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Thai crisis puts Japanese companies on notice

by Pavin Chachavalpongpun

Special To The Japan Times

The Thai political crisis shows no sign of subsiding. Indeed, political violence is on the rise. And since Thailand is an important part of the regional economy, its problems have has produced far-reaching effects on its economic partners, including Japan.

Already the crisis has exacted a toll on the Thai economy. This year Thailand’s economy is expected to grow 4.3 percent, down from an earlier projection of 5.2 percent. Economic growth could fall to as low as 3 percent if the political unrest persists.

For now, many foreign investors remain committed to Thailand, although Japanese companies are closely monitoring Thai political developments. They have put in place backup plans to avoid unfavorable consequences as a result of an escalation in political conflict.

Echoing the apprehension of Japanese businesses, Japanese ambassador Shigekazu Sato, in December 2013, expressed his own concern over Thailand’s political uncertainty.

Referring to the stance of Prime Minister Shinzo Abe and Foreign Minister Fumio Kishida, Sato said: “As the largest foreign investor in the country with a big Japanese community living here, we wish for all parties concerned to resolve the conflicts in a peaceful and democratic manner within the framework of the constitution.”

One of Japan’s backup plans is the realization of the Thailand-Plus One business model. But it is imperative to clarify that the Thailand-Plus One policy did not originate at the governmental level; nor was it a direct response to the Thai political crisis.

It was an idea catalyzed by the Japanese business community, which had looked into the possibility of relocating some of its labor-intensive productions into Thailand’s neighboring countries, namely Cambodia, Laos and Myanmar (CLM).

The Thailand-Plus One business model could come to the rescue of Japanese businesses in Thailand if the political conflict persists, as it would surely affect their confidence.

Sihasak Phuangketkeow, permanent secretary of the Thai Foreign Ministry, even admitted that Japanese companies have strategically shifted parts of their businesses concentrated in Thailand to “Plus-One” locations such as Laos and Cambodia to avert the risks from political unrest and natural disasters in Thailand.

The Thailand-Plus One initiative is not new, but rather an imitation of an earlier China-Plus One policy.

Japan businesses are now implementing this policy to relieve economic burdens, exploit opportunities in growing markets in Thailand’s orbit and diversify political risks away from the kingdom.

It is important to note that, as in the Chinese case, instead of continuing to search for sophisticated markets to pursue lucrative businesses, Japanese companies are attracted to the idea of linking their production bases in Thailand with small- and medium-sized cities in the border area as alternative locations for manufacturing.

Needless to say, economic and political conditions in Thailand provide a rational behind the initiative. Economically speaking, and as alluded to earlier, labor-intensive industries in Thailand have increasingly become nonviable because of rising wages and labor shortages.

In terms of political risk, relentless conflicts marked by intensifying political violence are expected to delay foreign direct investments including those from Japan.

The prospect of the conflict coming to an end is slim. Political uncertainty is thus responsible for the partial relocation of Japanese production from Thailand to neighboring countries.

Moreover, Thailand’s neighbors have improved their domestic economic conditions. Rapid economic growth is being seen in Cambodia, Laos and Myanmar. Their growth rates have exceeded those of the original members of the Association of Southeast Asian Nations.

Meanwhile, the governments of Cambodia, Laos and Myanmar are eager to welcome foreign investors. They are formulating attractive policies to ensure continued inflows of foreign money into the countries. Incentives on offer to potential investors, near and abroad, include upgrading infrastructure, making business laws more equitable, allowing economic concessions to attract foreign investments and guaranteeing political stability.

Abe’s visit to the three countries last year signaled Japan’s seriousness in forging stronger business ties with them.

What’s the impact for Thailand?

The original idea behind the Thailand-Plus One policy was to provide a useful tool for both Thailand and Japan. Japan has never wanted to abandon its long-term investments in Thailand in light of the strength of the Thai economy, its skilled labor forces and a considerably reliable production process.

The Thailand-Plus One initiative was designed to consolidate Thailand as a regional hub of manufacturing that would take charge of other, smaller-scale production bases in Cambodia, Laos and Myanmar.

Japan would also be able to expand its economic presence in the region, not only to pave the way for potential investments from Japanese businesses but also to raise Japan’s own competitiveness in an era of a fierce competition with China.

From this perspective, Japan’s Thailand-Plus One policy is a win-win formula for its businesses and local hosts in the region.

It is, however, undeniable that the political crisis in Thailand has partly influenced Japanese companies to search for more reliable local partners.

With Japanese investors already nervous about a fragile global recovery, competition with China and Japan’s own economic recession, Thailand’s political stalemate could hurt its appeal as an investment destination for Japanese business and lead to dangerous outflows of capital.

After more than three months of political demonstrations in Bangkok, the impact on the economy is palpable. With the tourism industry being hit hard by the political impasse, foreign investors have delayed their purchasing decisions.

Unavoidably the relocation of branches of Japanese production to the CLMs at this critical point signals diminishing confidence in the Thai economy.

As the largest economy in mainland Southeast Asia, second only to Indonesia in ASEAN, Thailand’s economic trajectory, during the current crisis and in its aftermath, will play a vital part in the regional economy in the context of ASEAN.

Japan’s Thailand-Plus One policy may come to fix a part of its own investment dilemma in the region, but it could also sound the alarm on the seemingly never-ending instability in Thailand.

Pavin Chachavalpongpun is associate professor at Kyoto University’s Center for Southeast Asian Studies.

  • http://www.sheldonthinks.com/ Andrew Sheldon

    I question the value of that strategy. Yes, labour costs are rising in Thailand, but they are rising in ‘cheap labour’ countries as well, and these are investments which are going to last 20 years; NPV impact in 16 years. The solution is not to take a capital and transport cost hit today to save money down the road. It would make more sense to intensify the use of capital in Thailand. The problem is the emphasis on risk, and people’s attitude to risk. Risk is not avoided, its broken down and understood. The fact that Thai people are challenging the nature of their government is a healthy sign of a maturing populating challenging embedded ideas. The fact that they are not resorting to violence is a positive step. Investing in Cambodia strikes me as ‘silly diversification’ rather than any coherent appraisal of risk, particularly when you consider issues of non-substitutability of components used to produce finished products. It strikes me as carrying a very tangible cost today because of a fear one refuses to appraise; presumably because one has a sceptical world view.