Non-Equity Modes of Trade in ASEAN
Promoting new forms of trade between
Japan and ASEAN

land
i
a
Th

PAPER 9A P R I L

2020

For inquiries, contact ASEAN-Japan Centre(ASEAN Promotion Centre on Trade, Investment and Tourism)
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Paper 9 / April 2020 / Non-Equity Modes of Trade in ASEAN: Thailand
Promoting new forms of trade between Japan and ASEAN

Non-Equity Modes of Trade in ASEAN
Promoting new forms of trade between
Japan and ASEAN

PAPER 9A P R I L

2020

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NOTESThe terms country and/or economy as used in this study also refer, as appropriate, to territories orareas; the designations employed and the presentation of the material do not imply the expressionof any opinion whatsoever on the part of the ASEAN-Japan Centre concerning the legal status ofany country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers
or boundaries.

The following symbols have been used in the tables:• Two dots (..) indicate that data are not available or are not separately reported.
• A dash (-) indicates that the item is equal to zero or its value is negligible.
• Use of a dash (-) between dates representing years, e.g., 2015–2016, signifies the full period
involved, including the beginning and end years.
Reference to “dollars” ($) means United States dollars, unless otherwise indicated.

There are 10 papers in total. Five (Cambodia, Lao PDR. Myanmar, the Philippines andViet Nam) have been published. The other papers are being produced subsequently.
Paper 1. Brunei Darussalam
Paper 2. Cambodia (published in August 2019)
Paper 3. Indonesia
Paper 4. Lao People’s Democratic Republic (published in March 2020)
Paper 5. Malaysia
Paper 6. Myanmar (published in March 2020)
Paper 7. Philippines (published in March 2018)
Paper 8. Singapore
Paper 9. Thailand
Paper 10. Viet Nam (published in December 2018)

Prepared by Professor Chie Iguchi (Keio University, Japan) and Yasushi Ishida of theASEAN-Japan Centre (AJC) under the direction of Masataka Fujita (AJC). Errors and omissions
are only those of the authors and should not be attributed to their respective organization.

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CONTENTS
1. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Characteristics and scope of NEMs: Thailand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.1 Scale and scope. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 NEM by modality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6(1) Contract farming/contract growing (cooperatives)by integrators: Chicken meat. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6(2) Subcontracting (or outsourcing): Apparel industry . . . . . . . . . . . . . . . . . . . . . .  16(3) Subcontracting: Automotive parts industry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

(4) Subcontracting: Jewellery industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
(5) Other types of NEMs: Offshoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

2.3 Crucial factors affecting the capacity developmentof local Thai firms: Backward linkages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  47
3. Opportunities and challenges for NEMs in Thailand . . . . . . . . . . . . . . . . . . . . . . . . . . 52
3.1 Ownership/non-ownership. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
3.2 Relationships between NEMs and industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

3.3 Ownership and control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
3.4 Localization strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
4. Policy implications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
4.1 Enhancing capacities of local firms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
4.2 Mainstreaming sustainable development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
4.3 Improving the institutional setting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

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KEY MESSAGES• The volume of Thailand’s non-equity mode (NEM) production and exports has been increasing,reaching an estimated $106 billion in the goods sector alone in 2016. NEMs are estimated to haveaccounted for 48% of total merchandise exports in 2016. If services are included, NEM exports thatyear would amount to at least $150 billion.
• Thai firms are involved in various types of NEMs, including contract farming and growing,
subcontracting, management contract and franchising. The type of NEM varies by industry.
• Chicken integrators are a good example of contract farming and are also business partnersof transnational companies (TNCs). The industry is one of the best-performing and highest
employment-generating ones in the agricultural sector. Thailand was the fourth largest exporterof broiler meat and broiler meat products in 2015, sharing 6.2% of global exports of broiler meat.
Chicken integrators participate in a wide range of value chain activities, from poultry raising toretailing. They have stable NEM agreements and alliances with foreign customers.
• Having the ability to supply the entire textile and garment value chain, from upstream todownstream, the textile and apparel industry in Thailand has traditionally flourished. The export
value of textiles and garments in 2016 was $6.5 billion; their share of total exports and export
value has remained flat. Development of design capacity is required in order to continue NEM
relationships and to maintain and explore domestic and regional markets.
• Thailand’s automotive industry contributed about 12% of the total gross domestic product (GDP)in 2016 and was ranked as the largest automobile producer in ASEAN in that year. Automotive
component exports amounted to $16.3 billion, or 43% of exports from the ASEAN+6 group ofcountries. Local Thai firms typically have developed their technological capabilities throughbackward linkages with TNC affiliates in Thailand.
• Jewellery is one of the top 10 export industries in Thailand. The export value of gems and jewellery
was $16 billion in 2016. The main Thai firms that have linkages with TNCs are not large firms
but rather medium or small ones. The industry faces a reduction of skilled workers and needs toinvest more in research and development and in training to sustain the skilled labour force.
• Thai NEM partner firms have developed their capabilities to differentiate them from competitors
in neighbouring countries. They have experience in capability building and technological learningfrom having direct technological transfer from TNCs through foreign direct investment (FDI), or
backward linkages with TNC affiliates in Thailand or customers outside Thailand. The questionis whether Thai firms have acquired enough of the capabilities that TNCs require in their partner
firms.
• Local Thai firms’ capabilities in both technological and managerial skills should be enhanced tomeet TNCs’ current and potential demand. Once these necessary capabilities have been attained,
firms can have more initiative or autonomy in their operations; they can find potential customers
through networks; and independently from TNCs in terms of autonomy or initiatives, they can thencreate their own business activities or create their own Thai brands in the long run.
• As local NEM firms and their foreign clients have no equity relationship, the normal TNC governanceof foreign affiliates in host countries is sometimes almost absent. The Thai government thus
cannot rely only on the compliance level and guidance of foreign clients for the governance of local
NEM firms.
• The government of Thailand should consider implementing the regulatory framework for NEM
firms to export, promote innovation, expand employment and upgrade technology successfully.

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1. INTRODUCTION
Trade is not always undertaken between independent firms. Both arm’s-length and non-arm’slength trade exist, and in the latter, trade may also take place between foreign companies and local
firms without an equity relationship, with the local firms controlled by the foreign ones. In Thailand,
this non-equity mode (NEM) of trade is spreading in the form of international subcontracting in
manufacturing of automobiles, electronics and garments, among other industries; contract farmingin agriculture and livestock, as in shrimp aquaculture and food processing; international franchisingin fast food and retail (including convenience) stores; variations of build-own-operate-transfer
arrangements and other concessions in infrastructure projects; and management contracts (e.g. ininternational hotel chains).1 This paper examines the case of Thailand within the overall frameworkof the NEM project by the ASEAN-Japan Centre (AJC) (box 1).
In Thailand, the 32nd largest economy in the world and the 2nd largest in ASEAN after Indonesia(according to World Bank data), NEMs in all three sectors – primary, manufacturing and services –have been contributing significantly to economic development. In manufacturing, for example, theautomotive industry plays a pivotal role, accounting for 12% of GDP. For auto parts alone, exports
reached over $7.4 billion in 2016, with more than 1,700 supplier companies.
The next section explains the characteristics and scope of NEMs by type and introduces particular
types that have distinguishing characteristics in Thailand. Section 3 provides a picture of opportunities
and challenges in the selected industries and analyzes the implication of NEMs for the economy.
The last section makes suggestions about policy implications.

Box 1. The NEM project by the ASEAN-Japan Centre
Other than arms-length relationships, equity holding is not the only means of exerting control
over the international value chain. Companies also enter into contractual relationships with otherindependent firms. This trade is gaining importance as the system of global production becomes
more integrated and forms value chains. This is an area in which lack of knowledge and a huge gapof research exist in ASEAN. It also calls for an overall analytical framework to assess development
impacts in order to propose a generic policy framework for dealing with this kind of transaction. The
fundamental difference to normal trade is that non-equity forms of operations relate to a contractual
partnership between private parties. The role of the state related to this partnership is limited tosetting the framework conditions within which the private parties can freely negotiate the terms of
their cooperation. By better understanding this phenomenon, including the scale and scope, andfilling a policy analysis gap, the ASEAN-Japan Centre (AJC) will provide ASEAN country governmentswith policies that they need to consider in order to fully benefit from these new forms of trade, as
well as investment.
In order to understand the scale and scope of non-equity involvement in major industrial sectors,
a case study methodology is used. The reasons for taking this approach are two-fold: (1) balanceof-payments and supplementary statistics do not provide the detail necessary to accurately
measure cross-border non-equity participation; and (2) the relevant microdata are fragmented anddisconnected. As much as possible, each case study builds on existing research and statistics.
…/

1

There are also many types of NEMs of business activities among local companies. As this paper focuses on NEMs
in the context of international trade, it does not address the case of NEMs among local companies.

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Box 1. The NEM project by the ASEAN-Japan Centre (Concluded)
New opportunities are opening up for ASEAN countries in the context of TNCs’ internationalinnovation networks. Although attracting FDI and encouraging foreign TNCs to establish
affiliates remain important options, governments need to review their current regulatory regimes
in the context of international innovation networks. A key objective of this study is to makerecommendations on which policies (investment and industrial) governments need to consider inorder to fully benefit from emerging opportunities.

Table 1. Description of selected non-equity modalities, including examples of typicalindustries, in Thailand
Modality

Description(in the international context)

Typical industries

Company examples
Sumitoronics (Japan)

Subcontracting

Electronics
Agreement whereby a TNC contracts
out to a host-country firm one or more
aspects of product design, processing
Garments
or manufacturing. Includes contract
manufacturing and design, andoutsourcing in the case of services orAutomotive parts
business processes.

• Sheico (Taiwan Provinceof China)• VT Garment (Myanmar)
Denso (Japan)

Contract farming/
contract mining

Agreement between a TNC buyer
and host-country farmers andminers (including governments)that establishes conditions for the
production and marketing of farm andmining products.

Sahachol Food Supplies(Thailand)

LicensingContractual relationship in whichFood
a TNC (licensor) grants to a hostcountry firm (licensee) the right touse an intellectual property (e.g.
copyrights, trademarks, patents,
industrial design rights, trade secrets)
Character goods
in exchange for a payment (royalty).
Includes brand licensing, productlicensing, process licensing (crosslicensing, intra-firm licensing).
RetailCharoen Pokphand(Thailand)

Franchising

Contractual relationship in whicha TNC (franchisor) permits a hostcountry firm (franchisee) to run a
specified business modelled on asystem developed by the franchisor in
exchange for a fee.

Education

Kumon Thailand (Japan)• Agriculture• Fishery• Siam Export Mart
(Thailand)• PTN Group (Thailand)• Dream Express(Thailand)• True Corporation Public(Thailand)• Kiragames (Thailand)• Kantana Group Public(Thailand)Management
contracts

Agreement under which operational
control of an asset in a host country
is vested in a TNC contractor thatmanages the asset in return for a fee.

Tourism andhospitality

Compass Hospitality
Group (Thailand)

Other

Includes concessions, leaseagreements, build-operate-transfer
arrangements, etc., in the context ofpublic-private partnerships.

Infrastructure

Bangkok Expressway
Co. Ltd. (Kumagaigumi,
Japan)

Source: AJC.

