The Potential of the "Thailand-Plus-One" Business Model ―A New Fragmentation in East Asia―

Summary 1. “Thailand-Plus-One” is a business model in which Japanese companies operating in industrial clusters in Thailand transfer the labor-intensive parts of their production processes to special economic zones (SEZs) in Cambodia, Laos and Myanmar near their borders with Thailand. 2. The Thailand-Plus-One business model is derived from the fragmentation that have been a feature of world trade and investment since 2000. However, it differs from traditional models in that it links on small- and medium-sized cities in border areas. 3. Two factors are helping to turn the Thailand-Plus-One business model into reality. The first is the dwindling attractiveness of labor-intensive production in Thailand due to rising wages and labor shortages in that country. The unemployment rate in Thailand is under 1%, and wages have increased over 30% over the last two years. The second factor is the improvement of political and economic condition of the CLM countries―Cambodia, Laos and Myanmar―as recipients of investment by foreign companies. In recent years their growth rates have exceeded those of the original ASEAN countries, and they are all now making the transition to middle-income status. Another factor that has brought them to the fore as investment targets is the proactive efforts made by their governments to attract foreign companies. 4. There is a high probability that the Thailand-Plus-One business model will move ahead still further due to the following three factors. The first is full-scale participation by Myanmar. However, Laos and Cambodia are unsuitable as absorbers of labor-intensive production from Thailand, Myanmar has a population similar to that of Thailand, making long-term supply chain cost reductions feasible. An additional advantage is the fact that once a road link to Dawei is completed, it will be easy to export goods from production clusters in Thailand to India, the Middle East and Africa without having to pass through the Strait of Malacca. 5. The second factor is the development of transportation infrastructure in Thailand. The investment of 2 trillion baht into the improvement of transportation infrastructure development between 2013 and 2020, including the construction of a new railway linking Bangkok with neighboring countries, is expected to reduce transportation costs within supply chains centered on Thailand. 6. The third factor is increased support for the CLM countries from Japan and international financial institutions. This is expected to result in wide-ranging infra structure improvements. Moreover, it is anticipated that the Greater Mekong Subregion development program coordinated by Asian Development Bank (ADB) will lead to increased development of power supply systems and road networks in these countries. In addition, Japan promised ¥90 billion of assistance. 7. The Thailand-Plus-One business model is a valuable tool for Japanese companies hoping to develop and secure markets in the rapidly growing emerging and developing countries. To realize the full potential of the concept, it will be necessary to raise the productivity of manufacturing bases in Thailand.