The turnaround in Thailand's industrial sectors was in line with economic growth, which was projected at 4-4.5% for 2002. Although there was severe flood damage in many province, it was not expected to adversely affect the country's economic and industrial outlook.

According to the Bank of Thailand, the Manufacturing Production Index (MPI) in the first nine months of the year to Sept 30 grew by 7.32% to 120.7, compared with 112.4 in the same period in 2001.

Domestically focused industries with satisfactory growth included iron and steel, liquor, motorcycles, cement and building materials. Export-oriented industries with high growth included electronics and electrical goods, commercial vehicles and rubber tyres.

The increase in the production capacity of domestically oriented industries mainly reflected the turnaround in the property sector.

The boost in industrial production resulted in a rise in manufacturing capacity utilisation to 58.7% in the first nine months, up from 53.1% in the same period in the previous year.

The industries with the highest increases in capacity included electronics and electrical goods, beverages, iron and steel and automobiles.

However, the figure indicated that a huge capacity surplus still remained.

Employment as of the end of September increased to 6.88 million workers compared with 5.96 million in the same period of 2001.

According to the Department of Labour and Welfare and the Social Security Office, the number of laid-off workers under the social welfare system in the first nine months of the year totalled 83,333, from 5,584 enterprises that had shut down. This compared with 107,745 laid-off workers and 4,717 closed enterprises in the same period of 2001. The total number of laid-off workers for all of 2001 was 166,215, with 6,128 closed enterprises.

The sectors with the most laid-off workers were the service and production sectors related to retailing.

Although the 2002 industrial outlook, particularly in terms of production, showed signs of a strong recovery, business and industrial confidence has declined since September, mainly due to external factors.

Continuous stagnation in the global economy, particularly the faltering recovery of the US and Japanese economies, combined with the fear of a terrorist attack and possible war in the Middle East, undermined the confidence of business and industrial operators.

The Bank of Thailand's Business Confidence Index dropped below 50 for the first time in six months, to 49.5, in September.

The index is based on a survey covering the business and industrial outlook for business operations, purchasing orders, investment, employment, production costs and overall production.

The Office of Industrial Economics believes the confidence index could countinu declining in 2003, given the variable external factors and the uncertain recovery in the world's core economies, the United States, Europe and Japan.

Although oil prices in the international market were expected to gradually decline after Iraq accepted the United Nations resolution on disarming, the fluctuation of oil prices and the threat of war in the Middle East were still of concern to the business and industrial community.

In addition, the value of many export products has continuously declined, reducing the income of the local manufacturing and investment sectors.

The country's economic growth depends heavily on exports which represent 60% of gross domestic product.

Recent government measures adopted to control credit cards are also expected to have a negative impact on some industrial sectors, particularly electronics and electrical goods, furnishings and household products.

The automobile and auto parts industry expects growth to slow in 2003 to 15% after significant growth of 35-40% this year.

Although several risk factors remain, the Federation of Thai Industries projects Thailand's manufacturing sector will grow by 4.5-5.5% in 2003, compared with 4-5% in 2002.

Phaphad Phodhivorakhun, the FTI chairman, said the forecast growth in 2003 would be fuelled by the persistence of low interest rates, a better rating on Thailand's economic outlook by Moody's Investors Service, and continuing political stability.

Still, he suggested the government should speed up the debt restructuring process of manufacturing firms under the Thai Asset Management Corporation and do more on industrial restructuring.

In the meantime, manufacturing operators also needed to undertake corporate restructuring and improve their corporate productivity to successfully compete in the tougher business environment.

The following is a brief overview of how some key sectors have fared over the past 12 months:

ELECTRICAL AND ELECTRONICS

According to the Bank of Thailand, manufacturing production in the electronics and electrical sector in the first nine months of 2002 expanded continuously from late 2001 by 24%, compared with a contraction of 27.5% in the same period in 2001.

The output of integrated circuits increased in line with the rise in exports to the United States, though questions remain about demand for IT products, Meanwhile, the production of television sets also rose significantly due to the launch of additional sales promotion in both the domestic and export markets. As a result, capacity utilisation in the sector increased to 58.5% compared with 46.6% in the first nine months of 2001.

Although the sectors are expected to maintain growth in the coming year, the demand for electronic parts in the global market remains uncertain.

In addition, local producers have experienced heavier competition from Chinese producers that have successfully expanded the market in the United States and have a competitive advantage in terms of raw material and labour costs.

CEMENT AND CONSTRUCTION MATERIALS

Cement and construction materials continued to grow significantly from the end of 2001, reflecting the upturn in the residential construction and property sector.

This was partly the result of effective government measures to stimulate the real estate sector, and the impact of low-interest credit and low cement prices.

The speeding up of construction work at the Suvarnabhumi international airport also contributed to strong growth in the sector.

Production grew by 19.3% in the first nine months of 2001 compared with 3.5% growth in the same period a year earlier. The industry's capacity utilisation rose to 61.4%, compared with 51.4% in the first three quarters of 2001.

However, Siam City Cement, the country's second largest cement producer, forecast that the sector would have moderate growth of 5% in the coming year, reflecting a slowing of local demand in the property sector.

