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"Industrial Sector Perspectives on the East Asian Economic Region"

June 5, 2003

Mr. Praphad Phodhivorakhun
Chairman, The Federation of Thai Industries
Chairman, Kang Yong Electronic Public Company Limited

First, I would like to express my sincere gratitude to the Nihon Keizai Shimbun, Inc. (Nikkei) for inviting me to be a guest speaker for the 9th Annual International Conference on the Future of Asia. I am indeed delighted and honored to participate in the discussion. I would like to take this opportunity to firstly discuss current conditions in the East Asian economic region from the perspective of industry.

The changes in economic environment in East Asia region:
The Asia Crisis in 1997 was the catalyst for the rapid changes in the Asia region. The lessons learnt from the Asia crisis, alone with pressures of globalization, and the emerging Chinese economy provided strong impetus for the Asian governments to seek closer economic collaboration by strengthening regional linkages in trade and investment among countries in the East Asia region. The leaders of the Asian countries have been taking steps to bring back the economies with prosperity and stability through their domestic economic policies, which effectively aim to stimulate domestic GDP growth. These include monetary easing, financial restructuring reform, stabilizing exchange rate and fiscal expansion. This is certainly a positive step for boosting domestic demand and restoring confidence as well as economic stability, which eventually will contribute to a higher economic growth. The industrial sectors will certainly benefit from such an economic environment.

Current regional economic conditions:
The current regional economic condition remains positive given that most of the economies are on recovery path and a continual expansion in export growth.

Referring to the Table 1, having experienced a sharp economic contraction in 1998, the economies in the East Asia region led by South Korea, China and Singapore began to recover rapidly from 1999. Over the past two years, East Asia economic growth was relatively strong, compared to other regions in the world. This reflects in a solid growth experienced by major Asian economies such as China, and South Korea of the average rate of 7.6 percent and 5.1 respectively in 2001-2. The economic growth in the East Asia region is expected to continue to recover despite a number of uncertainties surrounding the region. One of the key factors, apart from the economic recovery, was an increase in intra-regional trade in the region, which has made a considerable contribution to export growth of the East Asia and Pacific regions. This reflects in a rise in the ratio of trade to GDP from an average of 53.6 percent in 1997 to an average of 62.4 percent in 2000-2001.

At the turn of the new millennium, specifically the Asia Crisis marked a turning point for industrial sectors in the East Asian region. Most notably, the new phenomenon was a rapid progress of economic integration through bilateral Free Trade arrangements (FTA). Such a trend began with Singapore making bilateral trading arrangements with Japan and other countries outside the region. ASEAN countries such as Thailand, Philippines and Malaysia are now on the bilateral talks to set up an FTA with Japan, while the study of bilateral FTA is being conducted between Korea and Japan. These countries want to use the FTA arrangement as an effective way to realize closer economic integration. One might also says that such arrangement will help bypass the slow progress of the "WTO plus" and include further some other areas of economic cooperation such as intellectual property tights, e-commerce and movement of natural of natural persons. From the perspective of industry, I certainly see that this is a great sign towards regional economic integration, since an accumulation of the FTAs with lead to regional liberalization. What the regional liberalization means to us is an enlargement of the market, which will allow for better utilization of regional economies of scale. Moreover the regional liberalization will force the country to introduce effective domestic sectors reforms, which aim at the industries with comparative advantages to improve their productivity and competitiveness.

The move towards regional economic liberalization

I would like to briefly explain how the liberalization process will benefit the region as a whole. If each country focuses on the development in the areas, in which it specializes in and increases its engagement in the regional trade, it is believed that the optimal level of productivity (what so called economies of scales) can be reached at low price. This will not only provide a growth potential for whole region to expand its export in the global market but also attract more foreign direct investment. Eventually employment and incomes for the countries within the region will increase. Moreover the consumer will enjoy high quality products at low price and the overall welfare in all the participating countries will rise.