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2. CHARACTERISTICS AND SCOPE OF NEMS:THAILAND
2.1 Scale and scope
According to the Ministry of Commerce and the Bank of Thailand, in 2017 the country’s total external
trade (exports plus imports) in goods and in services reached some $459 billion and $121 billion,
respectively.2 With a favourable world economy, the export growth of both goods and services in 2017
registered a surplus of more than 5%.
In 2010 UNCTAD estimated global NEM production at over $2 trillion of sales (UNCTAD, 2011).3
However, it noted that the analysis of NEMs is complex, as “the web of directly owned, partiallyowned, contract-based and arm’s-length forms of international operation of TNCs is tangled, andsome of the distinctions between the different modes are blurred” (p. 130). Thus, the analysis islimited to a number of industries in which NEMs are especially important. Various trade data showthat the growth of world trade has stagnated since 2008. In 2016, trade in goods declined by 0.2%
from the previous year to $15.9 trillion, only a $0.8 trillion increase from 2010 at current prices.4
In this context, NEM export activity in Thailand in 2016 was estimated at $106.4 billion in the goods
sector alone, which had total exports of $236.6 billion. The amount of NEM activity jumps if services
trade is considered. For example, tourism, one of the major services industries using NEMs in
Thailand, had $36.7 billion revenue in 2016 and a 9.2% share of GDP.5 Total NEM exports of goods
and services reached at least $150 billion in 2016, and NEMs accounted for 48% of total exports.
Tables 1 and 2 summarize NEM operations by mode and in selected main industries, respectively.
In each sector, NEM exports are substantial. In the primary sector, the production and export ofchicken meat is a good example of the contract farming and contract growing6 that is operated andmanaged by cooperatives and chicken meat exporters affiliated with major food companies such as
Saha Farms, Charoen Pokphand (CP) and Cargill. Chicken meat is a major agricultural export of thecountry; Japan is the largest export destination, receiving products worth $302 million, or 51% of all
chicken meat exports from Thailand in 2016.7 Rice and rubber are other major agricultural exports.
In the secondary sector, the automobile industry has been playing a major role in driving Thai
exports and FDI. The industry constituted about 12% of total annual GDP in 2016. There are 18
car assemblers in the country, owned either 100% by foreign manufacturers or through joint
ventures between Japanese and local companies. The industry includes some 2,500 automotive
suppliers operating at different levels.8 These suppliers are the backbone of the industry, which had$6.53 billion in exports in 2016.

2

3

4
5
6

7
8

Goods exports: $236.6 billion; goods imports: $222.7 billion; services exports; $75.3 billion; services imports;$45.5 billion.
Contract manufacturing and services outsourcing accounted for $1.1–1.3 trillion, franchising $330–350 billion,
licensing $340–360 billion, and management contracts about $100 billion (UNCTAD, 2011).
IMF, Trade of Goods, Selected Indicators (source: International Financial Statistics).
Travel & Tourism Economic Impact 2017 (WTTC, 2017).
Contract growing is a contract between a production company and a cooperative, typically called a “poultry
production and purchase agreement”.
UN Comtrade.
See AJC, Global Value Chains in ASEAN, Paper 10: Thailand, March 2019.

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The apparel industry attracts foreign companies in all stages along the value chain from upstream
to downstream. In 2016, exports of textiles and clothing amounted to $7.5 billion and exports offootwear to $0.8 billion. The industry includes roughly 4,700 textile manufacturers.
As for the tertiary sector, various services are growing rapidly. The share in GDP of this sector alone
reached 55% in 2015, with an average growth rate of 6.6% from 2005 to 2015.
Convenience stores are growing rapidly in urban areas, replacing local shops and stores. Amongthem is a well-developed example of store franchising: 7-Eleven, the largest international chain of
convenience stores. It has 11,000 stores in Thailand: about 50% are franchised stores whose owners
pay franchise fees and marketing fees to C.P. Seven Eleven, which in turn makes payments to theparent company in Japan.
According to a World Travel & Tourism Council report, the direct contribution of travel and tourism
to GDP in 2017 was $42 billion, or 9.4% of the total. The industry also generated 6.2% of total
employment in that year. Within the industry, hotels – and international hotel chains in particular–contribute to NEM operations through management contracts.

4% increase in export
share, 2012-2016

China (44%)
Malaysia (14%)
Japan (6.9%)
United States (6.3%)

World’s biggest rubber
exporter; but global
market is shrinking

Market and trade scale

Product/service scope

Source: AJC.
Note: EU = European Union. Selected industries only. 2016 data unless otherwise noted.
aThailand convenience store market outlook (2016).

Rapid shift to higher-value
work

More convenience
stores to open
Over 70% of export value isfrom OEMs. Responding to newtechnologies (e.g. eco car and EV)
is a key to development.

Exports to ASEAN andexports of functional textiles
likely to continue to grow

Exports to Japan andnon-EU markets likely tocontinue to grow for the
next few years

United States (32%)
Germany (15%)
United Kingdom (7.9%)
Hong Kong, China (6.3%)
Japan (3.5%)

11.7 million customers
per day
Malaysia (13%)
Indonesia (11%)
Japan (11%)
United States (7.6%)
India (5.1%)

ASEAN (23%)
United States (16%)
EU (13%)
Japan (11%)

Japan (51%)
EU (28%)

3% increase in export
value, 2016-2017

About 100,000

Contract manufacturing

Annual growth rate of
12%, 2014-2020a

Over 140,000

Franchising/ licensing

18% increase of export amount in2016 from 2012

8% decrease in export
amount, 2012-2016

12% increase in export
amount, 2016-2017

About 1 million

About 350,000

Export growth

35,000 households

About 6 million

Estimated NEM
employment

Subcontracting

Contract farming

NEM modality$3.9 billion($1.5 billion)$6.53 billion($2.61 billion)$8.3 billion($5.8 billion)$3.05 billion (2017) 790,000
tonnes($2.44 billion)$4.46 billion($1.56 billion)

Estimated export volume(Estimated exports by
NEMs)$468 million sales

Pranda Jewellery
Goldfine Manufacturers

7-Eleven
Tesco Express
Family Mart
Mini Big C
Lawson 108

Aapico Hiteck
SomboonAuto Alliance Thailand
Thai Summit
Bosch
Denso

Hi-Tech Apparel
Thanulux
Nanyang
TuntexSaha Farms
CP
Cargill
GFPT
BetagroSri Trang AgroVon Bun Dit
Southland

Major companies

Over 145

14,847 stores

About 2,500
Tier 1: 700
Tier 2: 1,800 [Thai Auto-Parts
Manufacturers Association:
TAPMA]

Over 4,700 [Thai Garment
Manufacturers Association:
TGMA]Over 40 export companies[Chicken meat producers
for Thai companies are
NEMs]

About 40 export companies[Rubber producers for Thaicompanies are NEMs]

No. of companies[NEM-related estimation]

Jewellery
SelectingGem cutting
SawingBruiting
Jewellery manufacturing
DesignConvenience stores
Small retail groceries
Snack foods
Confectionery
Soft drinks
TobaccoAutomobile parts
Engine parts
Suspension
Brake
Wheel tyreElectronic parts
Engineering materials

Textiles and Clothing

Technically specified
rubberRibbed smoked sheet

Product/services

TextilesFootwearHeadgear

Tertiary

Chicken meat

RubberIndustry (representative
example)Secondary

Cooked chicken
Uncooked chicken

Primary

SectorTable 2. NEM operations in major sectors, 2016

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2.2 NEM by modality
There are many foreign firms and TNCs doing business with local partners under NEMs in various
industries. The type of their involvement and their contribution to the Thai economy vary by modality
and industry. In this section, modalities such as contract farming and subcontracting are examinedby looking at a particular industry that relies on the modality.

(1) Contract farming/contract growing (cooperatives) by integrators: Chicken meat
In the production of meat, Thailand has the capability to compete on a global level. Production ofbroiler meat expanded 6.3% between 2010 and 2016, from 1.33 million tons to 1.92 million tons.
Between 2010 and 2016, Thailand exported 30-35% of domestically produced broiler meat. In 2015,
according to the Office of Agricultural Economics, Thailand’s production of broiler meat and broiler
meat products accounted for 2% (1.78 million tons) of the world’s total production (89.55 million
tons). That year, Thailand was the fourth largest exporter of broiler meat and broiler meat products,
recording 6.2% (0.67 million tons) of global broiler meat exports (10.79 million tons).9Japan was Thailand’s main export partner for broiler meat in 2016, accepting 51% of total exports,
up from 39% in 2012, when the EU was Thailand’s biggest export partner (with 40% of total exports).
After Japan lifted its import ban in 2013, the value of exports of broiler meat to Japan increased
from $0.4 million to $302 million in 2016.10 Apart from Japan, the EU and ASEAN markets are theother main export destinations, accounting for 28% and 8.1% of total broiler meat exports in 2016,
respectively (figure 1).
In 2015, Japan imported 0.94 million tons of chicken (both frozen raw meat and frozen processed
items), of which about 34% (approximately 0.32 million tons) came from Thailand. Of the total, about
10% of frozen raw meats and 24% of frozen processed items were imported from Thailand. Total
exports of chicken from Thailand to the world were in excess of 0.67 million tons (0.21 million tonsof frozen raw meat and 0.46 million tons of frozen processed meat) in 2015 (figure 2).
In the export of heat-processed chicken meat, the top five firms (Cargill, CP, GFPT, Betagro, BRF)
produced 71% of total exports, and in the export of frozen raw chicken meat, the top five firms (Saha
Farms, CP, Cargill, GFPT, Betagro in 2015) produced 67% of total exports (ALIC, 2015).11 Thesefirms, called integrators, started with feeding factories or poultry farms. By vertically integrating
their management from upstream to downstream in the value chain, they achieved competitivenessby having lower costs for feed and chicks (which account for the majority of the production costs ofchicken-related products). Later, these integrators intensified the production scale by absorbing
small firms and by further strengthening their degree of integration. Today, these integrators are
the main players in the chicken broiler industry in Thailand. Smaller firms merely sell the purchased
chick to a contract farmer to grow for sale to a chicken disposal facility, whereas an integrator owns
all or part of the stages: cropland chicken, chicken disposal facilities and feed factories.

9
10

11

Behind Brazil (38.1%), the United States (27.6%) and the EU (11.6%).
Since 2012, several economies have lifted bans on imports of fresh and processed broiler meat from Thailand. Thebans had been in place since the outbreak of the H1N1 bird flu in 2004. Economies that lifted bans were the EU in
July 2012, Japan in December 2013, Singapore in June 2013 and the Republic of Korea in November 2016.
Agriculture & Livestock Industries Corporation, Japan.

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Figure 1. Key export partners of Thailand, 2012 and 2016 (Per cent)

2012

2016

10.49

8.11

6.37

11.33
38.70

53.91

31.61
39.48

Japan

The EU

ASEAN

Other

Source: Office of Agricultural Economics, Thailand.

3.0

0.70

2.5

0.60
0.50

2.0

0.40

1.5

0.30

1.0

0.20

0.5

Million Tonnes

US$ Billion

Figure 2. Broiler meat export value and volume for Thailand, 2010–2016

0.10

0.0

0.00
1

2

3

Export volume (processed meat)

4

5

Export volume (fresh meat)

6

7
Export value

Source: Office of Agricultural Economics, Thailand.

