The Dragon Versus The Elephant:
when a company wants to move a factory to Asia

The Dragon is a symbol of China just as the Elephant is a symbol of Thailand.  Our Company works in both countries and handles a number of projects each year in which clients in primarily Europe or the U.S. come to us with plans to either have a product currently produced in their country produced somewhere in Asia (so-called OEM manufacture) or to actually move a factory or build a new factory in Asia.  Usually most of these clients tell us they want to go to China.  The reason is that they have read countless stories of other companies relocating there or stories about China’s growing middle class and think they need to be there.  Also, most of them believe manufacturing in China is the cheapest in Asia and that they also need to be cheapest to compete effectively.

In business, the customer is always right, but in consulting one also has a professional responsibility to politely point out the pitfalls and to ask the tough questions to help the client fully think through the process he or she has started.  The truth is that many if not most of these companies really haven’t thought their plans through completely and that often more research is required before the best location to move a factory or to manufacture an item can be determined.  This is an area in which our company excels in that we have completed projects across China and can compare North China with areas such as Shanghai, Hangzhou, Beijing, Chengdu or South China.  We also are different because of our long term relationships in Vietnam, Thailand and elsewhere in Southeast Asia allow us to look at these locations and evaluate them as alternate sites as no company can afford to have all of their eggs in one basket.

     

Weihai, China

Recently we completed a project for a major client who came to us thinking he wanted to move one of his factories to China.  Usually the first choice mentioned by the client is Shanghai.  Unfortunately, Shanghai is no longer a low cost center and there are many better locations, such as Weihai in the North where labor rates are a third of those in Shanghai, land is cheaper and where there is much more motivated City and Province leaders competing for investment.  Shanghai is a big modern city and the right location for a head office in China, headquarters of a world bank or business services company or a base where better infrastructure or people skills are needed, it is certainly no longer the lowest cost site in China or even when compared to many other places in Asia.  I believe the situation with Shanghai is analogous to the situation in the stock market in a sense where public perception is often several months behind the market and by the time most buyers know of the opportunity and are ready to move, much of the opportunity is already gone as new opportunities develop. 

 

Although China can be the right choice for certain projects, we believe that China is only one site to be evaluated and that there are also opportunities elsewhere in Asia.  We convinced our client to look at more than one location in Asia and Thailand after consideration of Vietnam, the Philippines, Indonesia and Malaysia was selected as the alternate site.  The interesting outcome of this whole exercise was the result – in actuality China was not the best or even cheapest location for the proposed factory.  Thailand came out to us a somewhat surprising winner on many fronts and overall.  It is a lesson that many foreign investors would be wise to note and the Thai government to better publicize.

Thailand, sometimes called the “Land of Smiles” was the hot foreign investment (FDI) site of the 1980s.  During this time, many companies built factories to service Asia and to re-export back to their own country.  Thailand was a first choice because of its location, stability and the long term pro-business outlook of succeeding Thai governments.  Japan took the lead in this and still has a leading role in international business throughout the country.  In the 1990s, Thailand’s cost advantages comparatively became less compelling and from 1997 through the rest of the century, Thailand was working off a major debt crisis that slowed business throughout the country and the region.

At the same time Thailand was stumbling badly, China was yearly seeing increases in investment and business as the low wage rate and growing consumer market attracted investors to China.  Last year, China exceeded the U.S. as the number one site for foreign investment and continues to boom as America barely keeps from tumbling back into recession.  Having just returned from a week long swing through Shanghai, Hangzhou, Suzhou and Weihai in China, I can hardly believe how fast China’s economy is obviously growing.  This growth is an attraction for those wanting to tap the growing middle class in China but it has been our experience that most of our investors have been less interested in this and more focused on where is the best location in terms of cost, stability, intellectual property protection and tax incentives to site their factory now. 

With the above considerations in mind, Thailand surprisingly beats China especially for investors who are willing to look outside of Bangkok and its suburbs to the industrial sites of Rayong and other areas nearer to the Thai coast and to shipping connections.  Why is this area in particular attractive?  The reason is that the Thai government has come up with an impressive package of tax and other incentives to encourage economic development and job creation outside of Bangkok and the neighboring provinces.  These incentives when combined with the coming of age of many of Thailand’s better Industrial Parks such as Rojana Industrial Parks have created both the opportunity and the support structure for comfortable factory operations at low cost. 

