Thailand’s Position in Japanese Companies’ Strategy for Asia

The State of Management

Japanese companies’ business in Thailand has hitherto been primarily in export assembly. Currently, however, in addition to exports this business is headed in three directions: 1. business activities towards local market development, 2. production, primarily of automobiles, and 3. transition from production/sales to research and development. Regarding the first direction, there has been new construction and strengthening of existing local sales centers. Regarding the second, expansion into Thailand is going as far as third-tier subcontracting. Regarding the third, a research and development sector has been established and independent R&D centers have been constructed. However, because of an increase in production costs, existing centers have not been expanded as in China or Vietnam.

Company A, a sales company, is equipping its product marketing function with technology research services, engineering services, and research and design functions aimed at clients. In this way, it is attempting to transition from a product sales center to a solutions provider. The employee turnover rate has also been held down by improving wages and the rate of wage increase, promoting local hires for top management, and creating a cheerful working environment. Company B, an export assembly company, has separated manufacturing and sales and has reached a 60% local procurement rate after 15 years of operations in Thailand. Moreover, company C, which makes automobile parts (bearings) for local sales, is developing a three-in-one organization comprised of manufacturing, sales, and R&D. It has only been in Thailand for five years, and so its local procurement rate is low. While company B is 100% equity, company C has developed its operations as a joint venture. Yet there are no concerns over technology leaks from its joint venture partner, such as would be found in China. Compared to Japanese companies in China, both company B and company C employ a higher rate of university graduates. Company B uses a temporary hire system to avoid cumbersome areas such as slashing costs and labor management. Its pay levels are lower than sales companies or chemical material manufacturers in Bangkok. In addition, the localization of personnel represents an issue for both company B and C. Japanese and other foreign companies are expanding into the industrial zone, so the loss of personnel is a concern.

Companies D and E, which produce chemical materials, are both basically oriented towards local sales. In terms of equity, one is 100% equity while the other is a joint venture. Both take the organizational form of separating into manufacturing and sales. Both are in the equipment-intensive industry, and as such have little concern over technology leaks. Both take advantage of production networks in the ASEAN region. Since they are in the materials industry, there are few employees relative to the amount of investment and sales. The percentage of university graduates is also high. Due to the high level of technology and safety concerns, the level of pay is higher than in other manufacturing industries. Company D provides a housing allowance at 15% of the basic salary. A structure of strong educational backgrounds, high wage standards, and good benefits has helped to keep the employee turnover rate low. Company E has established an organization that oversees five different production, sales and R&D centers in Thailand, creating a self-contained business structure. A Thai native with experience studying in the US has been placed at the top of this organization.

Thailand’s Position in the Strategy for Asia

1. Primary Activities Differ Among the ASEAN Region

Company F, a general electronics maker, expanded into Thailand in 1961 to develop the local market. Since the 70s, however, its main export centers have been in Singapore and Malaysia. Currently, the makeup of ASEAN’s total 2 trillion yen production (about US$18 billion) is as follows: Malaysia 30%, Singapore 25%, Thailand 8-10%, and the remaining filled by Indonesia, Philippines, Taiwan, India and etc. Company F’s production remains concentrated in Singapore and Malaysia. It is attempting to cover sharp rises in personnel costs by strengthening R&D and by adding high value. Company F’s Asia Pacific headquarters is located in Singapore. Singapore and Malaysia were favored because: 1. favorable investment treatment from the local government, 2. language accessibility, 3. developed infrastructure, and etc. Thailand basically meets all of the same conditions, but it does not claim a significant edge in any one category. Despite the fact that labor and political problems have recently surfaced, goods distribution, commercial distribution, and the flow of people are accelerating along the line from southern China to Vietnam, Thailand, India, and the Middle East. Company F is rearranging its Asia strategy tailored to this arched economic region, and to promote this strategy there is no choice but to secure a foothold in Thailand.

In contrast to company F’s strategy, when company G’s (automobiles) Asia Pacific headquarters was to be moved to ASEAN, it was faced with a choice between Singapore and Thailand. In the end, it was decided to establish it in Thailand which is close to production and sales. Currently, company G’s Asia Pacific headquarters is equipped with production, sales, and cash-flow management functions, and in April 2007 its purchasing function (IPO) is also scheduled to be moved to Asia Pacific headquarters.

2. Difference with the Assessment of Business in India

Since the 70s, company F has experienced failure in both production and sales with washing machines, air conditioners, televisions and etc., and consequently its business development in India has not progressed much. It also has the problem of collecting payments. South Korean companies are currently expanding their influence in India, so it is understood that the situation will become increasingly difficult. On the other hand, the importance of India for company G is rapidly increasing. The number of four-wheel vehicles produced in India doubled from 50,000 in 2006 to 100,000 in 2007, and should double again to 200,000 in 2008. Two-wheel vehicles also went from 4.5 million in 2006 to over 5 million in 2007. In the near future, the number of vehicles produced in Thailand will be surpassed by India.

3. Confirmed Common Points

Both companies (F and G) have a long history of over 40 years since beginning operations in Thailand. Another common point is that both have many Japanese employees stationed locally. Company F has 19,000 Thai employees and 170 Japanese stationed employees, while the numbers are 5,500 and 300 for company G. Business management is basically handled by the Japanese side, and even in joint ventures formats cases of technology leaks or struggles over managerial authority, such as found in China, are few and far between. In addition, because the export ratio is high in both companies, price increases for parts is putting a squeeze on profits.

In this way, the business activities of Japanese companies in Thailand are changing, and Thailand’s position is rising in the overall Asia strategy. Japanese companies should not get carried away by booms or rumors, but instead develop strategies for business in Thailand based on thorough research of the situation.