Export competitiveness and "structural adjustment"
Baht appreciation's effect on unemployment?
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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[Update: 4:30 pm 01-08-07 Union Footwear, Saha Union's footwear subsidiary, announced that it is going out of business as this article was being written]
A rather abstract and ominous sounding word is being bandied about quite a lot nowadays, the word is "structural adjustment":
Definition #1. The reallocation of resources (labor and capital) among sectors of the economy in response to changing economic circumstances, including trading conditions, or changes in policy. (Source: University of Michigan)
Definition #2. A programme of policies designed to change the structure of an economy. ...Such policies are much criticised in the developing world, sometimes with good reason (Source: The Economist)
What exactly will "structural adjustment" mean for Thailand in the current situation of baht appreciation?
Plant closings and layoffs in Thailand's export sectors might happen or might not, depending on where you look and who you ask.
Let's look at the bad news first. In today's article below, Declining orders at Saha Union's footwear subsidiary might make it the next casualty of baht appreciation.
Lower labour costs in Vietnam and China have led to declining Thai market share in global footwear markets.
Some Thai manufacturers have relocated to Vietnam, but Thailand still retains an advantage in the industries that support footwear production.
Under the new Japan-Thailand Economic Partnership Agreement (JTEPA) new footwear exports to Japan might relieve some of the pressure on the industry.
Whether Thailand's lack of competitiveness in global footwear markets is a long-term problem that pre-dates the current rounds of baht apprecation is not clear.
Now for the good news, unemployment from baht appreciation may be less than what people expect.
Dr. Yongyuth Chalamwong, a labour expert at the Thailand Development Research Institute (TDRI), in another article yesterday, was a lot more optimistic. Labour shortages and labor mobility would cushion the impact of baht appreciation:
"...systemic unemployment was unlikely since there was still a labour shortage, especially in the low-skilled segments....laid-off workers would be able to move to other firms. As long as the economy grew by at least 4%, there should be no employment problem at a macro-level.
Low-skilled workers in the processed food, textile and garment and leather industries have some degree of mobility. They can move to other types of businesses in labour-intensive industries..."
He also predicted that textile manufacturers would adapt to the situation and minimise the impact or currency appreciation:
"Most textile firms will survive if the baht is kept stable, as they will resort to imported technology and raw materials. Those with overseas manufacturing joint ventures can also expect profits abroad to help offset their local losses....Most companies are adapting all the time to maintain their market shares. [Joint-venture] firms are also knowledgeable. They rely on the marketing strengths of their parent firms. They do not suffer much from the baht."
India's structural adjustments
Democracy can generate "correct policy outcomes," notes Dani Rodrick in his Harvard economics blog.
Under democratic pressures India shifted policy "three times in three months" to cope with currency appreciation, and tried out almost every policy combination possible of: 1. Exchange market intervention, 2. Sterilisation of capital inflows, and 3. Subsidies to the export sector.
Thailand hasn't tried policies directed at the export sector yet, so India's experience is informative:
"...appreciation led to a clamour for help from exporters. A spate of studies also started to suggest that the Indian growth machine would slow down because of the appreciation. So, in act two, the Commerce Ministry, announced a package of financial assistance—comprising duty drawbacks and cheap credit...Will this sort of policy make its way into policy platforms during the next elections?"Assistance to exporters in the form of duty drawbacks is an inferior response to declining competitiveness: drawbacks provide relief only to some (mainly manufacturing) exporters; the magnitude of relief is arbitrary and perverse (the more a sector buys imported intermediate inputs, the more relief it gets); import-competing industries get no assistance; and drawbacks give rise to administrative costs and opportunities for rent-seeking and evasion. One hopes the assistance will be implemented consistent with India’s WTO obligations. If that is the case, and given the relatively modest magnitude of the relief, it can be viewed as a small cost, perhaps even a necessary political concession to forestall demands for more damaging policy actions." (Source: Business Standard, India)
For further reading, at TDRI check out time series on exports, imports, trade balance, current account, balance of payments, international reserves, and inflation
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What export industries does Saha Union do business in?