Another major change in the regional economic environment in the past few years is the emergence of China. China's rapidly growing economy is assumed to have an increasingly significant role in regional affairs. In term of GDP, China has grown to be an economy, which is worth more than one trillion U.S. dollars, larger than the Republic of Korea and all ASEAN countries combined. The GDP growth has continued to expand strongly by 7.3 per cent in 2001 and 8 per cent in 2002. If the present trend continues, China will become one of the main engines for growth in the world's most dynamic region throughout the future. From the perspective of industry, such a trend will bring many challenges to other countries in East Asia, especially those which produce and export similar trading goods as China.

Thailand's strategy in response to the changes in the regional economic environment:
As the case of Thailand, the Thai industry responded to such a trend by identifying the sectors of which have had comparative advantages over competitors. We then concentrate on developing our areas of comparative advantages to compete in the global or regional markets. The strategy is aimed to soften, if not overcome, the impact of those downside risks in affected industries to continue with efforts to sustain or promote greater competitiveness and to establish niche markets in the international market.
Thailand has a number of industries with international competitiveness such as food and automotive industries. However in terms of export, electronics and electrical and automotive industries are the leading industrial sectors with the highest export earnings. The values of export items such as computer and components, electrical circuit, electrical appliances and others respectively in 2002 of the total exports in Thailand accounted for 12.1%, 4.9% and 6.5% respectively.

Electrical and electronics industry

The electrical and electronics industry has made great progress in development over the past few decades. Even though the industry was hit hard by the financial crisis, production soon recovered and the sector retained its position at the forefront of manufacturing for Thailand. From 1999, the industry's exports expanded with an annual growth rate of 10 percent on average. In 2002, the industry export value accounted for 21.9 percent or $US 15,100 of total export value. These include the electrical appliances, electrical apparatus for making, machinery and mechanical appliance. Technical know-how, not cheap labour, will determine the success of Thailand's electrical and electronics industry in 2000s. The country has been actively engaged in development in various areas, including technical know-how and human resources of electrical industry. This industry is fully equipped with wide ranges of strongly supporting industries, mainly made up of SMEs. The SMEs produce diverse kinds of electrical and electronic parts and provide a subcontracting base to large-scale production. These include motors, diode, electrical circuits, fiber cable transistor and compressor etc. Nevertheless the industry is still dependent on foreign investment and technology transfer in order to develop its competitiveness to compete in the global market.

Automotive industry

At the turn of the new millennium, with the latest addition of General Motors (Thailand) and BMW (Thailand), there are now sixteen automotive assembly plants in Thailand with maximum potential capacity of around one million units per year. Today Thailand has been considered as "the Detroit of ASEAN" in automotive industry, since it has the largest vehicle assembling capacity and the highest quality parts manufacturing capability in ASEAN. There is a strong demand within the domestic market with potential buyers of 3 million people. Moreover as member of AFTA, Thailand's export industry, including automobile will enjoy great benefit of market enlargement with population of more than 500 million.

Assessment of the automotive cluster's competitiveness

It has a variety of supporting industries with the full capacity to facilitate the automotive assembling process. Such supporting industries include steel, plastics, rubber & tires, electronics, glass, leather & fabric, machinery, tools, mold & die and jig & fixture. However a number of Thailand's supporting industries are regionally competitive. To become globally competitive, these companies require improvements in infrastructure and technological and managerial support. There are huge opportunities to promote foreign investments through the forms of joint ventures and acquisitions in this area. Thailand has a vision for this industry in that by the year 2011, we will become the automotive production base in Asia that adds value to the country with strong domestic supplier base.

The Federation of Thai Industries (F.T.I.) recognized the need, not only for Thai industries but the industries in other Asian countries, to be ready for these positive changes in the economic environment in the region. As the only voices of the industrial community in Thailand, the F.T.I. sees the potential benefits for further economic integration of the Asian region. We, therefore, will support the government's initiative in moving forward to the next step of bilateral and regional economic agreements, which eventually lead to regional economic liberalization.

Titles of speakers, names of companies, etc., were correct as of the time when the forum was held.