Business model of integrators
In 2016 the number of contract farmers for chicken meat included approximately 35,000 households
in central Thailand (ALIC, 2016). The total number of birds raised was about 260 million, with theaverage farmer raising about 10,000. Most farmers produce birds under a contract with a chicken
firm, whether small or integrator. The length of contracts is one year; the purchase price of feed andchicks, and the price of the chicken to be shipped to these firms are predetermined (ALIC, 2016).
Major integrators have their own farms (70% of their production) and contracting farms (about 30%).

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Figure 3 illustrates the general business model for contract farming in the chicken meat industryin Thailand. The industry targets both domestic and foreign markets. Stakeholders are the financial
sector, the government, farmers and companies that are integrators. Each stakeholder has it own
role. The financial sector supports famers with various financial services. The government plays
various roles for farmers and companies, which are explained in more detail later. Companies playvarious roles in the market, with the financial sector, and with farmers.
Figure 4 describes the business model of chicken integrators. Integrators purchase the chickenfrom contract farmers. Then integrators process the chicken into either (1) frozen chicken meat,(2) frozen partially processed chicken, (3) frozen cooked, processed and packed chicken, or(4) frozen cooked and processed chicken that needs additional heating. These frozen products areexported, for example to Japan. In Japan, imported products are either (1) frozen products solddirectly to households in supermarkets, (2) ready-to-eat chicken products sold in convenience
stores and heated in the stores, or (3) cooked chicken sold in restaurants by cooking from frozen
chicken meat or frozen partially processed chicken meat.

Figure 3. General model of contract farming of chicken meat industry in Thailand
Distribution

ExportDomestic market

MarketForeign market

Financial sector

Company

Government sector

FinancialsupportProduction
management

Knowledge
management

Regulation

FarmerPig

Source: Issariyodom et al. (2008).

Broiler

Chicken and egg

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9Figure 4. Business model of chicken integrators in Thailand

Roles of integrators in Thailand
Chicken producers(Contract local farming)

Demolition
Processing

Seasoning

FrozenChickenFrozen half
processed chicken

Heating(Cooking)

Frozen processedchickenPrimaryheating

Frozen processedchicken

Export to Japan

Export to Japan

Roles of buyers in Japan
Seasoning

Heating(Cooking)

SecondaryheatingHeating(Cooking)

Final consumption in Japan
Products consumed in restaurants

Products sold in
convenience stores

Frozen foodfor household

Source: ALIC (2016).

Most large companies or company groups have adopted the model of vertically integrated farms,
whether fully or partially. Contract farming in chicken meat is an external contract between aprocessing company (buyer) and local broiler farms (sellers and/or suppliers). Contract farming
became very popular in the 1970s as it facilitated Thai companies exporting their chicken products
to foreign markets on the basis of their high standards of production. Contract farming helped
companies ensure the quality and quantity of their input material, especially the level of food safety,
to meet international standards as well as their customers’ requirements. Contract farming played
an important role in the development of the Thai chicken meat industry at the beginning of exportoriented production.
Of six major exporting firms (Cargill, CP, GFPT, Betagro, BRF, Saha Farms), four are examined
here: box 2 describes Betagro Group, box 3 describes Charoen Pokphand Foods PCL (CPF), box 4
describes Saha Farms and box 5 describes GFPT PCL.

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Box 2. Betagro Group
Betagro Group (Thailand), founded in 1967, had about 30,000 employees as of 2017 and owns
two main plants: Better Foods Co. in Samutsakorn and Betagro Foods Product International Co.,
Ltd., in Lop Buri. The company engages in the production of animal feed, livestock, animal healthproducts and food products. It also engages in food retailing and wholesaling, as well as restaurant,
resort and plantation crop businesses. It serves customers in Thailand and internationally.
It owns 10% of its farms and the remaining 90% are contract farms, a higher share than at the
average integrator. This is because the company considers contracting farmers important as longterm partners.
As the group considers strategic alliances with foreign firms critical, it has several allianceswith Japanese firms, such as Mitsubishi Corporation, Ajinomoto Co., Inc., and Ito-Ham Foods.
In order to avoid price competition in the Japanese market, most integrators in Thailand have
tried to differentiate themselves from competing companies, such as Chinese ones, by offering
products with higher value added (ALIC, 2010). Betagro Group established Betagro Foods ProductInternational Co., Ltd., a joint venture between Mitsubishi Corporation (50% stake) and Ajinomoto
Betagro Frozen Foods (Thailand) Co., Ltd., which is itself another joint venture with Ajinomoto
Corporation (51% stake).
The group has introduced Betagro Quality Management 24/7, which controls production processes
24 hours a day, to ensure the quality of its products. This program is even applied to the mostsuitable choice of feeding material and breeding management for contract farmers and thecompany’s own farms, as well as to guaranteeing the quality of food processing plants and facilitiesin Thailand. Since this program is an internationally guaranteed standard of chicken quality basedon the regulations of the United Kingdom’s Royal Society for the Prevention of Cruelty to Animals,
the group expects to increase its exports to countries that have high quality standards.

Box figure 2.1. Contract farming under Betagro Group

Feed production
Equipment and tools
Pharmaceuticals
and supplements

Chicken farms(chicken breeders, hatcheries, broiler farming)

Chicken manufacturers

Betagro shops

Farming contracts

local farms(Broiler)

Betagro Deli
Outlet (quantity + quality)

Restaurants, supermarkets(Domestic/global)

Source: Betagro Group report.

Contract price
Supplies

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11Box 3. Charoen Pokphand Foods PCL (CPF)
Charoen Pokphand (CP) Group is one of the largest integrators and the largest food-related
manufacturer in Thailand. One of its biggest subsidiaries is Charoen Pokphand Foods (CPF),
with a diversified value chain from food processing to food retailing (such as Seven-Eleven) in
Thailand. The group owns four plants, in Saraburi, Minburi, Bangna and Nakhon Rtchasima thatare operated by CPF.
In the Japanese market, for example, CPF cooperates with 12,000 stores of Seven-Eleven Japan tosupply teriyaki chicken and shrimp chili sauce – imported as frozen partially cooked products fromThailand – after cooking onsite. The group also sells their imported products in stores that do notcompete directly with its Japanese alliance partners (ALIC, 2010).
One of the notable innovations by Thai chicken integrators has been to introduce animal welfare
initiatives to respond to demand from consumers or distributors in export destination countries.
CPF started to implement its initiative in response to requests from consumers in the United
Kingdom. CPF became the first Thai chicken supplier of Tesco (United Kingdom).

Box figure 3.1. CPF business

Source: CPF report.

As illustrated in box figure 3-1, CPF has three categories of business: (1) feed production: animal
feed for swine, broilers, layers, ducks, shrimp and fish; (2) farm production: animal breed,commercial animal and preliminary processed meat (slaughtering, semi-prepared, fresh anduncooked products); and (3) food production: semi-cooked and cooked meat, and ready-to-eat
food products under owned brand, other company’s brands and customers’ brands.
…/

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Box 3. Charoen Pokphand Foods PCL (CPF) (Concluded)
In addition, CPF retail and food outlets sell the company’s brands such as Kitchen Joy, 5-Star,
BK and BKP in its Thailand operations, and 5-Star, Taste Inc. and Michelina’s in its international
operations. The company also produces products under customers’ brand names. CPF’s
distribution channels are operated directly by the company or through franchisees.
CPF introduced the concept of contract farming to the Thai agricultural sector in 1975. As of 2015,
about 5,000 farmers had undertaken contract farming with CPF. Under the contracts, the company
determines a standard and quality of a farm product to ensure food safety and farmers deliver
their products into the supply chain, as illustrated in the box figure 3-2. The farmers do not need tofind a market and worry about the price of their products, as the price is guaranteed in the contract
before the farmers start producing. Thus, both the company and the farmers benefit from risk
reduction, stable income and sustainable development.

Box figure 3.2. Contract farming with CPF

Raw material(from local farms)

Importedmaterials

CPF
feed mills

CPF
farms

Fresh, uncooked
products

Commercial
feed

Commercial
breeders

Foodprocessing
plantsing s
rm ct
Fa ntracoLocal farms

Outlet (quantity + quality)

Source: Pornsi Laurujisawat (2012).

Contract price

Processed foods andready-to-eat foods

CPF
retail andfood outlet

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13

Box 4. Saha Farms
Saha Farms Co. Ltd processes, produces and exports frozen chicken products to customers
in Thailand, Japan, the United Kingdom, Germany, China, the Netherlands, Belgium and othercountries. It started with small-scale farms, producing 500 birds per week in 1969. In 1974, withcooperation from a Japanese importer, Saha Farms started exporting processed chicken meatproducts to Japan under the KISS brand. Today, Saha Farms Group is one of the largest chicken
product exporters of Thailand, with 7,800 employees. The company’s production systems observe
international standards related animal welfare, hazard analysis critical control point (HACCP) andgood manufacturers’ practices. The company has R&D facilities and certificates of HACCP.
In addition, Saha Farms was the first company in Thailand’s history to utilize antibiotic-free chickens
and its value chain is fully vertically integrated chicken businesses, as illustrated in box figure 4-1.
•Grandparent stock farms in Pechaboon Province: An imported breed, the U.S. Cobb, israised in a modern, climate-controlled system to supply parent farms, both domestically andinternationally, with more than 2 million parents per year.
• Parent stock farms in several provinces (Lopburi, Chonburi, Prachinburi and Bangkok) havea combined production capacity of 145 million hatching eggs per year.
• The hatcheries of Saha Farms have the capacity to produce 60 million chicks annually in
36 hatcheries and 36 incubators.
• Broiler farms enable chickens to be grown fast, and have the potential of sending more than
120,000 chickens per day to the processing plants.
• Processing plants use grown chicken, mainly from the company farms and others from contract
farms. Saha’s processing plants in Pechaboon and Lopburi can handle at least 450,000 chickens
per day.
• Silos and feed mills produce chicken feed using input materials (corn, soybeans) from local
farmers. The company operates two silos in Ayutthaya and Lopburi provinces with the capability
to buy up to 350,000 tons of corn per year from the farms. The silos have a combined drying
capacity of 100 tons of corn and 60 tons of soybeans per hour and have a minimum storage
capacity of 200,000 tons per year. Saha Farms has two feed mills in Lopburi Province, producing
high-quality chicken feed for all the farms in the project with a minimum production capacityof 500,000 tons per year.

Box figure 4.1. Contract farming with Saha Group

SAHA group

Grandparent
stock farms

Parentstock farms

Hatcheries

Broilerfarms

Processing
plants
Farming
contracts

Silos andfeed mills

Grandparent
stock farms

Outlet (quantity + quality)
Source: Saha Group report.

