labor

and environmental standards. In the long term, they

should upgrade their production to become ODMs.

Thus, the role of the government is to equip them

with technological knowledge and skills on design,

research and development as well as management.

˙ Original Design Manufacturers (ODMs)

In the short term, the ODMs should

strengthen their design and production capacities to

be more efficient. At the same time, they should

strive to become original brand manufacturers

(OBMs) in the long term. In this respect, the

government should support them to gain

knowledge and skills on branding, marketing and

customer services.

˙ Original Brand Manufacturers (OBMs)

Figure 8: One-Stop Service Unit


The OBMs might consider upgrading their

domestic brands to regional ones in order to

expand their markets. Correspondingly, the role of

government is to support their activities in

marketing and building international networks by

supporting them to expose themselves in regional

trade exhibitions and roadshows.

In general, to support Thai companies to upgrade

along value chains and to increase their competiveness,

the government should play the following roles.

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

and shoes and leather goods, are considered as sunset

industries. To promote greater access to capital,

government’s specialized financial institutions, such as

the Export-Import Bank and the Thai Credit Guarantee

Corporation, should play a leading role.

Secondly, government agencies should provide

support for SMEs to develop and strengthen linkages

among themselves as well as among them and large

companies. In this regards, the Department of Industry

Promotion should partner with related industry

associations to strengthen its cluster support programs.

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.

Fourthly, government agencies should support

SMEs to expand their marketing and networking by

providing useful and up-to-date information, such as

information on potential markets and technology. In

particular, the Department of Foreign Trade Promotion

should support them to attend international trade shows

and events.

Fifthly, the Ministry of Industry should encourage

the upgrading of SMEs’ technological capabilities by

focusing on technology development and technology

transfer through various activities, such as providing

industrial experts, promoting industrial network, and

strengthening the linkages between industry and the

academia.

Finally, relevant government agencies, especially

the Ministry of Industry, should encourage SMEs to

improve their manufacturing process in order to

achieve international standards, such as ISO 9000 and

ISO 14000. Manufacturers should also be promoted to

adopt lean manufacturing to make their operation more

cost efficient.

The government should declare this decade to be

“the Decade of Productivity Improvement” to set a

clear direction in which all relevant stakeholders will

follow. The government, business and workers are

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

paper, is currently a research fellow in Science and

technology development program at Thailand

development research institute. She earned her PhD in

economics at the University of Melbourne, Australia.

Her research specialties include applied economics,

development economics, science and technology

upgrading, and productivity upgrading.

Dr. Somkiat Tangkitvanich, the second author of this

paper, is currently the president of Thailand

development research institute. He earned is PhD in

computer science at the Tokyo institute of technology,

Japan. His specialties include trade policy, industrial

policy, ICT policy, and Media policy.

References

Akamatsu K. (1962) A historical pattern of economic growth in developing countries. Journal of Developing

Economies, 1(1):3–25.

JETRO. (2013) The 23nd Survey of Investment Related Costs in Asia and Oceania.

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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