Trade upgrade

Technological change, once a gentle breeze, is now sweeping through with much greater force, raising concerns about whether these advancements will disrupt Thailand’s export sector, which accounted for 54.5% of GDP last year, excluding services.

Thailand has fallen behind Vietnam in the export of high-tech products. Vietnam has become a production base for the downstream electronics industry, with demand increasing as the global market recovers, especially for computers, semiconductors and smartphones.

While Thailand mostly ships intermediate electronics products, such as integrated circuits (IC) and printed circuit boards (PCB), these products face price competition and evolving technology, meaning relatively little value is added.

Danucha Pichayanan, secretary-general of the National Economic and Social Development Council (NESDC), said Thailand’s traditional product champions are hard disk drives and various peripherals.

While peripherals are still viable, the production of hard disk drives is declining because of technological shifts, he said.

WEAKER INCENTIVES

“I have been saying for years that hard disk drive manufacturing, which shifted to use solid-state technology, has resulted in smaller sizes and the need for chips to control them. This change has led to a decrease in demand for hard disk drives, which are now primarily used in data centres,” said Mr Danucha.

“Our problem in the past was an inability to attract chip manufacturing factories to Thailand. These high-tech industries require incentives beyond what the Board of Investment provides, including capital subsidies and tools we didn’t have before. About 7-8 years ago our hard disk drive industry was doing well, so we were not aware of these needs. Now, we must act swiftly.”

Apart from measures and incentives to entice high-tech industries to invest in Thailand, he said it is imperative to produce a workforce capable of supporting them.

In the past, Thailand has not produced enough skilled tech workers. However, some universities have signed memorandums of understanding with foreign universities to establish chip design centres in Thailand, accelerating the training of such workforces.

While the government has enacted laws to enhance competitiveness, more funding is needed to support this endeavour, said Mr Danucha.

In the 2024 budget, 16 billion baht was allocated for the Competitiveness Enhancement Fund.

He said in the past, the country managed to attract a few upstream chip and chip design factories to invest in Thailand through this support mechanism, but more efforts are needed.

Mr Danucha stressed the importance of increasing financial support for this fund.

A continuous funding mechanism, bypassing the annual budget process, may be necessary to attract crucial factories to Thailand, including battery production plants, he said.

According to Mr Danucha, the government is also planning to allocate part of the revenue from the global minimum tax (GMT) to this fund.

He said the extent of subsidies for the high-tech industry depends on various factors, such as the size of the factories and the benefits the country will receive, including technology transfer.

These factors depend on negotiations with the owners of those technologies, said Mr Danucha.

He said Vietnam adapts to technological changes faster than Thailand because of its political structure.

However, Mr Danucha said he believes the Competitiveness Enhancement Fund can attract more high-tech factories to set up production bases in Thailand.

GLOBAL TAX

The principle of the GMT, initiated by the Organisation for Economic Co-operation and Development (OECD), is to ensure that large multinational enterprises (MNEs) pay a minimum global tax rate of 15% in each country where they operate.

If taxes paid in any country are less than 15%, the difference must be paid to the country where the parent company is headquartered.

The GMT agreement applies only to MNEs with global revenue exceeding €750 million per year (around US$870 million).

Countries participating in the agreement can impose a minimum corporate income tax rate of 15% on these MNEs operating within their borders. If a subsidiary of an MNE operates in a country with a corporate tax rate lower than 15%, the parent company’s home country can collect the difference up to the 15% minimum.

While some countries have not joined this agreement and have corporate tax rates of less than 15%, the mechanism allowing the parent company’s home country to collect the tax difference creates an incentive for non-participating countries to raise their corporate tax rates to 15%.

This gives countries an incentive to collect the tax revenue themselves, rather than allowing the parent company’s home country to benefit from collecting the difference in tax revenue.

Thailand, as one of the 140 countries that signed the global tax reform agreement, drafted the Top-Up Tax Act.

This draft law prepared by the Revenue Department passed a series of public hearings, in accordance with the constitution.