2. Why might Saha Union close down some of its factories?
3. Where are the factories of Saha Union's footwear subsidiary located?
4. How many workers does the footwear subsidiary employ?
5. Is the footwear subsidiary's business concentrated in a small number of clients or spread over a large number of clients?
The footwear subsidiary's business is concentrated in a small number of clients. Nike accounts for 99% of the company's total sales last year.
6. How much has the baht appreciated so far in 2007?
7. What factors have led to reductions of footwear orders this year?
8. How was the financial performance of Union Footwear this year compared to last year?
9. How do footwear costs in Thailand compare to those in Vietnam? How have some Thai manufacturers taken advantage of these differentials?
10. Why can Thailand still compete effectively against Vietnam in the global footwear market?
11. Which is larger, the Thai or Vietnamese footwear industries?
12. How might the Japan-Thailand Economic Partnership Agreement (JTEPA) signed earlier this year help the Thai footwear industry?
Bangkok Post Article July 31, 2007
Saha mulls closing some shoe units
Union Footwear, with 4,700 workers, on listARANEE JAIIMSIN
Saha Union Plc, one of the country's largest textile and apparel makers, is considering closing some footwear manufacturing operations due to decline in orders and the stronger baht, according to source at the company.
Among the operations being reviewed were those of Saha's SET-listed subsidiary Union Footwear Plc, said the source, who asked not to be named. Union Footwear's main plant is in Bang Pakong and it has four other factories in the Northeast: two in Khon Kaen, one in Nakhon Ratchasima and one in BuriRam. The company employs around 4,700 workers. Its main customer is Nike, which made up 99% of the company's total sales last year.
The source said the appreciation of the baht by about 7% against the US dollar over the first half of this year had made its products less competitive than those of its competitors, particularly in China, Vietnam and Indonesia. Union Footwear has lost some large orders to these foreign producers while some of its own orders have been reduced because of the slowing economy in the United States.
Union Footwear posted a net loss of 44.5 million baht in the first quarter of this year compared to a net profit of 12.2 million baht in the same period last year.
Executives of Saha Union and Union Footwear could not be reached for comment.
Thamrong Tritiprasert, chairman of the Federation of Thai Industries' Footwear Club, agreed that Thailand's footwear makers were losing market share to low-cost countries, particularly Vietnam and China.
He said the growth of the local footwear industry would be flat this year or may even decline from last year, due mainly to the strong baht and stiff competition from Vietnamese shoes in export markets.
The FTI estimates that the local footwear industry will be worth between 28.5 billion and 30 billion baht this year.
Thai footwear prices are currently 17-18% higher than those of comparable products made in Vietnam, noted Mr Thamrong.
As well, he said, the Vietnamese shoe industry was now three times bigger than Thailand's and some Thai manufacturers have already relocated their plants in Vietnam to enjoy its comparative advantages.
However, the majority of local footwear manufacturers still believe Thailand can compete effectively with Vietnam due to the existence of strong supporting industries, said Mr Thamrong.
"But the odds may no longer be in our favour when these supporting industries move to Vietnam, drawn by its fast-growing footwear industry," said Mr Thamrong.
While it is struggling in other markets, Thailand's footwear industry is hoping to see some gains in export revenue to Japan under the new Thailand-Japan free trade agreement.
Mr Thamrong noted that Thailand exported fewer than four million pairs of shoes to Japan last year with revenue of around 1.32 billion baht.
The country's shoe exports to Japan are expected to increase by 20% per year after the trade deal, known as the Japan-Thailand Economic Partnership Agreement (JTEPA), takes effect. Both countries' legislatures are expected to ratify the agreement later this year.
Shares of Union Footwear (UF) are thinly traded on the Stock Exchange of Thailand. They last traded on Thursday when they declined four satang to 3.24 baht.