Contract priceDirectly operating

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Box 5. GFPT PCLGFPT PCL produces and distributes frozen and cooked chicken products in Thailand andinternationally. The company was founded in 1981 and had 7,381 employees as of 2017. The
company’s plant is located in Samuthprakarn. The company is involved in eviscerating chicken ;producing and distributing processed food products; and operating a feed mill and parent chicken
farm for egg production and distribution. It also operates a grandparent chicken farm for production
and distribution of parent stock chicks, a parent chicken farm and hatchery for production anddistribution of chicks, and a broiler farm.
The main business of the company is broiler meat, with annual sales of 123,000 tons, of which
about 30% is exported. The company has subsidiary companies such as KFPC (fodder production),Grand Prize Breeding (ancestor chicken production), Krung Thai Farm (hatch facilities) and M.K.S.
Farm (poultry farm), GF Foods (chicken processing plant) and McKey Foods, which supplies
McDonald’s (chicken processing plant).
The company has a joint venture with Nichirei Foods Inc. (Japan), called GFPT Nichirei (Thailand)
Co. Ltd. (51% stake). GFPT Nichirei was established in 2008 and has 4,800 employees in Chon
Buri. It manufactures fresh frozen chicken meat and sells cooked chicken products in Japan andinternationally. In the Japanese market, this exported frozen chicken is sold in convenience storeswith which Nichirei Foods in Japan has alliances.

Implications from case studies
From these four case studies, the following implications for Thai integrators can be found:• Integrators engage in a wide range of activities in the value chain, from poultry raising to retailing.
• The market for their products is both international and domestic.
• Each integrator has NEM agreements and alliances with foreign customers through joint venturesin Thailand as well as independent integrators.
• Each integrator has undertaken efforts to obtain international recognition for its production.
Betagro obtained certification Royal Society for the Prevention of Cruelty to Animals, CP Foods
obtained animal welfare recognition, Saha Farms has R&D facilities and certificates for HACCPand GMR, and GFPT has a joint venture with Nichirei Foods Japan to introduce a high foreign
standard.
• The integrators understand international market demand well; for example, Japanese andEuropean consumer demand.
The main competitors of Thailand integrators are firms in Brazil, as costs for feed such as soyabean
are very low there. However, according to the Thai Broiler Processing Exporters Association, Thaifirms have differentiated products such as kara-age (special Japanese fried chicken). Thai firms
have also upgraded the domestic chicken industry through efforts toward automation, dealing withissues such as environmental and food safety. The firms follow each recipient country’s standard forprocessing chicken, a requirement that comes from the special NEM relationships. Their customers
are also enthusiastic in helping Thai firms upgrade. Tesco even comes to Thailand to check thequality and adherence to standards and to issue their certificate for Thai firms.
The chickens that become broiler meat and broiler meat products are from contracting farmers who
do not have direct equity relationships with integrators or with their customers (e.g. Tesco, SevenEleven Japan, Mitsubishi).

PA P E R 9 T H A I L A N D

15Challenges for Thai firms
Exports of broiler meat and broiler meat products have been increasing due to the high demand formeat products from Thailand. In order to maintain or increase the level of production and export,
the production rate of contract farmers needs to be stable or growing. In order to achieve this,integrators play a huge role by upgrading their production capacity and the quality of their products
to meet the international standards of export destinations.
Contracting farms are critical for integrators. However, contract law in Thailand does not necessarily
protect contracting farmers. The levels of safety and of quality control are other importantconsiderations for foreign customers.
The fact that Thailand is one of the main world exporters of broiler meat and broiler meat productsmeans that contract farmers face some problems in raising chickens. The production cost of alive broiler in 2016 was about $0.43 to $0.44, higher than in competitors outside Thailand. This
relatively higher production cost is caused by higher feed cost, the dominant cost component ofbroiler production in Thailand.12
As the production of broilers continues to grow, the domestic supply of corn is becoming insufficient.
The insufficient supplies of locally produced corn and of highly import-dependent soyabean need
to be dealt with by the Department of Livestock Development (DLD), a government agency under
the Ministry of Agriculture and Cooperatives. The DLD is responsible for overseeing and controlling
the livestock industry, including animal health, treatment, breeding, quality control of animal
feed, animal clinics, animal diseases, livestock and meat processing, with the aim of achieving
international standards for both domestic consumption and exports.
The Thai government has been making efforts to upgrade the industry through its Thailand 4.0
initiative. Some integrators are using computerized systems, so that the working areas of employees
and fertilizing areas of chickens can be strictly separated. These systems also monitor cleanlinessto shut out any germs or diseases from the fertilizing areas. However, the process of cooking
chicken and the industry’s processes as a whole are still labour intensive and far from the conceptof Thailand 4.0. There is still some room for improvement in government support to the industry.
Along with the DLD, the Thai Broiler Processing Exporters Association, established in 1991, acts asa regulating and service agency for the large number of Thai chicken meat producers and exporters.
All 20 members are leading Thai producers and exporters.13 About 30% have their own chicken farms
and 70% have contract farms. Some member firms employ as many as 200,000 contract farmers.
Usually one farm needs about 20,000 birds to break even or make profits. Member firms support
their contract farmers. Usually contract farms have chickens and pigs as well as cornfields.14 Most
member firms are in Lopburi and Nakornpratom provinces. Usually the contract period for the firms
is one year, renewable each year. This is because prices for chicken fluctuate. There is a farming law,under the Ministry of Agriculture and Cooperatives.

12

13

14

In Thailand, the key feed ingredients for broilers are corn (62%) and soybean meal (30%), with the averagewholesale price of corn ($0.27/kg) being 73% cheaper than soybean ($0.47/kg) in 2015. However, due to high tariffs
on importing corn (20% with a special importing permit, 73% without a permit), farmers prefer not to import corn
as a feed ingredient.
Member firms include CPF (Thailand) PCL, Cargill Meats (Thailand) Co., Ltd., BETAGRO (Better Foods Co., Ltd.),
BRF (Thailand), Co., Ltd., GFPT PCL., GFPT Nichirei (Thailand) Co., Ltd., TFG (Thai Foods Group) PCL, Panus Poultry
Co., Ltd., Central Poultry Processing Co., Ltd., Tanoasree Thai Chicken Co., Ltd., Laemthong Food Products Co.,
Ltd., Laemthong Poultry Co., Ltd., Sun Food International Co., Ltd., F&F Food Co., Ltd., and Bangkok Ranch PCL.
More than 60% of local corn is used for chicken feed.

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To member firms, the association provides information and data, including new or revised international
regulations for each country or region. Meetings are held to help members understand issues andexplain the market situation. Since member firms’ target market is global, firms need to be aware of
new standards, new laws or new regulations, such as those related to the International Organizationfor Standards and food safety. In order to raise awareness, the DLD provides lectures on these issues.
The department has a checklist for safety and farm standards, which each firm needs to meet in order
to be approved. Good manufacturing practices and good agricultural practices follow international
standards, under the DLD. In addition to representatives of local government, the association invites
people from the EU or Japan or each exporting country’s government to such meetings.

Table 3. Summary of contract farming: Chicken meat industry
Opportunities

Challenges• Job creation for farmers• Possibility of exploring new markets aswell as existing markets (Japan and United
Kingdom)• Possibility of adding higher value on existingproducts• Possibility of exploring new demand fromnew lifestyles (healthier eating habits)• Possibility of establishing healthier imagesof chicken• Heavy dependence by foreign TNCs on Thai
integrators for chicken products• Compliance issues by Thai firms for contracting farmers• High cost of feed
• Need to maintain safety and quality levels required by foreign
TNCs• Demand from local customers in Thailand and ASEAN regionsis increasing (leading to lack of supply of chicken meat forforeign TNCs)• Government needs to consider supporting wider value chain(starting upstream)• Still room for improvement in Thailand 4.0 implementation• Government needs to consider easier imports of feed foranimals

Source: AJC, based on company interview.

(2) Subcontracting (or outsourcing): Apparel industry
The Thai apparel, garment and footwear industries have been developed over decades. In 1990,
exports of textiles amounted to $3.7 billion and exports of footwear and headgear to $0.9 billion,
accounting for 16% and 4% of total exports from Thailand, respectively. Combined exports of textiles
and clothing amounted to $6.5 billion in 2016 (figure 5). Export amounts have been growing in textiles,
reaching $7 billion by 2017 but those of footwear have declined, to $0.8 billion. Data show a decline
in the export shares: 3% for textiles and 0.3% for footwear in total exports from Thailand (figure 5).
Thailand has the ability to supply the entire textile and garment industry chain, from upstream todownstream. This industry was attractive for FDI thanks to Thailand’s cheap labour and land prices,
as well as good-quality hand-made products. However, in recent years, the industry has faced
several challenges, including rising labour costs and increasing competition, and has started to lose
its competitiveness.
As noted, one of the strengths of the industry in Thailand is that Thai firms can cover all stages ofvalue chains, from upstream to downstream. Thailand has roughly 4,700 manufacturers of textiles,
ranging from fibres to yarns, to dyeing to cloth production (Thailand Textile Institute). The textile
and garment industries in Thailand are mainly categorized into four sectors: fibre, yarn, fabric andclothing. In the upstream segments, synthetic fibre is procured from the petrochemical industry
and natural fibre is sourced from organic material. The fibre undergoes spinning for the formationof yarn. This part of the value chain primarily caters to wholesalers and clothing manufacturers,
including suppliers for TNCs in Thailand and importers.

PA P E R 9 T H A I L A N D

17

Figure 5. Exports of textiles, footwear and headgear and their shares in total exports

(%)

9,000

18

8,000

16

7,000

14

6,000

12

5,000

10

4,000

8

3,000

6

2,000

4

1,000

2

0

0

19

9
19 0
9
19 1
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
0
20 2
0
20 3
0
20 4
0
20 5
0
20 6
0
20 7
0
20 8
0
20 9
1
20 0
1
20 1
1
20 2
1
20 3
1
20 4
1
20 5
1
20 6
17

(US$ million)

Exports (FOB) of textiles, HS Classification 50-63

Share of exports of textiles in total exports

Export volume (fresh meat)

Share of exports of footwear in total exports

Source: Euromonitor International from United Nations, International Merchandise Trade Statistics Thailand.

The yarn formed in the upstream segment enters the mid-stream segment, where it undergoes theprocess of weaving or knitting, which are also done by suppliers for TNCs in Thailand. Either of thetwo processes leads to the formation of cloth, which is then transferred to the finishing industry
for dyeing and/or printing. The middle stream largely serves retailers and clothing manufacturers,
along with importers. The list of large apparel TNCs (table 4) suggests that this process is done in
Thailand. The cloth then enters the downstream segment, where it reaches consumers through thegarment industry.

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Table 4. Largest apparel TNCs with supplier factories in Thailand
Company

1

Inditex, Industria deDiseño Textil SA

Supplier Factories(including Thailand)

Sales(US$ billion)

Country

BrandsSpain

Zara
Pull & Bear
Massimo Dutti
Bershka
Stradivarius
Oysho

47 countries

30.97

38 countries

24.31

2

H&M (Hennes &Mauritz AB)

Sweden

H&M
COS
Weekday
Cheap Monday
Monki
ARKET
Afound3

Fast RetailingJapan

UniqloGU

6 countries

17.34

4

GAP Inc.