 

Thailand has 56 provinces and 40 of them are in what the Board of Investment (BOI) calls Zone 3.  Zone 3 investments when also located in a government approved Industrial Park such as the Rojana Industrial Park in Rayong, entitles approved Board of Investment (BOI) projects lots of benefits.  Here is a short table that shows how Zone 3 in Thailand compares to China in a number of areas:

 Cost Comparison for Thailand and China         

Factor	Thailand –Zone 3	China	Difference
Land Cost	$30/sq meter	$30/Sq meter	China -50 yr lease
Land Ownership	Fee Simple	50 Year Lease	Thailand  - Full Ownership
Plot Coverage	About 85%	50-60%	Thailand allows more building for same amt of land
Building Cost	For Western high quality factory $25/sq ft	For similar structure - $22/sq ft	Slight difference in favor of Thailand
Utilities	Similar	Similar	No major difference
Taxes	Thailand offers 8 yr exemption for BOI approved projects plus 5 additional years at 50%.  Further deductions for transportation, electricity, water for 10 years plus other deductions	2 yr exempt – 3 yrs at 50%	Thailand clearly better
Import Tax on Raw Materials	5 year exemption, 75% exemption of imports exempt on domestic sales	No Customs Duty if for Export Only	Slightly more generous for Thailand
Value Added Tax	7%	17%	Thailand less tax , easier on refund for exports
Cost of Fees	Thailand slightly more expensive	China slightly cheaper	Thailand needs to reduce these fees
Unskilled Labor	Thai Zone 3 minimum wage about $70/month	China cost of unskilled worker $60/month	China looks cheaper but required benefits actually make China more expensive
Skilled Labor	Thailand competitive because of addition of China required benefits in middle but not at top	China about the same through the middle levels, but cheaper at the top end	Thailand more expensive for high level management, engineers, etc.
Cost of Shipping a 40 foot Container	Slightly under $2,000	About $2,000	Slight benefit to China
Additional Shipping Fees	Thailand Cheaper	China more Costly	Slight advantage to Thailand
Protection of Intellectual Property	Thailand Stronger	China Weak	Thailand clearly stronger
Size of Domestic Market	China clearly larger	Thailand’s increasing with AFTA and possible FTA with China	Advantage to China
Quality of Life for Expatriate Staff	Thailand Offers more amenities except when compared to maybe Shanghai	China Improving	Thailand provides more extensive activities
Cost of Supporting Expatriate Staff	Relatively Cheaper housing, food and other costs	More expensive Housing, Food and other expenses	Thailand cheaper

The above figures may look surprising but they are current and based on considerable research by Runckel & Associates staff.  Each project is different and we always believe that any project needs full research and consideration.  Thailand is not right for every project as intensely labor intensive projects usually are cheaper in Thailand.  Further, not only Zone 3 in Thailand should be consider for every project as existing factories in Bangkok or the suburbs maybe a good choice for projects requiring a considerable  design component or other factors.  However, the truth of the above also have been recognized by Chinese entrepreneurs such as the China World Best Group of Companies from Shanghai (a large textile and garment group of companies), that has built four factories in Rayong’s Rojana Industrial Park and currently has over 1,000 employees producing for re-export to China and elsewhere.

(Left and right) China World Best Group, Shanghai, moved its factory to Rayong's Rojana Industial Park

The good news for Thailand is that parts of the country are as competitive as potential sites for a new factory as their competitor sites in China.  The Thai government policy on offering increased tax incentives to investors willing to create jobs and increase income outside of Bangkok is a sound one.  The BOI website on Thailand as a source of investment is also a winner.  The problem, however, is that the BOI and the Thai government need to do more.  Because of government policy, some basic items made in Thailand like plastic resin are purchased for cheaper rates in China than they are sold for in Thailand even though they are produced there.  Fees for everything from renewal of work permits to licenses needs to be lessened and the application process made less costly and more efficient.  BOI and Government officials need to do more to get out the good news on Thailand’s competitiveness and they particularly need to do more to convince Thai executives who are often the quickest to advise would-be investors to look to China.  Thailand truly can be the “land of smiles” for newly hired workers in rural factories but government, business and the press need to do more to let the world know that Thailand is open for business and welcomes foreign factories with open arms not just a pretty smile.

About the Author:  

Christopher W. Runckel, a former senior US diplomat who served in many counties in Asia, is a graduate of the University of Oregon and Lewis and Clark Law School. He served as Deputy General Counsel of President Gerald Ford’s Presidential Clemency Board. Mr. Runckel is the principal and founder of Runckel & Associates, a Portland, Oregon based consulting company that assists businesses expand business opportunities in Asia. (www.business-in-asia.com)

Until April of 1999, Mr. Runckel was Minister-Counselor of the US Embassy in Beijing, China. Mr. Runckel lived and worked in Thailand for over six years. He was the first permanently assigned U.S. diplomat to return to Vietnam after the Vietnam War. In 1997, he was awarded the U.S. Department of States highest award for service, the Distinguished Honor Award, for his contribution to improving U.S.-Vietnam relations. Mr. Runckel is one of only two non-Ambassadors to receive this award in the 200-year history of the U.S. diplomatic service.

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