Finding a Fit in Thailand

Finding a Fit in Thailand

Bangkok is known as the "City of Angels," but does Thailand still offer a blissful place to set up shop?

Despite enduring some tough economic times and recent political unrest, Thailand continues to provide an attractive location for multinational manufacturers. The country boasts a skilled workforce, a robust supply chain, a strong infrastructure and policies geared toward supporting a manufacturing base.

Last fall, International Finance Corp. and the World Bank noted in "Doing Business 2009" that Thailand had jumped from 19th to 13th in the world in terms of ease of doing business. The report credited Thailand for improvements that made it "easier to pay taxes, start a business, trade across borders and register property." Thailand also was cited for taking steps "to protect investors, improve bankruptcy procedures and strengthen the legal rights of creditors and borrowers."

One of the country's top 10 employers, Fabrinet, continues to expand its manufacturing operations in Thailand. Fabrinet is an engineering and manufacturing services provider of complex optical and electro-mechanical components, modules and bulk optics serving data communications, telecom, networking, medical and automotive markets.

Approximately 10 years ago, Asian outsourcing guru Tom Mitchell, co-founder of Seagate and current CEO of Fabrinet, conducted an extensive around-the-world investigation for the location of its optical component manufacturing. He chose Thailand. The criteria he used to make his decision then are similar to the criteria the company still uses in determining manufacturing locations.

"We conducted a broad-based, thorough investigation that evaluated eight specific areas: labor, engineering, infrastructure/cost, transportation, automation, political system, supplier base and language," Fabrinet Chief Operating Officer Dr. Harpal Gill explains. "Thailand was measured against Malaysia, China, Philippines, Singapore, India, South America, Mexico and Taiwan."

Fabrinet narrowed its top five criteria to:

  • Labor.
  • Engineering pool.
  • Political system.
  • Supply base.
  • Language barrier.

The company honed in on Asia because that area of the world helped the disk-drive industry to become a high-tech manufacturing success story. The disk-drive industry has addressed the "time-to-market, time-to-volume, time-to-cost" metrics better than any other industry, in Fabrinet's opinion. So Fabrinet chose Thailand.

In Thailand, the annual salary of a senior engineer is $10,000, while semi-skilled labor earns $1,500 per year, according to the American Chamber of Commerce in Thailand. English is the second language. The infrastructure is well-developed and aided by strong investment support. Those factors, plus the ability to leverage the rapid launch and product transfer experience from the disk-drive industry, tipped the scale away from other countries.

Choosing Thailand has proven to be quite successful for Fabrinet, which recently built a fifth manufacturing facility on its campus near Bangkok to accommodate its expanding business.

A major factor in Fabrinet's expansion has been the strength of Thailand's supply chain.

"Once you sign a contract, it is upheld," Gill says. "We don't need to worry about the quality of the products or whether it was built to the correct specifications. I can't say that about other countries. In some locations the first product you see is great but the others that follow are not. You are then required to put additional resources into monitoring the quality of future products, and that initial cost advantage is lost. In our businesses, especially the medical field, we can't have that kind of exposure. We need to adhere to the highest standard of quality."

Intellectual property (IP) protection is another critical issue for contract manufacturers. Gill notes that while some countries offer minimal IP protection, "That's not the case in Thailand.

"And IP protection is one of the main contributors to our growth. Each customer of ours has a factory within our factory."

One reason IP protection isn't a problem in Thailand is the nature of the workforce. Unlike China, the people in Thailand are not looking to open their own businesses, Gill points out. And the turnover rate for employers is extremely low compared with other Asian countries.

A technician in Fabrinet's materials and process lab performs a shear strength test for adhesives.

The workforce, especially in engineering, has grown exponentially since Fabrinet first located here. One reason, Gill says, is that the government is very active in promoting education, both in Thailand and elsewhere. What's unique about the Thai workforce is that unlike many of their Asian counterparts who are educated outside of their country, Thais will return to Thailand to work. Additionally, the government works collaboratively with universities to ensure that the skills taught match the work available.