United States

GAP
Banana Republic
Old Navy

30 countries

15.86

United States

Victoria’s Secret
Pink
Bath & Body Works
Henri Bendel
La Senza

5 countries

12.63

50 countries

8.91

5

L Brands

6

PVH Corp

United States

Tommy Hilfiger
Calvin Klein
Izod
Arrow

7

Ralph Lauren

United States

RRL
Ralph Lauren Vintage

Over 700
manufacturers
worldwide

6.65

8

NEXT

United Kingdom

NEXT

41 countries

5.64

9

American Eagle
Outfitters

United States

American Eagle
Outfitters
Aerie

29 countries

3.80

10

Abercrombie& FitchUnited States

Abercrombie & Fitch,
Hollister Co.

4 countries

3.49

Source: AJC, compiled from companies’ annual reports.

Business model of TNCs and positioning of Thai firms in the industry value chain
The expansion of free trade following the elimination of the Multi-Fibre Arrangement in 2005 resulted
in a greater number of apparel producers across a greater number of countries (Abernathy et al.,2006). Luxury-brand companies seek to retain control over the manufacturing and distribution of
their products to sustain a consistent brand image across international markets. Most companies,
however, have moved to both offshore sourcing and outsourcing options (Fernie and Grant, 2015).
Table 5 provides a typology of the supply chain relationships of fashion retailers with Thailand’s
apparel exporters.

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Table 5. Typology of fashion retailer supply chain relationships
Vertically integrated or strong
control of supply network• Luxury fashion houses or those with a unique business model(e.g. Zara, Benetton, American Apparel)• A greater international store network, more offshore sourcing

Mid-market retailers withcollaborative relationships• Quick response concepts for offshoring business• Development of international sourcing and distribution hubs
• Use of full-package intermediaries (e.g. Li & Fung)

Fast-fashion retailers• Strong emphasis on sourcing from the cheapest suppliers• Relationships can be short and variable• Markets classified into short and long lead times• For Western European retailers, a gradual shift from China to Viet Nam,
Turkey to Egypt, and Romania to Moldova in terms of sourcing patterns

Source: Based on Fernie and Perry (2011).

Table 6 shows different levels of TNC sourcing and their implications for Thai suppliers. There isa horizontal link between sourcing and other functional areas. Activities such as design, productdevelopment and sourcing are assigned to the most competent units across the world. Different
levels of apparel TNCs offer different potential positioning for Thai firms. For example, at level 3, Thai
suppliers may be able to become supplying partners for those TNCs that purchase internationallyas part of a courting strategy. At level 4, there are opportunities for Thai suppliers to become OEM
partners. Worldwide capabilities in design, product development and sourcing are necessary tooperate at level 5, which offers the potential to be an original design manufacturing (ODM) partnerin the product development function in these TNCs.

Table 6. The five levels of sourcing and potential positioning for suppliers in Thailand
Level

Characteristics of apparel TNCs

Potential positioning for Thailand

1

Domestic purchasing only

Limited local suppliers

2International purchasing only as needed – reactive sourcing

International full-scale local suppliers

3International purchasing as part of a sourcing strategy –proactive sourcing

Supplying partner

4

Global sourcing strategies integrated across worldwide
locations

OEM partner

5

Global sourcing strategies integrated across worldwide
locations and functional groups

ODM partner

Source: Based on Fernie et al. (2009) and Trent and Monczka (2005).
Note: At Level 1, smaller retailers will source domestically. Level 2 is the use of international sourcing only when needed, i.e. theproducts cannot be sourced in the domestic market (reactive sourcing). Level 3 involves proactive international purchasing
as part of an overall sourcing strategy. Level 4 is the first of two global sourcing strategies integrated across worldwide
locations. Operating at this level requires executive leadership that endorses the global perspective. It requires highly skilled
personnel, advanced information systems and an organizational structure that enables coordination of global operations.
At Level 5, global sourcing strategies are integrated not only across worldwide locations but also across functional groups
such as product development or marketing.

Table 7 presents the characteristics of the different combinations of outsourcing and offshoring.
Both sourcing overseas and outsourcing non-core functions have been used by large retailers toachieve profitability by driving down the costs of product supply.

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Table 7. Different combinations of offshoring and outsourcing
Internalized activities performed in-house

Externalized outsourcing

Domestic activities
performed at home

Domestic activity
Company performs the activities at home

Domestic outsourcing
External suppliers in home country

Offshoring

Offshoring/FDI
Own subsidiary performs the activities inforeign country

Offshore outsourcing/NEM
External suppliers in foreign countries

Source: Based on Fernie et al. (2009) and Pyndt and Pedersen (2005).

Mass outsourcing was facilitated by a combination of geopolitical reasons (e.g. the end of tradequotas), market needs (e.g. increased competition) and technological advancements (e.g. informationand communication technology and transport improvements) (Azuma and Fernie, 2004; Djelic and
Ainamo, 1999). Most domestic production in the industrial core areas centres on luxury and upscaletextile products with a strong association to country-of-origin features: cashmere in Scotland,luggage and handbags in France, shoes in Italy. Luxury segments tend to internalize the production
function in order to retain control over quality and to protect the artisan skills that underpin the
production of bespoke luxury goods, which is paramount for protecting brand value. Thus, it is noteasy for suppliers in Thailand to get involved with this type of vertical integration business modelof TNCs. It is necessary to seek a different type of segment to be potential OEM or ODM partners.
However, there is a change of supply chain patterns in the fashion industry. As figure 6 shows, not all
luxury companies have vertically integrated structures.15. The vertical integration model is becomingrare even within the sectors that have been strong advocates of controlling the supply chain.

Figure 6. Supply chain models in the fashion industry: vertical integration anddesign/source/distribute models

Vertical integration
in-house

Design/source/distribute

Outside the company

i.e. fast fashion, recently
luxury segmenti.e. suppliers

i.e. traditional luxury segment

DesignDesignFabric/trims production

Fabric/trims production
Sourcing

Garment manufacture
Distribution

Garment manufacture
Distribution

Source: Fernie and Perry (2011).

15

In 2011, up to 20% of Prada’s collections were made in China, Turkey and Romania (Sanderson, 2013), and Burberry
had a similar tendency to use full-package overseas suppliers.

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21Compliance of major TNCs
Local suppliers can have relationships with fast-fashion retailers (table 4) through NEMs ofinternational production. Recently, some apparel TNCs have been disclosing their suppliers’ lists
every year (table 8) because of requirements for transparent governance. For example, Inditex(Industria de Diseño Textil SA) has the largest sales in the apparel market. In 2018, it had 1,079
suppliers with a total of 3,087 factories in Asia and the rest of the world (table 8).

Table 8. Number of suppliers of Inditex, Industria de Diseño Textil SA, 2018
Number of stores in each region by brandRegionTotal
StoresZara

Pull &
Bear

MassimoDutti

Bershka Stradivarius

Oysho

Zara
Home

Uterqüe

Number of Number ofsuppliers factories

Worldwide

7,475

2,251

979

780

1,098

1,017

670

590

90

1,805

6,959

Europe

5,508

1,352

691

534

763

746

456

406

60

661

3,739

Asia andrest of world

1,662

571

193

185

225

199

150

123

16

1,079

3,087

Source: Inditex annual report.

Cases of suppliers (OEM and OEM) in Thailand
For this study, three suppliers were interviewed in Thailand: S.P. Brother Co. Ltd. (supplier of Levi
Strauss & Co.); Theparerg Co., Ltd. (supplier of Levi Strauss & Co.); and Thong Thai Textile Co., Ltd.
(supplier of Levi Strauss & Co. and Adidas) (table 9).

Table 9. Local suppliers in Thailand who have linkages with TNCs, selected cases
Name of the company

S.P. Brother Co., Ltd.

Theparerg Co., Ltd.

Thong Thai Textile Co., Ltd.

Year established year

1985

1985

1959

Number of employees

985

570

1,900

Export destinations

EU, Japan

EU, Japan

United States, EU

Experience with Japanesecustomers

3 years

7 years

No experience

Product development time..

30-45 days

60-90 days

Production time

3-4 months

30-45 days

..

OEM

OEM

OEM

OEM

ODM

with 2 people

ODM 2 persons

No design yet, only OEM

Small lot order..

..

Small lot orders accepted

OEM:ODM

80:20

..

..

Female:male

90:10

80:20

70:30

Factories outside Thailand(# of employees)

Cambodia (..)

Myanmar (550)

Lao PDR (250)Myanmar (400)Suppliers from the official
suppliers’ list

Levi Strauss & Co.

Levi Strauss & Co.

Levi Strauss & Co.
Adidas…/22

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Table 9. Local suppliers in Thailand who have linkages with TNCs, selected cases (Concluded)
Name of the company

S.P. Brother Co., Ltd.

Suppliers from interview
data (OEM) in EU

Ben Sherman
Ted Baker London
Boss
Hugo Boss
Eden Park
Henleys
DKNY
Pringle of Schotland
Massimo Dutti
Vroom & Dreesmann
Burberry
Manor
MaddisonJohn Lewis
BurtonMariner
Timberland
Manor
JIL
El Corte Ingles

Suppliers from interview
data (OEM) in global market..

..

AdidasODM in EU

Golf Pointe (Switzerland,golf related)
Harry Wilson (Belgium)
Glenbrae (United
Kingdom)..

..

Suppliers from interview
data (OEM) in United States
and Canada

DiadoraToad & Co.
Patagonia
Robert Barakett
Cooper Jones Supply..

Levi’s (United States)
Reebok (United States)

OEM in Japan

Montbell
K The Shop TK
Crocodile
F.O.KIDS
Gunze
HusHusH

Thailand:Double_B Miki house(OEM)
F.O.KIDS (OEM and ODM) Kappa
Kissmark (basic polo)
Myanmar:
WEGO
Earth music and ecology

OEM in Asia

Jim Thompson
Levi’s
JockeyPierre Cardin
Lee
Hush Puppies
Guy Laroch

Levi’s (Thailand)
CC Double O (Thailand)
Portland (Thailand)
AIIZ (Thailand)

Canterbury (New Zealand)

Workers’ minimum salary
per month

Thailand: $300
Cambodia $170..

..

Quality control

Fabric inspection: 100%
inspection, four-point
systemGarment inspection :AQL 2.5
Safety: Metal/Needle
Detector
Accreditation: ISO9001
version 2010

ISO 9001: 2008,
Compliance certificationfrom Sedex (by Sedex)and TOE (Levi’s)

ISO9001:2008
ISO 14001:2004
OHSAS 18001:2007

Source: AJC, based on company interviews.

Theparerg Co., Ltd.

Factory in Thailand:
Monoprix (France, OEM)
Roden (UK, OEM)
Vigino (Netherland OEM)
Factory in Myanmar:
El Conte Inglés (Spain)
DustinEmilio Pucci

Thong Thai Textile Co., Ltd.

Decathlon (France)

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23

In the next section, each supplier’s development path and business model are introduced: box 6
introduces S.P. Brother Co., Ltd., box 7 introduces Theparerg Co., Ltd. and box 8 introduces Thong
Thai Textile Co., Ltd.