IRON AND STEEL PRODUCTS

All products expanded in this sector, especially the production of hot- and cold-rolled sheets and galvanised iron sheets.

The growth was attributed to rising domestic demand, and to the Board of Investment's import surcharges in the first half of the year, which were followed by more long-term anti-dumping measures implemented by the Commerce Ministry.

The production of iron and steel for construction, such as wire rod, steel bar and steel pipe, enjoyed high growth in line with domestic construction recovery. Production in the sector grew by 25.3% in the first nine months of 2002, compared with 3.1% growth in the same period a year earlier. Consequently, capacity utilisation in the sector surged to 62.3% from 50.7%.


The sector is expected to maintain growth in the coming year in line with a continuous turnaround in the auto and construction industries. In terms of international trade, however, trade protection would remain high.

PETROLEUM AND PETROCHEMICALS

Production expanded by 1.9% over the first nine months of 2002, compared with 3.9% growth in the same period a year earlier. The decline in production was in line with the annual maintenance shutdowns of local refineries in the second quarter.

Still, capacity utilisation increased to 76% for the nine-month period, in line with rising domestic demand late in the year, and up from 74.6% in the same period in 2001.

But the industry's growth in 2003 is forecast to be static as the peak cycle of the industry is not expected until 2005, compared with initial projections of 2003.

FOOD

The industry's production output rose by 3.2% in the first nine months of 2002, compared with a contraction of 4.5% in the same period a year earlier.

The increase in production was due mainly to the output of sugar as a result of significantly more sugarcane available than in the previous year. The increase stemmed from the expansion of sugarcane plantations, induced by high sugarcane prices the year before and low sugarcane yields caused by contagious diseases such as the borer outbreak.

However, the industry's production began to decline from the third quarter as a result of raw material shortages in other product categories.

This was due to related problems such as chemical residues in exported broiler chicken and shrimps, and a ban on those contaminated products by the European Union.

Capacity utilisation in the industry for the year to September was at 45.2%, up from 42.5% in the same period in 2001.

TEXTILE PRODUCTS

This industrial sector was one of the few experiencing negative growth rates in 2002, along with petroleum and block rubber. Textile products lost market share in the United States and Europe to their free trade area partners, particularly Mexico and the Caribbean nations. Thailand's products have faced increasingly strong competition from several neighbours that have lower production costs such as China, Indonesia, Vietnam, Pakistan and India.

Textile production in the first nine months of 2002 contracted by 0.8% compared with 1.5% growth in the same period a year earlier.

Change is a necessity

ENTREPRENEURS: SMEs still find it hard to obtain funding due to poor management

SRISAMORN PHOOSUPHANUSORN

Supporting small and medium-sized enterprises has been a crucial cog of national development policies for numerous governments over the past few decades.

Under the Thaksin Shinawatra government, tens of billions of baht have been budgeted for liquidity support, training, technological assistance and marketing programmes to help small firms upgrade their competitiveness, expand markets and move up the value chain.

A worker tend a machine at a ceramics factory in Lampang, where 200 such view as a model plants export one billion baht worth of products a year and employ 9,000 workers. Lampang is viewd of industrial cluster development.

Yet the results of such initiatives have been less clear, with many experts saying that all too many small companies remain reluctant to implement the changes necessary to compete in today's business environment, whether in the form of improving accounting systems, drafting clear business plans or acknowledging the need to bring in outside managers or shareholders.

``Most of the applicants lacked business potential and transparent accounting systems because most are family- run,'' according to Wiwan Tharahiranchote, managing director of One Asset Management, who oversees the stated-owned SME Venture Capital Fund.

She was responding to critics who said that One Asset had been failing in its mission to help SMEs and should lose its management mandate for the venture capital fund due to slow progress in the approval process.

The company has a 10-year contract to manage the one-billion-baht venture-capital fund. To date, 145 million baht has been invested in joint ventures with 14 small businesses since June 2000. There were 57 applicants seeking a total of 855 million baht from the fund during the period.

``We have managed the fund with full professionalism, and delays in closing deals were due in part to structural difficulties of many small and medium-sized enterprises,'' Ms Wiwan said.

Labour-intensive ventures will find it harder to compete.

``It's also not easy to convince the SME managements to clarify their accounts.

It means they have to pay more taxes.'' Other state-sponsored funds have also failed to comply with the government's policy of improving the liquidity and competitiveness of small and medium-sized enterprises.

One problem restricting investments has been the fund criteria established by the Finance Ministry, which were ``tough and not practical'', an executive of a SME venture fund claimed.

A regulation that only SMEs with debt-to-equity ratios of less than 2:1 would qualify for funding are also a disincentive to investment.

On the other hand, small and medium-sized enterprises blame the conditions on lending and demands for high collateral as key barriers to obtainingloans.

According to Patanasak Hoontrakul, president of the Subcontracting Promotion Club, a requirement for the venture capital fund to hold not more than 50% of the paid-up capital of potential partners was one of the key hindrances to attracting investment. Since most SMEs have registered capital of only one million baht, they are limited to receiving 500,000 baht which is insufficient for business expansion.

