Wage rises and costs driving garment industry to set up shop out of Thailand

The populist government policy to increase minimum wages to Bt250 per day within two years will directly hit labour-intensive industries, particularly the garment industry, forcing manufacturers to build plants outside the Kingdom to maintain competitiveness.

Vietnam, Indonesia, Bangladesh and China are among the countries where Thai exporters foresee business opportunities in the future. Some Thai companies have already been running plants in Vietnam for several few years.

The "unreasonable" increase in minimum wages from Bt215 to Bt250 within two years will reduce the country's competitiveness. The entire burden will be placed on manufacturers, making it more difficult for them to quote competitive prices.

As a result, they will have to expand their businesses outside the Kingdom, taking advantage not only of cheap labour but also tax privileges that the countries will gain from free-trade agreements.

The success of the strategy will pave the way for Thailand to become a trading hub for garments, like Hong Kong, with Bangkok becoming the headquarters, dealing with investment planning, product development through to material-sourcing.

Sukij Kongpiyacharn, president of the Thai Garment Manufacturers Association, said in an interview with The Nation that the six largest Thai garment manufacturers - Nice Apparel, Hi-Tech Group, Thong Thai Textile, Nan Yang Textile, Liberty Garment and Hong Seng Knitting - are surveying locations in three potential countries to set up plants.

Almost all of their manufacturing focuses on sportswear. They will invest an average of US$8 million to $10 million (Bt242 million to Bt303 million) on setting up the new sites.

Those major players had combined sales of $700 million of total Thai exports of $3.2 billion last year.

Liberty Group set up a plant in Ho Chi Minh City, Vietnam a few years ago and employs about 2,000 workers. Nan Yang Textile has established a plant in China.

It is expected that the forthcoming investments of all six companies will employ at least 25,000 workers.

Sukij pointed out that the garment industry mainly relied on labour-intensive production, with manufacturers already paying higher than the minimum wage. For instance, general skilled labourers earn an average of Bt300-Bt400 per day with two hours overtime.

He said this was the first wave of Thai garment manufacturers investing abroad, though more companies were thinking about following them.

"The minimum wage in Thailand should apply to foreign labourers rather than Thai skilled workers, which we should focus on," stressed Sukij, saying Thai workers should focus more on technical manufacturing for higher wages.

Investment abroad will encourage Thailand to focus more on medium to high-end products. The Thai garment industry is able to produce high-technology products with ultra-sonic cutting, laser cutting and laser fill techniques to make sportwear such as swimming suits that need seamless cutting.

Production outside the Kingdom should concentrate on basic-goods manufacturing.

Many of the manufacturers see Vietnam as base for their new plants as its government's policies have supported foreign direct investment. In addition, exports from the country to the United States will enjoy tax privileges and low tariffs under the Trans-Pacific Partnership.

Sukij is also managing director of Hong Seng Knitting, which he said is planning to set up a second manufacturing base in Kang Nam province of Vietnam with a 50-year land lease. Construction is scheduled to start this year.

Vallop Vitanakorn, chairman of Hi-Tech Group, said Vietnam was a suitable location for a new plant as the living and working culture was similar to Thailand's.

The group plans to set up a factory employing 5,000 workers in Danang, in central Vietnam, with an investment of $10 million. The group is in the process of establishing a company and applying for investment privileges there.

"The Vietnamese government is attracting foreign direct investment by offering attractive tax privileges, and it is not far away from Thailand," he said, pointing out that foreign investors enjoy tax exemption for the first four years of operation and a 50-per-cent tax rate for another nine years. They are subject to normal rates after 15 years.

Vallop said there were many countries where Thailand could invest but Cambodia, Laos, Burma and Vietnam were the most interesting now.

Vallop warned that if the government's policy on labour wages remained unchanged, it would affect the new wave of investment into Thailand, not only from Japan but also other countries.

Dej Pathanasethpong, president of Thong Thai Textile, said he would survey potential sites in Bangladesh and Indonesia this month. Dej has already surveyed the investment environment and supporting factors in Vietnam. Labour wages in Bangladesh are lower than in Vietnam, he said.

The company's overseas investment plan will see it spend $12 million, with production capacity developed into the same size as Bangkok's within two to three years.

"Having manufacturing plants abroad will double our sales within the next three years from a current target of Bt3 billion this year," Dej said.

However, Thailand will be developed as a business model for management and a design centre for manufacturing outside the Kingdom in the future. The manufacturing base abroad will absorb orders that plants in Thailand are unable to handle.

"The government policy of only giving money to people and high corruption will lead the country to repeat what happened in the Philippines in the past, with politicians enjoying spending from tax collection. In fact, money from tax collection should be spent on infrastructure development," Dej said.