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Japan’s Thailand-Plus One Business Model

The Thai political crisis has shown no sign of subsiding. Indeed, the rise of political violence becomes more evident. And since Thailand is an important part of the regional economy, its protracted crisis has produced far-reaching effects on the country’s partners. Japan, a major economic partner of Thailand, has felt the political heat too.

 

The Japanese company Honda Motor suffered significant losses during the Thai floods in late 2011.

 

Already, the crisis is exacting a toll on the Thai economy. This year, Thailand's economy is expected to grow 4.3%, down from an earlier projection of 5.2%. Thailand's Finance Ministry has warned that economic growth could fall to as low as 3% if the political unrest persists. For now, many foreign investors remain committed to Thailand. But Japanese companies are closely monitoring Thai political developments, and have put in place backup plans to avoid unfavourable consequences as a result of escalation of political conflict.

Echoing the apprehension of Japanese businesses, in December 2013, Japanese ambassador Shigekazu Sato expressed his own concern over Thailand's political uncertainty. Referring to the stance of Prime Minister Shinzo Abe and Foreign Minister Fumio Kishida, Sato emphasised, “As the largest foreign investor in the country with a big Japanese community living here, we wish all parties concerned will resolve the conflicts in a peaceful and democratic manner within the framework of the constitution.” In this regard, one of Japan’s backup plans is the realisation of a Thailand-Plus One business model.

But it is imperative at this point to clarify that the Thailand-Plus One policy was not originated at government level, nor was it a response directly to the Thai political crisis. It was an idea catalysed by the Japanese business community, which looked into the possibility of relocating some of the labour-intensive production into Thailand’s neighbouring countries, especially the so-called CLM, namely Cambodia, Laos and Myanmar.

Thailand, in other words, has become too expensive for some kinds of labour-intensive manufacturing. Other challenges facing Japanese investors include rising minimum wages and shortage of labour. However, the Thailand-Plus One business model may come to rescue Japanese businesses in Thailand at this point when the political conflict has a tendency to persist; this would surely affect their confidence. Even Sihasak Phuangketkeow, Permanent Secretary of the Thai Foreign Ministry, reiterated that Japanese companies have strategically shifted parts of their businesses concentrating in Thailand to “Plus-One” locations, such as Laos and Cambodia, to avert risks of political unrest and natural disasters in Thailand.

The Thailand-Plus One initiative is not new, but a reproduction of the China-Plus One business model. Learning from experiences in China, Japan businesses are now implementing their Thailand-Plus One policy to relieve economic burdens, exploit opportunities in growing markets in Thailand’s orbit as well as diversify political risks away from the kingdom. Therefore, the essence of the Thailand-Plus One initiative is to transfer the labour-intensive parts of the production process to growing economies surrounding Thailand, in Cambodia, Laos and Myanmar.

It is important to note that, as in the Chinese case, instead of continuing to search for sophisticated markets to pursue lucrative businesses, Japanese companies are attracted by the idea of linking up their production base in Thailand with small and medium cities in the border area as alternative locations for manufacturing.

Needless to say, economic and political conditions in Thailand provide a rationale for the initiative. Economically speaking, the labour-intensive industries in Thailand have increasingly become unviable due to rising wages and labour shortages. In terms of political risks, relentless conflicts marked by intensifying political violence will practically delay foreign direct investments, including from Japan. The prospect of the conflict coming to an end is slim. Political uncertainty is thus partly responsible for the partial relocation of Japanese production from Thailand to neighbouring countries.

It is also noteworthy that Thailand’s neighbours themselves have improved their domestic economic conditions. Rapid economic growth is being seen in Cambodia, Laos and Myanmar. Their growth rates have exceeded those of the original members of ASEAN. Meanwhile, the governments of Cambodia, Laos and Myanmar are eager to welcome foreign investors, thus formulating attractive policies to ensure continued inflows of foreign money into the countries. Incentives such as upgrading infrastructure, fairer business laws, concessions for foreign investments and guaranteeing political stability are on offer to potential investors, near and afar.

But the impact on Thailand could be huge. The original idea behind the Thailand-Plus One policy was meant to be useful for both Thailand and Japan. At one level, Japan has never wanted to abandon its long-term investments in Thailand based on the strength of the Thai economy, its skilled labour force and a considerably reliable production process. The Thailand-Plus One initiative was designed to consolidate Thailand as a regional hub of manufacturing, in charge of taking control of other smaller-scale production bases in Cambodia, Laos and Myanmar.

Japan, at the same time, would be able to expand its economic presence in the region, not only to pave the way for potential investments from Japanese businesses but also to raise Japan’s own competitiveness in the era of a fierce competition with China. From this perspective, Japan’s Thailand-Plus One policy is a win-win formula for its businesses and local hosts in the region.

It is however undeniable that political crisis in Thailand has partly influenced Japanese companies to search for more reliable local partners. With Japanese investors already nervous because of a fragile global recovery, competition with China, and Japan’s own economic recession, Thailand’s political stalemate could hurt its appeal as an investment destination for Japanese business and lead to dangerous capital outflows.

To be sure, after more than three months of political demonstrations in Bangkok now, the impact on the economy is palpable. With the tourism industry being hit hard by the political impasse, foreign investors have delayed their purchasing decisions. Unavoidably, the relocation of arms of Japanese production to the CLM countries, at this critical point in Thai politics, will be taken as a sign of the diminishing confidence in the Thai economy. As the largest economy in mainland Southeast Asia, and second only to Indonesia in ASEAN, Thailand’s economic trajectory, during the current crisis and in its aftermath, will play a vital part in the regional economy.

With the ASEAN community building being materialised, economic and political uncertainties in Thailand may cause a huge disruption to that regional process. Japan’s Thailand-Plus One policy may come to fix a part of its own investment dilemma in the region, but it could also sound the alarm on the seemingly never-ending instability in Thailand.

 

 

 

 

 

 

   Pavin Chachavalpongpun teaches at Kyoto University’s Centre for Southeast Asian Studies.