As well, most SMEs do not reinvest profits or increase registered capital because they are family-run. Mr Patanasak said the requirement to create one board seat once a 50% investment was made was another obstacle. SMEs might be reluctant to accept it because most were family- run and had never held a board meeting, he said. As well, the requirement that venture receiving assistance must be profitable is a barrier.

Industry experts said small businesses still had to confront a painful truth: it will be difficult to obtain support as long as the government fails to modify the rules governing the SMEs venture capital funds to encourage more investment.

The government in 2002 began pursuing a policy of supporting industrial development and creating new businesses to strengthen the competitiveness of small and medium-sized enterprises.Many industrial development programmes have been implemented, including SME cluster development and industrial restructuring.

The Department of Industrial Promotion is preparing its own national SME development plan, expected to be completed in 2003.

A new entrepreneurs promotion board will be formed as part of the government's ambitious plan to create 50,000 new businesses within the next two years.

The board, to be chaired by Industry Minister Somsak Thepsuthin, is a refinement of an existing programme run on a smaller scale by the department, which has helped to produce 5,000 new entrepreneurs in the past two years. It initially helped proprietors run sustainable operations, effectively manage costs and prepare transparent accounts.

The National Science and Technology Development Agency, meanwhile, is stepping up its efforts to transform itself into an industrial technology research institute to help strengthen the capacity of SMEs, particularly in the area of technology assistance.

Pairash Tajchayapong, the NSTDA president, said the agency would follow in the footsteps of Taiwan's Industrial Technology Research Institute, one of Asia's most successful agencies in enabling the transfer of knowledge to SMEs, and Canada's National Research Council, a 60-year-old agency whose focus has been on strengthening SME capacity.

The transformation of the NSTDA was aimed at creating a more dynamic agency that would address economic growth through more innovative technology, the key to national development, Dr Pairash said. Another initiative is the creation of a national data centre for SMEs, which is a collaborative project of the Office of SME Promotion, the Thailand Institute of Scientific and Technological Research, the National Statistical Office and Krung Thai Bank.

The one-stop centre will offer a wide range of data services for small business operators, supplying updated information and assistance.The Industry Ministry, meanwhile, is coming up with the concept of the cluster-based development of SMEs, in a bid to improve competitiveness and productivity, reduce costs, and provide a value chain through the synergies of associated activities.

Industrial development under the cluster concept is being implemented using specialised industrial zones or estates, and exclusive zones for small and medium-sized companies.

So far, many industrial sectors were developing industry clusters or zoning, including automotive, agricultural, rubber, leather tanning and finishing, ceramics, waste recycling and printing ventures.

The Industry Ministry had assigned related agencies to help set a clear mission and direction for the cluster development of each industry, but nothing has been implemented so far.

However, the Lampang tableware and decorative ceramic cluster development concept is seen as the first cluster project in Thailand, initiated by the state-owned Industrial Finance Corporation of Thailand.

The concept initially aimed to boost productivity among small and medium enterprises in Lampang.

Teera Ashakul, an IFCT executive who oversees the project, compared the Lampang ceramic industry to the one in Sassuolo, Italy. Lampang's 200 ceramics factories export about one billion baht worth of products a year and employ some 9,000 workers.

In comparison, Sassuolo has 188 ceramics factories employing 22,000 workers and exports ceramics worth up to US$1.6 billion, which is about 39% of the global ceramics market.

A Thai Farmers Research Centre report said industrial clusters would be a key mechanism to increase the capabilities of SMEs to develop mutually dependent businesses and competitiveness.The report said that Thai industrial sectors are still confronted with increasing global competition and pressure from lower-cost countries, forcing companies to increase their production capacity and capability.

The United Nations Industrial Development Organisation (Unido) suggested SME development in Thailand should be based on the pattern in Taiwan where new industrial firms and clusters were encouraged to innovate and upgrade products and capabilities through a proactive strategy.

Frederic Richard, the branch director of Unido's Strategic Research and Economics Unit, agreed that SMEs, if allowed to operate their businesses separately, would be unable to strengthen their industries given the dynamism of capital flow, technology and customer demand.

In the past decade, state agencies and private companies in Thailand had spent very little time working toward this goal, when compared with those of other countries in the Asia- Pacific region.

He said it was not surprising, therefore, that industrial upgrading in Thailand trailed behind that of other countries in the region.

Industry experts said small and medium-sized enterprises needed to learn how to upgrade their products and apply new technology in production and management.

Small business operators had to be better prepared to move forward in the new economic era. Accounting systems, online customer services, supply chains and just-in-time management, and information management all needed improvement.

Based on research conducted by Prof Surachai Tumtavitikul of Thammasat University, a lack of skills in adopting IT and a lack of recognition of its benefits, were also a major problem for small and medium enterprises.

The research found that SMEs were too busy with their day-to-day operations to implement IT strategies. Most Thai small manufacturers used stand-alone computers with basic office applications, while some medium-sized manufacturers had system integration problems.

Similarly, research by Dr Busaya Vongchavalitkul of Vongchavalitkul University found that SMEs, especially in the Northeast, were short of both ITskills and quality IT infrastructure.