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Thai Apparel Industry Battles Rising Costs

Mounting wage costs, a shortage of labor and competition from cheaper neighboring countries could lead to contraction for the industry.

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BANGKOK — Mounting wage costs, a significant shortage of labor and competition from cheaper neighboring countries could lead to contraction for Thailand’s apparel industry.

“I cannot be optimistic because the U.S. economy is not great…Europe is in debt and Japan is in recession,” said Sukij Kongpiyacharn, president of the Thai Garment Manufacturers Association. “There will be no growth this year. I will be happy to see us maintain last year’s level.”

Exports in the first quarter of 2012 shrank 6.9 percent to $749.8 million year-on-year, according to TGMA figures. This was primarily due to faltering demand from its two biggest trading partners, the U.S. and the European Union, where exports from January to March fell 11.9 percent and 18.9 percent, respectively, compared with the first three months of 2011.

It is supply side pressures that are causing the most trouble for the industry here. Despite widespread opposition from garment industry officials and other business lobbies, the government introduced a new minimum wage on April 1, raising the daily minimum wage in Bangkok and six Thai provinces from about 215 baht, or $6.74 at current exchange, to 300 baht, or $9.41. Wages in other provinces have also increased more than 30 percent to 250 baht, or $7.84, a day, though more skilled workers can command wages of up to a third more. The Thai garment industry currently employs 500,000 to 600,000 workers in a country of about 67 million.

“The new minimum wage rate was a shock project by the government,” said Yuttana Silpsarnvitch, TGMA executive director.

He said the salary hike was the result of politically motivated efforts by the government of Prime Minister Yingluck Shinawatra to gain votes from low-wage laborers that constitute a large portion of voters.

“It is very difficult for us…because after you consider food and transport costs [which manufacturers normally absorb], we cannot give more,” he said. “The money comes from the private sector, not the government.”

The government had previously indicated that the wage increase would increase consumption and prompt Thai companies to expand into more capital-intensive industries. According to TGMA, the government has promised a cap of 300 baht on the minimum wage for three years.

Overall political stability is also a cause for concern. Politics here have been in flux since the military overthrew Prime Minister Thaksin Shinawatra’s government in 2006. A relative calm has since set in, with industry players saying they go about business as usual. But the coming months could be crucial as Parliament, controlled by Thaksin’s sister Yingluck, considers a law that could allow him to return from exile. Thousands of Thaksin’s opponents blockaded Parliament in early June to prevent the bill from being debated.

Some economists are skeptical of claims by business groups that the wage rise will lead to mounting inflation and mass business closures.

“The level of wages in Thailand is relatively high compared to Indonesia and Vietnam, and the garment manufacturing industry may suffer, but they have been in tough competition with China for some time,” said Tai Hui, head of regional research in Asia for Standard Chartered Bank in Singapore. “While [costs are] rising in Thailand, they are also rising in Indonesia, China and Vietnam. Everyone is putting up wages, so on a relative basis it is not as significant.”

Despite warnings by some industry players that the new law would lead to less competitive manufacturers closing, shutdowns have not been seen. According to Commerce Ministry figures, year-on-year inflation in Thailand rose 2.47 percent in April, easing from a 3.45 percent increase in March.

However, it is a second wave of wage hikes in the remaining provinces to 300 baht on Jan. 1 that industry officials are now fretting over.

“When it is 300 baht in every city, it will kill a lot of light industry,” Kongpiyacharn said.

While most garment firms are headquartered in Bangkok and its immediate vicinity, many of them were lured by tax incentives by the local Board of Investment in the Nineties to set up plants in the poorer up-country, he said. TGMA and another business lobby have asked the Thai government for a two-year freeze on the impending hike, which he said could mean cost increases of up to 80 percent for some businesses.

Kongpiyacharn said the proposed wage freeze would give the industry breathing room so that costs in neighboring countries could catch up. According to TGMA documents, minimum wages in Cambodia and Myanmar are as low as $61 a month. In recent months, workers in both countries have gone on strike in an attempt to raise salaries.

Some manufacturers are trying to cope by pushing workers to increase productivity.

“It used to be ‘show me the money’ and now we’ve shown it to everybody so they should work with us,” said Nalinee Suwanpatra, deputy managing director of Heart and Mind Apparel Co., which produces for the likes of DKNY, Timberland and Tommy Hilfiger.

Her firm is taking measures such as reducing lead-time needed to get materials in and taking measures to reduce defects and waste. The biggest problem lies in a shortage of labor.

“There is a very big shortage,” said Silpsarnvitch, who said TGMA has asked the government to help recruit 70,000 workers from the likes of Myanmar and Bangladesh for the industry. “It is not easy because they know each other and go for [more advanced] industries” like automobile manufacturing, which can pay significantly more.

Such problems have led some garment manufacturers to flock to lower-cost neighbors such as Cambodia, Laos, Myanmar and Vietnam, which are collectively known as the CLMV countries, to set up plants. Southern China, where wages are lower than the country’s prosperous East Coast, is also popular for businesses looking to expand. According to Kongpiyacharn, about 10 to 15 apparel manufacturers have recently ventured abroad to leverage costs.

The most popular destination is Myanmar, which has seen a slate of economic and political reforms since a nominally civilian government took power last year. The release of political prisoners and subsequent election to parliament of political dissident Aung San Suu Kyi have led to the U.S. and EU making moves to normalize relations and ease sanctions. The biggest advantage that Myanmar possesses is that it is relatively undeveloped and has an abundance of labor.

“Myanmar is the last territory that Thai businesses [can] spend serious money in,” Kongpiyacharn said. “The presence of factories in Myanmar that were only vacated relatively recently as a result of a wave of sanctions by the West has helped. This means that there are factories for immediate occupancy.”

Thai manufacturers have benefited somewhat from the “China Plus One” production strategy of many firms. TGMA figures show that year-on-year exports to Japan and China/Hong Kong increased 37 percent and 15 percent, respectively, in the first quarter.

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