The government extends its welcome mat to manufacturing companies through the Office of Board of Investment by offering incentives for "promoted" products, explains Kampone Nuntakwang, executive advisor for Fabrinet. The tax-based incentives include exemption or reduction of import duties on machinery and raw materials, and corporate income tax exemptions. The non-tax incentives include permission to bring in foreign workers, own land and take or remit foreign currency abroad. (Note: For information on the Incentives under the Investment Promotion Act, click here.)

Thailand boasts a number of industrial zones that offer infrastructure and logistical advantages such as electrical power, water supply, transportation, communications and waste treatment. Some of these infrastructure expenses are tax-deductible. Funds and subsidies are available for companies that participate in energy conservation programs as well. Location can make a difference, since promoted projects located in up-country or industrial zones can provide better incentives than those located in the Bangkok area, Nuntakwang explains.

"In our opinion, Thailand has the best logistical infrastructure in Asia for moving products in and out of the country," says Nat Mani, Fabrinet's executive vice president, sales and marketing. "There are multiple airports, the BOI is helpful and even the visa situation is straightforward."

The company has not been affected by the country's recent political difficulties, and has benefited from favorable public policies. Nuntakwang points out that "one of the country's main investment policies is that it will not, and has never, seized any company and claimed it as government property.

"In fact, the government encourages industry to expand its business by providing additional incentives. Companies operating in Thailand can freely conduct business as long as they wish."

BNL Finds Solid Infrastructure

BNL (UK) Ltd. also found success in Thailand. The company manufactures and designs thermoplastic bearing assemblies and technical molding solutions. Its decision to locate a subsidiary in Thailand was due to the fact that the company had a longstanding relationship with a supplier that had helped it start a small assembly operation.

A Fabrinet technician tests the functionality of a positional sensor.
"This worked extremely well and gave us the confidence to go at it alone," explains Gavin Charlesworth, managing director of BNL (Thailand). "The solid infrastructure with the industrial estate operators and investment schemes helped make the decision to set up in Thailand easier."

BNL discovered that setting up shop in an industrial park lessened the amount of bureaucracy associated with applications for land use, water, electricity, telephones and work permits. "The industrial estate operators provide first-class service and have a great deal of leverage with local service providers," Charlesworth says.

Local workforce customs must be factored into operations, as Thai culture differs from Western culture.

"It is quite often the case that Thais can work more easily with foreign companies with Eastern roots," Charlesworth explains. "However, by adopting some of the local culture and taking a softer approach than the typical harsh Western attitude, you will see very quickly that a keen, dedicated team will develop."

Charlesworth asserts that "local experienced support is paramount.

"It may come in the form of a law or accounting firm, or a professional with experience in setting up companies (specifically manufacturing companies) in the region. Consider very carefully what your business model will be, as some of the investment incentives can be troublesome or complicated if dealing with local firms."

But the real secret of success in operating in Thailand, according to Charlesworth, is the country's "can-do" attitude.

That attitude will have to help ease Thailand through turbulent economic conditions, which will cause the economy to contract 3% in 2009 -- marking the first time in more than a decade that the economy will shrink. But optimism still abounds, according to a recent Bank of Thailand survey in which business executives predict that the economy will begin to recover during the fourth quarter of 2009.

The survey, which questioned 182 business associations during the first quarter of 2009, found that most business executives believe that if they boost production efficiency, lower production costs, manage inventory more efficiently, explore new markets and reduce employee working hours, the economy will show improvement. Purchase orders for some industries, such as hard disk-drive manufacturing, have risen since the beginning of the second quarter this year, causing the Bank of Thailand to comment that supply and demand have begun to return to normalcy.

Charlesworth shares this optimism.

"Growth can still be seen in the region," he says. "Factories are still being built and investors are moving into the area. The lower cost of manufacturing and exceptional quality of the products produced by Thai workers will continue to draw companies who need to reduce costs."

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