Vocabulary (in discussion above)
ominous - makes you think that something unpleasant is about to happen
bandied about - when an idea is discussed by many people in a casual way
reallocation - shifting around, moving to different uses
Saha Union - part of the Saha Group of companies, a large conglomerate with textile, footwear, plastics and rubber, IT and hard drives manufacturing, also involved in the power plant building and energy generation business in both China and Thailand (See website and products)
Thai Development Research Institute (TDRI) - Thailand's first policy research institute established in 1984 to conduct policy research and disseminate results to the public and private sectors (See website)
Dr. Yongyuth Chalamwong - research director for labor development, human resources and social development program (Source: TDRI)
apparel - clothing
Union Footwear - the footwear subsidiary of Saha Union
systemic - affecting the whole thing
systemic unemployment - widespread unamployment in an economy
low-skilled segments - groups of workers without special training or skills
have some degree of mobility - can change jobs easily
* maintain their market shares
clamour for - demand loudly
a spate of - a sudden large number of
duty drawbacks - reductions in import duties
cheap credit - low interest rates, subsidised
a policy platform - the policies that a political party uses to get votes in an election
could not be reached for comment - (standard phrase) unable or unwilling to say anything about it
Federation of Thai Industries' Footwear Club - footwear industry trade group
market share - a company's percentage of sales in a market
x losing market share to y - y's precentage of the market is increasing, x's decreasing
relocate - move to a different location (in a different country)
* relocated their plants
supporting industries - industries that provide inputs into production (for instance, the plastics industry supports the footwear industry)
the odds - the likelihood or probability of happening
in our favour - helping us
odds may no longer be in our favour - we may fail
Thailand-Japan free trade agreement - See next entry
Japan-Thailand Economic Partnership Agreement (JTEPA) - (See Ministry of Foreign Affairs site, a previous article, and The Economist)
ratify a treaty - when the legislature of a country votes to accept a treaty
thinly traded - not a lot of trading of the company's stock on the Stock Exchange of Thailand (SET)
Answer Key:
1. What export industries does Saha Union do business in?
a. Textile and apparel
b. Footwear
2. Why might Saha Union close down some of its factories?
Saha Union might close down some of its factories because the strong baht has led to a decline in orders.
3. Where are the factories of Saha Union's footwear subsidiary located?
The factories are located in Isan (the Northeast) at Khon Kaen (2), Nakhon Ratchasima (1) and BuriRam (1).
4. How many workers does the footwear subsidiary employ?
Around 4,700 workers
5. Is the footwear subsidiary's business concentrated in a small number of clients or spread over a large number of clients?
The footwear subsidiary's business is concentrated in a small number of clients. Nike accounts for 99% of the company's total sales last year.
6. How much has the baht appreciated so far in 2007?
Roughly, 7%.
("The source said the appreciation of the baht by about 7% against the US dollar over the first half of this year...")
7. What factors have led to reductions of footwear orders this year?
a. Some orders have been lost to countries that are more competitive: China, Vietnam, and Indonesia.
b. Some orders have been lost from declining demand in the US due to a slowing economy.
8. How was the financial performance of Union Footwear this year compared to last year?
Financial performance declined considerably.
Last year the company made a profit of 12.2 million baht.
This year the company posted a loss of 44.5 million.
9. How do footwear costs in Thailand compare to those in Vietnam? How have some Thai manufacturers taken advantage of these differentials?
Vietnam is a lower cost producer. The price of footwear manufactured in Thailand is typically 17 to 18% higher.
To take advantage of this differential, some Thai footwear manufacturers have relocated to Vietnam.
10. Why can Thailand still compete effectively against Vietnam in the global footwear market?
Because Thailand still has strong industries that support footwear manufacturing.
If these supporting industries relocate to Vietnam also, competition with Vietnam will be even more difficult.
11. Which is larger, the Thai or Vietnamese footwear industries?
The Vietnamese footwear industry is three times larger than the Thai.
12. How might the Japan-Thailand Economic Partnership Agreement (JTEPA) signed earlier this year help the Thai footwear industry?
Footwear exports to Japan are expected to increase by about 20%.