Box 6. S.P. Brother Co., Ltd.
S. P. Brother Co., Ltd., was established in 1985 with 985 employees. The company produces pants,
underwear, T-shirts and polo shirts using 400 machines. Although products of the company aremainly exported to Japan and the EU, some products have been sold as its own brand (Khaki Bros.)in Thailand since 2014. Eighty per cent of its production is OEM for European, Japanese, UnitedStates and Canadian markets. The company has ODM capability: 20% of production is ODM, mainly
for the European market. Two designers are available to perform ODM for foreign customers. It
takes about three to four months to produce and deliver products to customers. Some Japanesecustomers who lack Cambodian contacts have entered into strategic linkages with the company inorder to have connections with Cambodian factories through Thai suppliers.
The company applies several levels of fabric inspection (100% inspection, a four-point system,
garment inspection, and AQL 2.5). For safety standards, the firm has a metal/needle detector
system. The firm also has ISO9001 version 2010 accreditation. Although this is not necessarily
specific to this company, as there is no tariff between Japan and Thailand, nor between Japanand Cambodia, Thai suppliers have the advantage of benefiting from Japan’s Thailand plus one
strategy (through Cambodian connections), which is also attractive for TNCs.

Box figure 6.1. Positioning of S. P. Brother Co., Ltd., in the value chains of TNCs

Official suppliers ofLevi Strauss & Co

S. P. Brother Company Ltd.
Established in 1985, 985 employees
Mainly exporting to Japan and EU

DesignSourcing

OEM (80% of production)
For Europe
Ben Sherman, Ted Baker London,
Boss Hugo Boss, Eden Park, Henleys, DKNY,
Pringle of Schotland, Massimo Dutti,
Vroom & Dreesmann, Burberry, Manor,
Maddison, John Lewis, Burton, Mariner,
Timberland, Manor, JIL, El Corte Ingles
For Japan
Mont-bell, K The Shop TK, Crocodile,
F.O.KIDS, Gunze, HusHusH

Distribution

Source: AJC, based on company interview.

For USA and Canada
Diadora, Hornytoad, Patagonia,
Robert Barakett, Cooper Jones supply

ODM(20% of production)
For Europe
Golf Pointe(Switzerland,
Golf related),
Harry Wilson(Belgium),
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Box 7. Theparerg Co., Ltd.
Theparerg Co., Ltd was established in 1985 and had 570 employees as of 2017. Its products range
widely, from blouses, dresses and skirts to infant wear, children’s wear (woven), denim wear, jeans,pants, shorts, trousers, boxers, woven shorts and swimming trunks. The company does OEM workfor the European and Japanese markets and ODM work for the Japanese market. New productdevelopment takes 30 to 45 days, as does mass production. Two people are available to perform
ODM for foreign customers. Depending on customers’ requirements for production cost andquality, the company uses factories in Thailand and in Myanmar. It earned ISO 9001 accreditationin 2008 and compliance certification from Sedex and TOE (Levi’s).

Box figure 7.1. Positioning of Theparerg Co., Ltd., in the value chains of TNCs

Official suppliers ofLevi Strauss & Co

Theparerg Co., Ltd
Established in 1985, 570 employees
Mainly exporting to Japan and EU

DesignSourcing

Distribution

Source: AJC, based on company interview.

OEM

ODM

For Europe• Factory in Thailand: Monoprix (France),
Roden (UK), Vigino (Netherland)• Factory in Myanmber: El conte Ingres(Spain),Dustin, Emiidio Pucci

For Japan
F.O.KIDS

For Japan• By Factory in Thailand: Double_B MIKI
HOUSE,
F.O.KIDS• By Factory in Myanmar: WEGO, Earthmusicand ecology

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25

Box 8. Thong Thai Textile Co., Ltd.
Thong Thai Textile Co., Ltd was established in 1959. It has 1,900 employees and an average of
300 machines in the factory. Its main products are sportswear and jackets. Its main exporting
partners are the United States, the EU and Asian countries. The company responds to customers’
needs such as small lot orders. New product development takes 60 to 90 days. The company
is competitive in printing technology, which is attractive for foreign customers. Both Adidas andReebok have ordered custom uniforms from the company (it takes 21 days to deliver worldwide
to individual customers through online orders). In order to perform ODM for foreign customers,
the company needs to have designers but they are not yet available. It has a factory in Myanmar
for low-cost production. For both the Thai and United States markets, the company has its own
brand, focusing on online orders for women’s sports and fitness. The company has international
certificates in ISO9001:2008, ISO 14001:2004, and OHSAS 18001:2007.

Box figure 8.1. Positioning of Thong Thai TextileCo., Ltd., in the value chains of TNCs

Official suppliers ofLevi Strauss & Co
and Adidas

Thong Thai Textile Co., Ltd.
Established in 1959, 1,900 employees
Mainly exporting to USA and EU

DesignSourcingOEM

ODM

For Europe• Decathlon (France)

For Global Market
custom-ordered
uniform for Adidas
and Reebok are madeby this company(21 days online order)

For Global Market• Adidas
For USA• Levi's (USA), Reebok (USA)For Japan• Kappa, Kissmark (basic polo)

Distribution

Source: AJC, based on company interview.

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Implications from the case studies
The case studies have the following implications for Thai suppliers:• Thai suppliers in the industries are already conducting OEM for foreign TNCs. Their roles havebeen upgraded from low-cost production to OEM or even ODM. As seen in table 5, different levelsof sourcing by TNCs directly affect Thai suppliers. TNCs consider international purchasing as apart of their sourcing strategy through NEM international production in Thailand. In some cases,
Thai suppliers are actively acting as OEM partners or ODM partners with TNCs. Thai suppliers cannormally respond to all TNC requests, as they cover the entire value chain of the industries.
• As Thai suppliers with NEM relationships tend to have FDI in neighbouring countries as well,they become Thai TNCs. This means that suppliers have relocated their manufacturing plants
to other neighbouring ASEAN countries such as Cambodia, Viet Nam and Myanmar to lower
their operating costs. Having both upgraded functions in Thailand and cost-saving functions inneighbouring ASEAN countries creates advantages for Thai suppliers.
• Thai suppliers have initiatives to explore new markets and secure quality control. They alreadyperform ODM for foreign TNCs. However, the number of in-house designers is not enough.
• Thai suppliers have tried to find areas or functions that can differentiate Thailand fromneighbouring host countries. In order to take on roles other than cheap labour, Thai suppliers
have to move up the value chain. In addition to cheaper labour costs, neighbouring countries offer
other advantages: there is no tariff for exporting from Cambodia, Myanmar and the Lao People’s
Democratic Republic to the EU, for example, and Viet Nam has a free trade agreement with the
EU. What Thai suppliers see as ownership advantages include obtaining access to wider supply
chains, from yarn to final products. In order to perform ODM, suppliers need to discuss the designof a product with yarn producers and colour options with dyeing operations. In the whole process,customers from overseas look for speedy responses. As it is crucial for foreign customers tohave available small lot production, customization and short lead times, Thai suppliers can haveadvantages over their competitors. Thai suppliers have their own brands in the Thai market in
addition to OEM or ODM for foreign TNCs.
Challenges for Thai firms
By covering all stages in both the textile and the garment industries, TNCs can establish linkages
with Thai suppliers not only for cheaper products but also for differentiated products through OEM
or ODM. As for the cost-saving products, many suppliers in neighbouring ASEAN countries are morecompetitive than Thai suppliers in terms of production costs. Thai suppliers need to differentiatethemselves from suppliers in neighbouring ASEAN countries so that they can compete in the global
as well as the local markets. Local suppliers must improve capabilities such as (1) developmentof new products, with a strong emphasis on innovation; (2) R&D, so as to deliver products withwider appeal in the market; (3) technological excellence, by adopting modern spinning machinery;(4) development of cordial relations with partners for the procurement of high-quality materials
for yarn production; and (5) provision of the largest variety of yarn products to its customers. By
upgrading their capabilities in Thailand, suppliers perform OEM or even ODM for TNCs in the
global market.
Roles of government and relevant associations
In order to deal with this situation, the Thai government has been taking various steps to reposition
the textile and garment industries, particularly in terms of focusing on providing premiumquality products at competitive prices, upgrading technology and conducting training programs for workers.

PA P E R 9 T H A I L A N D

27In order to enhance the competitiveness of the textile and garment industries in the local as well
as global markets, the non-profit Thailand Textile Institute was established under the Ministryof Industry in 2005. The Institute studies and analyses industrial information in order to assist
companies in the following areas: (1) planning, (2) human resource development, (3) technologicaldevelopment, (4) product research, (5) quality standards development, (6) brand awarenesscreation and (7) new markets discovery. The Institute acts as a connection centre for all industry
players including manufacturers, investors, suppliers and buyers. It focuses on quality, time andefficiency with a view to decreasing costs and improving quality though various initiatives such assmoothly running supply chain management, focusing on innovation, deepening education of humanresources, improving marketing techniques and emphasizing R&D. In 2014, the Institute announced
the “Thailand Textile and Fashion Industries Development Strategy 2015–2030” for transforming
the industries into “new creative + knowledge industries” by building on their existing advantagesof (1) comparative advantage in fashion culture, (2) craftsmanship that is creative, (3) a popular
tourism destination that attracts people from around the world, (4) geographical location advantage,(5) manufacturing knowledge in all sectors along the supply chain and (6) a close cultural connection
to Asia as their future largest marketplace.16
The Thai Garment Manufacturers Association (TGMA) is an association for textile and garment (notincluding footwear) firms, including 2,000 members in the garment industry and 5,000 members in
the textile industry. The TGMA is one of the eight associations under the National Federation of Thai
Textile Industries and the biggest in terms of membership. There are many opportunities for the
TGMA to negotiate with the National Federation, which directly negotiates or communicates with theappropriate sections of the government.
Thai suppliers of TNCs have been investing in neighbouring countries such as Cambodia and
Myanmar. The TGMA supports their members’ FDI efforts. Three suppliers in the case study use
factories in Thailand and subsidiaries in Cambodia or Myanmar.
Thai suppliers understand the strengths of each country; e.g. trousers can be produced well in
Cambodia, jackets in Viet Nam, football shirts and sports jerseys in Thailand. Thai firms havedifferentiated printing technology that cuts the end of a jacket and cleans it without sewing bymachine. Thai firms’ printing technology, supported partially by the TGMA, is one of their uniqueownership advantages that cannot be easily copied by neighbouring countries.
The TGMA has helped to upgrade Thai suppliers’ roles in the value chains of TNCs, by going beyond
looking for cheap labour to seeking ways to upgrade production and management processes for
OEM or ODM.

16

Thailand Textile and Fashion Industries Development Strategy 2015–2030 (http://www.thaitextile.org/index.php/
blog/2016/03/INDUSTRYSTRATEGYTHTI).

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Table 10. Summary of subcontracting: textile and garment industries
Opportunities

Challenges• Job creation• Further potential to perform OEM• Further potential to perform ODM• Possibility of having more Thai
brands through learning from ODM• Ownership advantages of Thai firmsthat can differentiate them fromcompetitors: quick response, smalllots, short production time
• World trend towards transparent
governance of TNCs in the industry• Service competition is for low-cost production• Cannot compete in price, have to compete in quality (higher value
added is required)• Labour costs getting higher in Thailand• Development of design capability is required to have continuous
NEM relationship• Consumers and demand are outside Thailand• Compliance issues of Thai suppliers (some of them are TNCs as well)• Government needs to support local firms in dealing with thesechallenges, e.g. support for design level or for substantial investment
for R&D• Still room for improvement in Thailand 4.0 implementation

Source: AJC, based on company interview.

