Foreign Investors Making Contingency Plans in Thailand

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China’s available manufacturing capacity is being ignored due to cost

As the political crisis in Thailand deepens and begins to extend into mass civil unrest, disruptions and violence, foreign companies are beginning to make contingency plans concerning their operations in the country.

Some of Dezan Shira & Associates clients are already starting to shift production quotas to other factories in the region, with Malaysia, Indonesia and Vietnam all being put forward as taking up manufacturing capacity from Thai-based plants. China is largely being ignored at this juncture due to the inflexible nature of labor laws making it hard for companies to place short-term manufacturing orders with the country, and the higher cost of labor even though China has large amounts of excess production capacity. China’s Free Trade Agreement with ASEAN is comprehensive, but not sufficient to offer blanket coverage on enough items to allow production to be moved from an ASEAN member state to China without incurring additional import duties, an issue China should be looking at.

Thailand issued a 60-day State of Emergency effective from today, effecting Bangkok and surrounding districts. The timeframe includes the scheduled general elections due to be held on February 2nd. The decree grants Thai security forces additional capabilities, such as being able to impose curfews, detain suspects without charge, and forbid entry into unsafe areas. Over the past few days, violence in the capital has increased with grenades being thrown and a couple of bomb attacks. Civil unrest has also closed government offices, including various government ministries, banks, and threatened to disrupt airport operations. Numerous airlines have already begun withdrawing services from and to Bangkok, and has also lead to mass cancellation of vacations scheduled for inbound tourists for the upcoming Chinese New Year.

Although there has been no reported violence against any foreign owned businesses, retail outlets in Bangkok have seen a sharp decline in turnover, affecting a number of foreign owned franchises. Other businesses housed in Bangkok’s suburbs, including light manufacturing and agricultural operations, have been moving part of their production to other locations in ASEAN.

Chris Devonshire-Ellis of Dezan Shira & Associates comments, “The unrest in Thailand actually highlights a couple of key points concerning ASEAN. Firstly that the blanket free trade agreement between ASEAN nations does allow fast and responsive relocation of manufacturing capacity to another member state without tax penalty. This is useful not just as a contingency plan as is the case here, but also in happier times when production is booming and additional capacity needs to be sourced quickly. It also highlights the need for China to integrate better with ASEAN and expand the scope of products contained with the China-ASEAN FTA itself.”

“Chinese manufacturers are losing out in competitiveness due to the lack of foresight in being able to take advantage of events such as this. Production that moves temporarily has a habit of staying put, and Chinese manufacturers, many themselves going through tough times, are losing out to other ASEAN countries as a result of the lack of product identified with the FTA,” he further commented.

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