Change of clothes: The transfer of capacity overseas is as much about moving up the value chain as about keeping down costs

Facing a slump in its market for traditional garments and textiles, the industry in Thailand is shifting both its aim and its focus. It is starting to think of regional economies as places not only to sell jeans, suits and dresses but also to manufacture them. With the US, Europe and China seeing weak growth and costs at home going up rapidly, the country has had to change the way it thinks, looking more towards ASEAN for both markets and capacity. In this respect, the situation for garments may be seen as a proxy for what is happening in industry overall.

At the same time, Thailand’s garment and textiles industry is starting to work its way aggressively up the value chain. Concentrating on advanced fibres, it is increasingly embracing the fashion side of the business. Sector stakeholders understand that the industry’s future is more than just about lowering costs; it now must also increase the value of the products it sells. Thailand is well placed to benefit from a broader shift in capacity to places like Myanmar, Cambodia and Indonesia. Ultimately, however, to remain successful it is going to have to move beyond the old model of merely making lots of products cheaply: it must also innovate and create.

Slip But Not A Slide

The sector has been facing stiff headwinds for a number of years. According to the Thai Garment Manufacturers Association and the Thailand Textile Institute (TTI), the country’s garments and textiles exports dropped 12.2% in 2012: textiles fell 13.7% and garments 10%. Even more worrying was the slip in sales to developed markets. In 2012, sales of garment and textile products to the US fell 14.8% and those to the EU sank 24.27%.

In 2013, the situation improved somewhat. Overall production was up 3.6%, according to published comments by Suthinee Phupaka, director of the TTI, while textiles exports grew an estimated 8%. Still, that uptick has come with qualifications. “The year 2013 has been a difficult one,” Suebphongse Poonsatha, president of Nippon Paint, told OBG. “The country faced a challenging political environment, flooding in some parts, and reduced consumer confidence on the back of elevated household debt.” Phupaka, of the TTI, expects the sector to grow 7-8% in 2014.

In the industry, Thailand already wields a number of advantages over many countries. Because of its highly skilled labour force and the technology it uses, it is able to produce more advanced products than many regional competitors. Indeed, because of its consistent high quality and attention to detail, garments coming out of Thailand tend to be favoured over those made in China.

Thailand is a rare example of a country that, in this sector, can just about do it all, according the Thai Trade Centre, USA. This includes everything from upstream, midstream and downstream petrochemicals and natural fibres all the way to design, marketing and sales. Along the way from source to end product, other countries in the region do capture a lot of the value chain, but it is Thailand that offers the most complete end-to-end solution. Indonesia, for example, also has operations along the entire value chain, but tends to concentrate its energies on the lower end of the business spectrum.

State Support

The government seems increasingly supportive. According to the Thai Trade Centre, the state is providing export promotion loans, encouraging professional training, and bringing in specialists from around the world to assist in keeping Thailand up to date with the latest technologies and trends. Private industry is also working with government. Twelve separate companies have come together to form Thai Tex Trend, or T3. They are cooperating to encourage innovation in the Thai textiles industry and to spur the adoption of advanced technologies in weaving, knitting, dyeing, finishing and printing. T3 members exhibit their products at trade shows around the world.

Development in the garment and textiles sector has very much followed that of industry in general: limited production, active promotion, exports and decline. Unlike with some sectors, however, for a time the Thai authorities all but gave up on the industry. As electronics and auto manufacturing took hold in the country, they declared a sunset on the textiles and garment industry and reduced and slowed support of its development. Despite this, the sector has managed to evolve and hold its own, moving up the scale of efficiency and value added without the sort of support received by more favoured sectors.

Over The Sea

The sector is now moving offshore in earnest. Myanmar is a prime target, and tariffs are a strong motivator. In 2013 that country received Generalised System of Preferences (GSP) tariff rates to the EU, just as Thailand was losing them. As a result Thai companies, which pay a 12% tariff on garments sold to the EU, are starting to see their poorer western neighbour as a viable and efficient base for manufacturing. “Myanmar represents a huge investment opportunity for businesses across the ASEAN region,” Sawasdi Horrungruang, chairman of Hemeraj Industrial Estate, told OBG. “Yet the country’s social fabric is deeply divided and this may be a source of investment uncertainty as conflict between different factions begins to develop.” Myanmar is also very cheap: wages can be as low as $110 a month, whereas Thailand’s daily minimum, applied at 21 working days a month, comes to BT6300 ($233).

Shortage of labour is another problem. With the Thai unemployment rate still less than 1%, Thai textile and garment companies are finding it difficult to recruit staff. Talented employees find allure in businesses that are more exciting and seem to have better prospects. Those entering the workforce for the first time prefer to opt for jobs in hospitality, entertainment and tourism, according to comments by Somsak Srisuponvanit, Chairman of the National Federation of Thai Textile Industries, published on fibre2fashion.com, an online industry magazine.

The Value Vertical

s in many sectors in Thailand, so too in garments and textiles, another reason companies are shipping operations overseas is to work their way up the value chain rather than simply down. In February 2014, Indorama Ventures, a Thai-based subsidiary of the global textiles maker, acquired 80% of PHP Fibers, a German company that specialises in making fabrics for airbags (it is Europe’s largest maker of such products). The other 20% was purchased by Toyobo, a Japanese company that is active in both the textiles and automotive sectors. In 2014, Indorama Ventures also acquired Artenius Turkpet, which produces polyethyle terephthlate, a resin used to make synthetic fibres.

Closer Neighbours

The ASEAN Economic Community (AEC) will further shake up the development of the sector. After 2015, inter-ASEAN tariffs on Thai textiles and garments will fall to zero; they are currently 5-10% in some member countries. Even as the country is pushing to keep its textiles and garment sector in place, it is actively transplanting certain segments of capacity to other countries in the region. Thai companies say they do not fear the AEC; rather, they are looking forward to it. The newly integrated market will give all of its members access to low-cost labour. This need not threaten local brands, which companies believe are strong enough to handle the competition. On balance, local executives see Thailand selling into the rest of ASEAN at greater volumes than it will be buying. This should help to strengthen its current-account balance.

The AEC will also present the sector with challenges, just as it will to all industries. Thailand has a good head start, but neighbouring nations are quickly catching up. Indonesia could very easily add more apparel design capabilities. Vietnam is fast building up its manufacturing strengths. All ASEAN countries will be pushing to grow from regional exports after 2015. As trade barriers come down, many dials on the cost dashboard will see movement. What Thailand is likely to discover that its fellow members will be as keen to export to it as to import from it.

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The Report: Thailand 2014

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