(3) Subcontracting: Automotive parts industry
Thailand’s automotive industry contributed about 12% of the total annual GDP in 2016. Thailand was
ranked as the largest automobile producer in ASEAN, with production reaching 1.94 million units in
2016, of which 69% were passenger vehicles and the rest commercial vehicles (Thailand Autobook,2017). The country is considered Asia’s automobile hub, with automobile exports accounting for 61%
of total production in Asia in 2016, and ranked 13th in the world in auto production in 2016.
As the automotive industry is strongly supported by the Thai government, several international
automakers have invested in the country. Manufacturers of automotive parts use Thailand as anexport hub because of its proximity to key countries such as Japan, Malaysia and Indonesia. As of
2016, automotive component exports from Thailand amounted to $16.3 billion (43% of ASEAN+6
exports), which was followed by Indonesia (16%) and Viet Nam (13%) (figure 7).

Figure 7. Exports of auto part components from ASEAN+6, 2016 (Per cent)

9

6

13

43

13
16

Source: UN Comtrade.

ThailandIndonesia

Viet Nam

Singapore

Philippines

Malaysia

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29The automotive industry in Thailand comprises several automakers, supported by automotive
component suppliers operating at different levels (figure 8). These suppliers are classified astier 1, tier 2 or tier 3 suppliers, depending on their scale of operations and technical expertise.
Tier 1 suppliers supply components such as engines, suspensions, brakes, tyres and electronic
components, while tier 2 and tier 3 suppliers provide engineering materials and special services
such as sheet rolls, bars and surface treatments. Tier 1 suppliers are firms that supply parts to car
manufacturers directly. Figure 8 shows the 18 car assemblers and 8 motorcycle makers in Thailand,
which are owned 100% by foreign manufacturers or joint ventures. As of 2014, Thailand’s automotive
industry was supported by 709 tier 1 suppliers and about 1,700 tier 2 and 3 suppliers. Of the tier
1 suppliers, 386 supply parts to car assemblers, 201 supply parts to motorcycle manufacturers, and
122 firms supply to both (Poapongsakorn and Techakanont, 2008).

Large firms SMEs

Figure 8. Industry structure of auto parts manufacturers in Thailand

Foreign
Joint
Venture(18 car makers
8 motorcycle makers)
Foreignmajority(287 firms)

Thaimajority(68 firms)

Pure
Thai
(354 firms)

600 companies are
member of TAPMA

SMEs

Tier 1 suppliers (709 companies)
Member firms of Thai Auto
Parts Aftermarket
Association (TAPAA)
117 companies

Tier 2 or 3 local suppliers (Supporting industries)(About 1,700 companies)

Source: Updated from Yongkiat Kitaphanich, TAPMA (2002), cited in Poapongsakorn and Techakanont (2008), based on data
provided by Nikkei Shimbun and SPEEDA.

There are 16 major categories of auto components (table 11).17 This report looks at five components
in which local Thai suppliers are active: (1) brake equipment, (2) automotive metal components,(3) seatbelts/airbags, (4) tyres, and (5) automotive and industrial rubber products. There aredifferences of value added between component categories.

17

They are transportation equipment, automotive components, automotive engine components – injection/coolingequipment, exhaust system components, powertrain components, brake equipment, vehicle suspension,
automotive electronic components, dashboard/lighting equipment, automotive metal components, seatbelts/
airbags, car seats, automotive body/interior components, vehicle assembly, tyres, and automotive and industrial
rubber products.

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Table 11. Industrial categorization in Thailand (Per cent)
Unit

Sales growth in 2017

Net profit margin

Transportation equipment

2.1

6.0

Automotive components

0.7

6.3

Automotive engine components - injection/cooling equipment

2.8

7.5

Exhaust system components

-9.4

2.9

Powertrain components

6.4

6.0

Brake equipment

-1.0

9.1

Vehicle suspension

-1.6

7.5

Automotive electronic components

2.3

6.8

Dashboard/lighting equipment

12.2

9.0

Automotive metal components

-0.7

7.1

Seatbelts/airbags

7.2

6.5

Car seats

1.2

3.5

Automotive body/interior components

-0.1

3.7

Vehicle assembly

-0.9

7.3

Tyres

-1.6

7.8

Automotive and industrial rubber products

4.8

100.8

Source: Thai Auto Parts Industry Association.

For example, brake equipment is manufactured by tier 1 suppliers. The brake equipment industry
procures materials from tier 2 suppliers (mainly small and medium enterprises (SMEs18)) andprocesses these materials into brake equipment. Brake equipment manufacturers not only sell
their output in Thailand, but also export a substantial portion. In 2015, total exports were 42% of
the value of total automobile production in the country.19 The industry is concentrated, with threemajor players – Somboon Advance Technologies, Fortune Parts Industry and Aapico Hitech – holding
about 90% market share in both drum and disc brakes. Most brake equipment manufacturers in
Thailand produce service brakes, which covers drum and disc brakes. However, the production ofanti-lock braking systems (ABS) and brake assist systems is increasing due to their growing use in
the automobile industry.
Thailand’s automotive body/interior components industry is one of the largest markets forautomotive parts in ASEAN. Driving forces behind this industry’s growth are large TNC subsidiaries
in the region with integrated capabilities in design, engineering and manufacture, as well as local
car manufacturers. According to the International Organization of Motor Vehicle Manufacturers,
in 2016 Thailand’s automotive industry ranked 12th globally in terms of production volume,
whereas Indonesia ranked 17th and Malaysia 24th. The industry manufactures critical value added
components including transmission systems, brake systems, airbag systems and steering systems.

18

19

In Thailand, SMEs are defined as companies with no more than 200 employees and B 2 million in assets. SMEs
make up 99.6% of all enterprises in the country, creating jobs for more than 10.5 million people, which accounts forthree-fourths of the national workforce (https://www.boi.go.th/tir/issue/201205_22_5/3.htm). Microenterprises or
micro firms in this report are defined as having fewer than five employees, and small enterprise or small firms as
having between five and 50 employees (Wasuntiwongse, 1999).
In Thailand, the end market for these manufacturers is assemblers and vehicle manufacturers such as Toyota(Thailand) and Suzuki Motor (Thailand).

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31

Export partners
Thailand has been exporting automotive components to high-demand countries, mainly in the Asian
region. In 2016, automotive component exports increased by 5.3% to $16.3 billion. Other parts andaccessories for vehicles (four-wheelers) dominated automotive components exports (42%), followedby pneumatic tyres and inner tubes of rubber (22%), spark-ignition reciprocating internal-combustion
piston engines and parts (22%), and other components (13%) that include transmission shafts andcranks, electrical equipment used in engines, ignition wiring sets and general components usedin motorcycles. As of 2016, Malaysia was the country’s major export partner for other parts andaccessories for vehicles (four-wheelers) (11%), followed by Japan (10%), Indonesia (10%), the UnitedStates (8%) and South Africa (6%)
Exports of brake equipment, including brakes and service brakes for automobiles, increased by
8.6% to $7 billion, primarily due to a major surge in demand for automotive parts exports. This
increase in exports was possible only because of the increase in production of braking systems by
the major TNCs. In 2016, the top two partners were the same – Indonesia with a 16% share, followedby Malaysia with 11% (figure 9).

Figure 9. Major export partners of brake equipment from Thailand, 2016 (Per cent)

16

30

11
3

4

10
4

4 4

5

Indonesia

Malaysia

Japan

South Africa

BrazilPhilippines

Saudi Arabia

India

Viet Nam

USA

Others9

Source: UN Comtrade.

Thailand is a net exporter of safety seatbelts, with exports accounting for 95% of total trade (exports
plus imports) in 2015 (figure 10). These exports declined by 11% to $97 million in 2015 from$177 million in 2010. Japan is Thailand’s key export destination for safety seatbelts, contributing
66% of total export value, $64 million in 2015, down from $115 million in 2010. Apart from Japan,
other top export destinations in 2015 were Malaysia (6%), Australia (5%) and the Philippines (4%).

Figure 10. Thailand’s export and import of safety seatbelts, 2010–2015 (US$ million)
200
150
100
50
0

ExportImport2010

Source: UN Comtrade.

2011

2012

2013

2014

2015

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Thailand is also a major net exporter of airbags. In 2015, these exports contracted marginally to$343 million (figure 11). Despite a decline since 2010 of 57%, Japan remains Thailand’s number one
export partner for airbags, accounting for 28% of total airbag export value in 2015. Other key export
partners in 2015 were China (11%), Mexico (9%) and the United States (7%).

Figure 11. Thailand’s export and import value of airbags, 2010–2015 (US$ million)
400
350
300
250
200
150
100
50
0
2010

2011

2012

2013

ExportImport2014

2015

Source: UN Comtrade.

In 2015, Thailand’s key export market for its automotive and industrial rubber products was theUnited States. The growth in rubber tube products exports was steady over the preceding five
years (figure 12).

Figure 12. Export value of automotive and industrial rubber products in Thailand,
2009–2016 (US$ million)
1,000
800
600
400
200
0
2009

2010

2011

2012

2013

2014

2015

2016

Gaskets, washers and other seals of vulcanised rubber

Conveyor and similar belts or belting of rubber

Gloves other than surgical, of rubber

Rubber tube, pipe, hose, except hard rubber

Source: UN Comtrade.

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Changes in business model and industry’s development path
The industry has both domestic and foreign players, with foreign players operating either throughsubsidiaries or through joint ventures with domestic players. The top three players in brake equipment
are Siam Aisin Co., Somboon Advance Technology and Kiriu, which together accounted for 90% of
market share as of 2012. Siam Aisin and Kiriu are the foreign-origin players dominating the industry,
holding about 70% market share. Somboon Advance Technology is a leading domestic player thathas about 29% of market share. Major international manufacturers of automotive metal components
such as Bosch (Germany) and Denso Corporation (Japan) have established manufacturing facilitiesin Thailand.
Similarly, Thailand’s safety seatbelt and airbag industry is largely dominated by foreign companies,
such as Autoliv Thailand (a subsidiary of Autoliv Inc. from Sweden), Takata TOA (joint venture with
Takata Japan and TOA Group), Ashimori (a subsidiary of Ashimori Industry Japan), and some local
firms such as Thai Seatbelt and Luckytex PCL. Since the end of the 1980s and especially since
the elimination of the bans on foreign majority ownership after the financial crisis, Japanese
corporations have increased their shares in local firms and often have become majority shareholders,strengthening their control of the manufacturing.
Japanese TNCs first deal with local companies as vendors. If they determine that the local
companies have adequate technical capacity and are reasonably reliable, they promote thosecompanies to subcontractors. The proportion of subcontractors to vendors varies from company tocompany. Subcontractors are provided with design specifications and limited technical assistance.
If substantial technical assistance is required, a separate contract for technology transfer may besecured. The majority of Thai suppliers (subcontractors) are SMEs starting with OEM with smallorders from several customers. Through intensifying in OEM, many successful local companies
promote R&D activities to develop their own design of automotive parts, and conduct both OEM
and ODM. Cooperation with TNCs has been contributing to the development of the Thai automotive
part industry and automotive industry, which are promoting their own brands based on their
manufacturing experience, technology and design learning. In many cases, even a fully Thai-owned
company may have great technological dependence on foreign automakers through technicalassistance agreements.
Challenges for the Thai suppliers
As a result of continuous government support for the industry, in 2014 (latest data available), theautomotive components industry in Thailand counted over 2,400 manufacturers. The industry includes
numerous SMEs that operate on a limited scale due to their limited technical expertise and lack offinancial support. As a result, major international manufacturers of automotive components suchas Bosch (Germany) and Denso Corporation (Japan) have established manufacturing facilities in the
country. Although the entry of foreign players has supported growth in the industry, it also poses athreat to domestic manufacturers as most of them are small-scale players striving to survive.
The majority of domestic brake equipment manufacturers, including manufacturers of advanced brakeequipment systems such as ABS and regenerative brakes for eco-friendly cars, lack the technologicalcapabilities to develop state-of-the-art products. Consequently, domestic manufacturers (tier 1)
have to depend on foreign companies, entering into joint ventures or procuring licences from them.
However, the Thai government’s local content requirement regulation has helped in the transfer ofknowledge to domestic manufacturers from their technologically superior foreign counterparts. The
lack of technological know-how in domestic firms has encouraged imports of brake equipment fromcountries such as Japan. However, imports of brake equipment and related parts decreased by 15%
between 2012 and 2016 to $293 million, which indirectly implies the development of technologicalcapability in Thailand that supports the industry’s local production.

