ASEAN Economic Community 2015 Opportunity or Challenge ?

? When ASEAN was founded in 1967, the year 2015 was a good half of a human lifetime away and probably most of the founders could assume that they would leave active business life before any really impacting measures would ever come into effect. Today the situation looks slightly different. We are three years away from the AEC taking effect, and most businessmen and politicians can assume that they will still be active in business life when D-day hits. I wont raise the question whether Thailand is ready or what Thailand needs to do to get ready. Ill concentrate on possible scenarios that more or less likely could happen once AEC comes into effect, with a main focus on workers.

ASEAN

What really does come into effect? In a first step the AEC will allow free flow of Goods free flow of Services free flow of Investment free flow of Capital free flow of Skilled Labor

for 12 priority sectors which are: Agro-based, Healthcare, Air transport, Logistics, Automotive, Rubber-based, Electronics, Textile and apparel, e-ASEAN/ICT, Tourism, Fisheries and Wood-based.

A very short look a few years back and a quick view on China Thailand used to be a production country par excellence. Low labor cost, good product quality, somehow politically stable, pleasant people and a nice country. Business was booming. Over time production standards in regard to Environment, Safety and Health have been raised under the pressure from buyers; products have become more expensive; life expectations of workers increased; and salaries followed more or less. When China opened its market in about 2002-2005 all the buyers ran to China. The old production paradise had become too expensive for the western buyers. China was the benefit and competitiveness savior, the welcome alternative. ASEAN+3 Today, if you want your wife to spend less, tell her darling, you can buy anything you want, as long as it is not made in China. Youll see theres not much left for her to buy.

The tide is turning Aside from that the Chinese dream was spiced with some nightmare experiences for some buyers (see for example:Mattel Recalls 19 Million Toys Sent from China in 2007), China also went through the same progress steps as Thailand did years before, resulting in product prices going up. The price difference between China and Thailand as of today is negligible and some buyers have at least partially returned to their Thai producers or are again looking for alternatives. In addition to the increased price level, there are three other interesting aspects from China that we may want to keep in mind when looking at AEC. The Chinese one child per family policy has resulted in parents investing all their money into the education of their only child. This educated child will not become a worker. In a society where social status plays a role, it is very difficult for a women working as a worker in a factory to get married. Its one of the least desired jobs. The increasing domestic demand among the huge Chinese population, makes it less attractive and/or necessary for Chinese manufacturers to export their goods which is related to more paperwork, compliance with regulations etc. etc.

While the first two points bear the risk of creating a labor shortage, the last point will make it more difficult to find Chinese suppliers willing to deliver to western buyers with all their conditions. Therefore its again time for buyers to look around and find alternatives. And those alternatives are most likely located within the AEC.

LABORCOUNTRIES LARGE
INDIA INDONESIA CHINA

NONLABORCOUNTRIES

DOMESTICMARKETSIZE

Produceatlowcostforown lowcostmarket
VIETNAM

Produceathighcostforown highcostmarket
PHILIPPINES

JAPAN

THAILAND S.KOREA MYANMAR MALAYSIA AUSTRALIA

Produceathighcostforexport
CAMBODIA LAOS SINGAPORE

Produceatlowcostforexport
SMALL LOW

NEWZEALAND

LABORCOST

HIGH

The above graph shows a countrys position based on population and labor cost, including the ASEAN countries except Brunei (green), the ASEAN +3 countries (blue) and the ASEAN +6 countries (orange). The example from China leads to the assumption that countries with large populations may want to focus on producing for their domestic market, while countries with small populations may want to focus on export markets. Obviously cheaper labor cost will

result in cheaper products and therefore countries to the left side are more interesting for buyers than those to the right. While Thailand is definitely on the high cost side, the equally distributed cross fade suggests that Thailand should focus on producing for its own high cost market. One might however argue that the differences in population are not as linear as this simplified graphic illustrates. That is true. There is a much larger population gap between the Philippines and Indonesia than between the Philippines and Thailand. And there is a huge gap between Indonesia and India or China. That said it could be that only China, India and Indonesia with their really large populations qualify for produce for the domestic market. That ASEAN+6 would mean we move the red horizontal line upwards to include the Philippines and Thailand into the produce at high cost for export zone. This would however also result in Vietnam moving into the produce at low cost for export zone, becoming a direct export competitor for Thailand which is a very realistic scenario, making Thailands stand as exporter even more difficult.

When producing becomes too expensive While Thailand will lose some of its western production to low labor cost countries such as Myanmar, Cambodia and Vietnam, just the same as it had lost it to China, the AEC bears another two threats to the Thai worker. One is that under the AECs free flow of goods, services, investment and capital policy, Thai manufacturers with labor intensive production processes will be allowed to move their production to low labor cost countries, just the same as western countries used to move their labor intensive productions to Thailand. This will result in another cut of labor jobs in Thailand. Whether the lower production cost in neighboring countries will result in lower selling prices of these products when sold back in Thailand or just increase the benefit of those companies remains to be seen. The other threat is that the by then downsized Thai labor market will be highly attractive to foreign workers due to the higher wages in Thailand compared to its neighbors, further intensifying the struggle to find a job for the Thai worker.

Bottom line After the AEC takes effect, it will be easier for manufacturing companies to survive, because they can move their production to low labor cost countries, import the finished goods back into Thailand at no tax and sell them at the same price as before. Without any doubt, we would call this an opportunity. Hopefully companies from neighboring low cost countries will come and sell their products on the Thai Market as well, as this would eventually bring the necessary price competition from which the Thai consumer would benefit.

The number of labor jobs in Thailand will considerably decrease, while the number of workers further increases in Thailand itself (poor education opportunities for the rural and poor) and through an increased influx from foreign workers. This is a potential source of serious conflict. History has shown that jobless workers can easily be mobilized and manipulated to gather in support for whatever political gain or ideology.

The Problem While a low cost country usually sells labor, a high cost country sells knowledge, technology and services (ex. banking). Thailand has moved from a low cost country to a high cost country (at least within ASEAN), but it has not shifted its assets from labor to knowledge, technology and services and that cant be done within 3 years. Therefore there is a risk for Thailand to fall into the gap of being too expensive without being ready to be expensive.

Vision Move Thailand from low labor cost to knowledge, technology and services. A key to this is Quality. In a high tech and high cost environment, good is not good enough. In a near future, Thailand needs to stand for Quality, Reliability and Excellence. If people read Made in Thailand they should feel the same as when they read Made in Germany. Chose and boost the industries that fit into the above quality model. An already existing and well expanding industry is the automobile manufacturing. New industries could be alternative energies, such as solar energy and wind energy. There are huge potentials there. Why does Thailand need to import solar panels from China? Why not make Thailand the world leader in using alternative energies? Become the role model of the planet. By the time other countries realize that alternative energies are ultimately the only way to go, Thailand will have had enough time to develop and fine tune its product range and its production technology and will be ready to support the international demand of these high tech products. Become the number One and supply the world, just as was the case with garments and rice.

Written by: Niklaus Stucki Bangkok, 31st July 2012 Published: -