The draft includes the Top-Up Tax Act, which aligns with the principles of OECD Pillar 2, as well as secondary or subordinate legislation.

The department submitted these to the secretariat of the cabinet and they are awaiting scheduling for a cabinet meeting.

If the law is approved by parliament and published in the Royal Gazette, it will take effect from the first day of the year following its publication.

The Revenue Department expects this law to come into force by 2025.

INFRASTRUCTURE NEEDED

Kriengkrai Thiennukul, chairman of the Federation of Thai Industries (FTI), said Thailand has historically chosen to be a manufacturer in the downstream electronics industry, in which it excels because of the relative ease of production.

This made Thailand a global manufacturing base for hard disk drives.

Major global companies in this industry, such as Western Digital and Seagate, established manufacturing bases in Thailand for export production, allowing electronics goods produced here to have the second-highest export value, following automotive exports.

Smart electronics alone generate 7-8% of the country’s GDP.

However, the downstream electronics industry is labour-intensive. With rising labour costs and technological disruptions, such as replacement by solid-state technology, the income from downstream compared with midstream and upstream industries varies significantly, he said.

Thailand earns only 120 billion baht from the downstream industry, while countries such as China and Malaysia with midstream industries earn double that amount, said Mr Kriengkrai.

He said the FTI is collaborating with the Higher Education, Science, Research, and Innovation Ministry to plan the development of the industry from downstream to midstream, which involves higher technology and less labour, such as PCB manufacturing and IC package design.

“However, to attract the midstream industry to Thailand, the government needs to improve the necessary infrastructure to create an ecosystem, especially the preparation of skilled personnel through upskilling or reskilling, as well as ensuring sufficient clean energy because the industry consumes a high amount of energy,” said Mr Kriengkrai.

“The world is becoming more concerned with the environment, and an adequate water supply is necessary.”

MIDDLING FDI

Aat Pisanwanich, an independent analyst on international economics, said Thailand’s weakness in developing high-tech industries is related to its policy for promoting foreign direct investment (FDI).

He said Thailand lacks rules requiring investors to engage in technology transfer, and the country’s policies do not have continuity.

In contrast, Mr Aat said Vietnam developed a clear roadmap in this regard over the past decade. Vietnam positioned itself as “China Plus One”, meaning that investments made in Vietnam can be exported to the Chinese market or link their production chain with China.

This led high-tech industries from the US, China and Taiwan to establish production bases in Vietnam, he said.

Mr Aat said another hindrance in Thailand’s pursuit of high-tech industries in this region is its political turmoil, especially during the past decade, marked by a coup.

Vietnam’s politics have been more stable, making investors confident, particularly in industries such as semiconductor manufacturing, which is “the future of all industries”, he said.

In addition, Vietnam has clear, enforceable laws, including the death penalty for corruption.

Mr Aat emphasised the necessity of Thailand clearly positioning its global role, such as increasing value-added products through innovation, or aligning with worldwide trends including social care, environmental sustainability, health or artificial intelligence and robotics.

According to the latest NESDC report, Thailand’s industrial goods production declined for six consecutive quarters.

In terms of the export product group, the proportion of production for export ranges from 30-60%. Key products that declined include the production of electronic components and circuit boards, down 17.2% year-on-year in the first quarter, while computers and peripheral devices fell by 16.7%.

The state planning unit reported the value of Thai goods exports decreased by 1% in the first quarter this year, aligning with the Manufacturing Production Index dipping by 3.7% in the same quarter.

The NESDC said the export decline is partly attributed to reduced exports of industrial goods, particularly automobiles, computer components, circuit boards, electrical appliance parts and air conditioners.

Given the weakening FDI in Thailand and decreasing export competitiveness compared with regional peers, it is crucial to create incentives and promote the upgrade of manufacturing sectors towards technology-driven production that emphasises innovation and advanced technology, said the planning unit.

This effort should be coupled with an emphasis on developing industries related to raw material production and intermediate goods within the country, as well as workforce development and skills enhancement to meet labour demand in the industry, noted the NESDC.

Source – Bangkok News