Efficiency The Oxygen for Thailands Production Industry

Historically, Asian countries have opened their markets to foreign investment and products, often resulting in the establishment of production facilities offering mainly labor job opportunities. This allowed western producers to manufacture their goods in low labor cost countries such as the Philippines, Malaysia, Indonesia, Thailand, India, Bangladesh and others which was essential for them to stay price competitive in their own consumer markets. At the beginning of the labor export era, the only requirement for Asian suppliers, in addition to low labor cost, was mainly to reach and fulfill western product quality standards. Today, these requirements have changed. Nowadays the western consumers concern is not only about the price/quality ratio of the product itself. He also considers environment friendly production, as well as operational safety, health conditions and social compliance in manufacturing countries. Western consumers increased awareness of these factors requires Asian manufacturers to invest in improvements to existing manufacturing methods and techniques and to implement social welfare policies and practices, which often translate into considerable cost. At the same time expectations of living standards across the population of rapidly developing countries in Asia are increasing, partially driven by new disposable income and the promotion of expensive western goods and life styles in Asian consumer markets. Both, the higher standard requirements in all aspects of production and the higher living standard expectations in the manufacturing countries lead to higher cost for the manufacturer and ultimately to a higher first cost of the product. The basic cost life cycle of a manufacturer starts with the cost of raw materials, the cost of the production process and the cost related to quality. The cost spiral then

gets further driven upwards by the requirements regarding environment, safety, health, (ESH) and social compliance.

When China opened its labor and production market, it could easily compete with the already well-established Asian countries like Thailand as it started with only the three first steps of the cost spiral. Western buyers moved a huge amount of their production to China in order to profit from the price advantage. Some of them later paid the price like Mattelin 2007 when it had to recall millions of toys made in China that did not meet quality and safety requirements. The same happened in the garment industry where entire shipments got rejected because of quality/safety issues resulting in lost sales for the companies that had moved their production to China. In order to make up for bad incidents damaging Chinas reputation as a reliable manufacturing country, Chinese manufacturers had to move up through the Quality and Compliance Cost Spiral very quickly. Two or three years after the big run to China many western buyers moved part of their production back to their previous reliable suppliers saying that the

price advantage in China is not worth the uncertainty of eventual quality incidents. Unfortunately by that time some Thai manufacturers had already run out of business. China remains a big labor and production market. With its often new and technologically well-equipped factories and a society more likely stimulated by competition than those in many South East Asian countries, China represents a serious challenge to the earlier well established production countries such as Thailand where competition keeps increasing and is likely to intensify with more countries trying to get a piece of the cake. Today we are at a stage where at least some industries in Thailand face the same problem as those in developed countries; they have become too expensive since they are higher on the cost spiral and they can hardly compete with their neighbouring competitors offering the same product at a lower price. To address this issue and survive, Thai manufacturers have to drastically reduce their production cost by reducing all kinds of waste and by increasing efficiency to a maximum. This will reduce the risk of customers considering to move or to effectively move their production away from Thailand. While the current Thai government, with its 300 Baht minimum wage policy, is somehow addressing the issue of the low purchasing power of its population (compared with neighbouring countries), eventually helping Thailand to gain a more attractive position in investors eyes and international comparison charts, as well as increasing consumption and though creating higher demand for hopefully domestic products, this same policy puts a huge additional burden on companies operating in the labor intensive manufacturing sector. Another challenge for the Thai manufacturing industry is already appearing on the horizon with ASEAN expected to open up frontiers and take down commercial

barriers among Asian neighbours in 2015. By that time, free flow and distribution of consumer goods are expected to be eased and ASEAN countries competition will not anymore be limited to who can supply more cheaply to industrialized nations. Instead we will see an increasing ASEAN-internal competition where your Ma-Ma-noodles, for cost saving reasons, may suddenly be produced in Vietnam or Laos and from there be shipped to the Thai consumer market or where a similar product from a neighbouring country may storm the local market and eat up market shares from the Thai product. With the unavoidable specter of a considerable cost increase due to higher daily wages to be paid to workers, and in the wake of a liberalized ASEAN market, it is ultimately time for the Thai manufacturing sector to seriously review and analyze all production- and operation processes and to make the necessary changes in order to increase efficiency and reduce cost to the absolute minimum. This includes: Taking substantial efforts to adopt Lean Manufacturing or other modern production technics Reducing overall production time to effective time of production eliminating all waste-times in between different steps of production Creating or improving transparency, visibility, accuracy and speed of information across all processes with the help of sound IT systems integrating the entire business and if possible even the customer Investing in labor skills, knowledge and competence through planned training and education Improving work attitude, motivation and psychological ownership through a participative management approach

Whether and for how long a manufacturing company can shield itself against the neighbouring competition and survive in the long run mainly depends on the implementation of the above mentioned improvements.

Written by: Niklaus Stucki Bangkok, 14th November 2011 Published: The Nation, 13th January 2012