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In 2015, Thailand started to host a regional conference of producers and traders in braking systems,
brakes and friction materials. Shifting away from price competition and paying more attention to
R&D, the 4th South and Southeast Asia Brake conference and Exhibition in 2018 had the objective
to upgrade the knowledge and understanding of entrepreneurs in the braking system industry in
ASEAN as a whole and to build a unified network of producers in the region.
Government support
Thailand’s Board of Investment (BOI) offers healthy incentives to manufacturers of vehicles andautomotive components. These incentives are applicable to different manufacturers, depending on
their operational regions, which are classified into three zones.20 The BOI supports this industry
as a super cluster. Depending on the area of investment within the industry as well as the type oftechnology required for production, investors are eligible for both tax and non-tax incentives.21
The Thai government started to implement an auto development policy in the 1960s, first introducing
high tariffs for imported cars, which encouraged foreign car manufacturers to start knock-down
production. The local content requirement regulation imposed by the BOI has encouraged domestic
manufacturing of automotive parts, including brake equipment. The BOI imposed local requirements
for the manufacturing of engines for pick-up trucks in 1986. In 1989, 20% of local content was required
for engines of passenger vehicles. The local content regulation stipulated that a certain ratio of autoparts be procured locally, forcing foreign players to set up brake equipment manufacturing units in
Thailand. Furthermore, companies manufacturing high-tech automotive components,22 classified
as a priority activity by the government, enjoy exemptions from corporate income tax and importduty for a period of eight years, irrespective of the zone, as the government strives to promote thedomestic automotive industry.
Since 1991, with improvements in technology to cope with the expansion and demand of theautomobile market and the development of mass production system, the Thai government haschanged its policy from a conventional protectionist one to an open market one. Tariffs on imported
cars and assembly parts have been reduced significantly. Although competition became intense due
to an increase in imported cars, the domestic market has become divided into domestic cars andimported cars since the latter are essentially limited to luxury cars.
With favourable government policies for some decades as well as tax incentives, the automotive
industry is set to enjoy consistent growth. Moreover, the rise in disposable income in Thailand
has boosted automobile sales in recent years. The government has also undertaken various free
trade agreements, which along with the ASEAN Economic Community that became effective since2015, benefits the domestic industry through better sharing of R&D and the attraction of greater
foreign investment.

20

21

22

Zone 1 comprises Bangkok, Samit Prakan, Samut Sakhon, Nakhon Pathom, Nonthaburi and Pathum Thani. Zone 2
consists of Ayutthaya, Chachoengsao and Chonburi. Zone 3 comprises Rayong along with the remaining provinces.
In terms of tax incentives, investors may be granted up to eight years of corporate income tax exemption with anadditional five years of 50% reduction in that tax. Non-tax incentives include privileges such as granting permanent
residence to specialized project leaders and permission for foreigners to own land to implement the promoted
activities.
The high-tech segment comprises automotive components such as anti-lock braking systems, substrates forcatalytic converters, electronic fuel injection systems, regenerative braking systems and batteries for electricpowered vehicles.

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Roles of associations
The Thai Automotive Industry Association is an association for all the car makers and motorcycle
manufacturers. The Thai Auto Parts Manufacturers Association (TAPMA) is the association for autoparts manufacturers. There are more than 600 member firms in the TAPMA, most of which are
Thai firms and SMEs (with factories, without pure trading companies). Member firms are tier 1, 2
and 3 suppliers for major car makers. The major tier 1 suppliers that are 100% Thai and membersof the TAPMA are Somboon Advance Technology (SAT) (box 9), Thai Rung Union Car (box 10) andAuto Alliance Thailand (box 11). The tier 2 suppliers are usually larger suppliers, with 500 to 800
employees, that supply the tier 1 suppliers. The sizes and scale of the tier 3 suppliers varies from
SMEs to larger suppliers with up to 500 employees.

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Box 9. Somboon Advance Technology (SAT)
Somboon Advance Technology (Thailand) (SAT), incorporated in 1941 as a private limited company,
became a public limited company in 2004. Its shares were listed on the Stock Exchange ofThailand in 2005. The company and its five subsidiaries are engaged in manufacturing auto partsfor vehicles such as passenger cars and pick-up trucks. As illustrated in box figure 8-1, SAT
invested in International Casting Products Co., Ltd., Samboon Malleable Iron Industrial Co., Ltd.,
Bangkok Spring Industrial Co., Ltd., Samboon Forging Technology Co., Ltd., and Mubea Somboon
Automotive (50% ownership). The company’s offerings include parts such as brake discs and brakedrums, suspension parts and engine parts.
As of 2016, the company has a 28% market share in domestic disc brake and drum brake
manufacturing. Revenue from brake sales grew at 28% during 2013-2016 to reach B 1.7 billion
in 2016. As of 2016, the brake equipment segment accounted for 20% of the company’s
total revenue.

Box figure 9.1. Company structure of Somboon Advance Technology (SAT)

1. Somboon Holding Co., Ltd.
2. Thai NVDR
3. NorTrust Nominees Ltd-Cl Ac.
4. HSBC (Singapore) Nominees Pte Ltd.
5. AIA Co., Ltd-EQ3-P
6. Others

As of August 24, 2018

SAT
Paid up B425 million

99.99%

99.99%

ICP

99.99%

SBM
21.25%

Tsuchiyoshi
SomboonCoated Sand

BSK

99.99%

29.92%
17.75%
5.23%
2.40%
1.69%
43.01%

50.00%

ICP

20.00%

Yamaha Somboon
2.90%

Nisshinbo Somboon
Automotive

Mubea
SomboonAutomotive

1.80%

Somboon Somic
Manufacturing

Source: Company report.
Note: Somboon Holding & Kitaphanich Family owns approximately 44%

SAT engages in NEM relationships with local companies and with foreign companies to become
their subcontractors. Its main customers include Mitsubishi, Toyota/Hino, Kubota, Isuzu, Honda
and Nissan (all Japan). Most of them have their own subsidiaries or facilities in Thailand to produce
their commercial products. The two types of subcontract between SAT and its customers are for
OEM and replacement equipment manufacturing. However, to run the business, SAT relies on its
suppliers (88 main suppliers). The input is from both local companies and imported resources.

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Box 10. Thai Rung Union Car PCL
Thai Rung Union Car PCL was established in 1967. The company supplies many kinds of automotive
products, focusing mainly on OEM parts and contract assembly, and on expanding its market forparts and bodies to various regions around the world. Besides assembling customers’ brands,
Thai Rung Union Car manufactures its own brand of car called TR. As illustrated in box figure
10-1, the company has seven subsidiaries and one sub-subsidiary in Thailand. The company had
about 1,400 employees as of 2017. Manufacture of equipment for production of car accessories
contributes the majority of the firm’s revenues, 65% of the total in 2017, followed by car assemblyand other related car services (23%).

Box figure 10.1. Company structure of Thai Rung Union Car

Thai Rung Union Car PCL[TRU]Thai Rung Tools and Dies Co., Ltd.
[94%]

Thai Auto Conversion Co., Ltd.
[20%]

Thai Auto Pressparts Co., Ltd.
[91%]

Delta Thairung Co., Ltd.
[30%]

Thai V.P. Auto Service Co., Ltd.
[94%]

Kyowa Thairung Co., Ltd.
[49%]

Thai Ultimate Car Co., Ltd.
[99.53%]Trex Thairung Co., Ltd.
[40%]

Source: Company report.

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Box 11. Auto Alliance Thailand Co., Ltd.
After establishment in 1995 as a joint venture between Ford Motor Co. and Mazda Motor Corporation,
Auto Alliance Thailand Co., Ltd., started mass production in 1998. The initial investment was about$500 million and reached $1.5 billion after the expansion of the passenger car plant in 2007. Today
it is becoming one of the largest and the most modern automotive manufacturing facilities inSoutheast Asia.
• Products: Ford Ranger, Ford Everest, Mazda BT 50 Pro, Mazda 2, Mazda 3 and Mazda CX-3
• Markets: 130 countries• Capacity: 175,000 units/year• Employees: 6,900

Box figure 11.1. Company structure of Auto Alliance Thailand

TNCs

ThailandMazda Motor
Corporation (Japan)

Thai affiliate of Mazda(owned by Mazda Japan)

JV

Ford Motor Company
(USA)

50%

5%

45%

Auto Alliance Thailand(Joint venture)

Local subcontractors

Source: Company report.

Auto Alliance Thailand is a foreign-owned joint venture. By locating in Thailand, the company
benefits from cost reductions and gains market share, while it also contributes to the developmentof Thai companies, especially majority-Thai SMEs, through local subcontracting. For example,• They create more jobs for local labourers and train them to become skilled workers.
• High competition forces local SMEs to improve their product quality, to be proactive in innovating,promoting R&D and doing marketing.
• They start by subcontracting small, simple parts of automotive products; then, step by step,
many SMEs begin OEM for more complicated parts and develop into conducting ODM.

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39The TAPMA provides incentives for developing the industry and helps members solve problems. For
example, some agreements are not favourable for all Thai vehicle makers; e.g. there is no tariff ontrucks or pick-up trucks. The TAPMA tries to negotiate with the government so that its incentives
are not greater than those of the Japan-Thailand Economic Partnership Agreement. As these newor revised agreements will significantly affect the auto parts industry, the TAPMA negotiates with
policymakers. The TAPMA also organizes business exhibition and matchmaking every two years.
Major foreign TNC subsidiaries are also the members (such as Denso, Bosch and Ogihara) as tier 1
suppliers. For example, APICO and Delta from Taiwan Province of China and SAIC Shanghai Group(a joint venture with CP Group) are members. Delta has 20,000 to 30,000 employees in Thailand
and is actively introducing robots and automation. The TAPMA organizes visits to bigger foreign
members to learn their automation or new technology. The TAPMA also provides training programsfor member firms with foreign firms such as Toyota, Nissan and other car makers.
The Thai government established the Automotive Human Resource Development Academy formobile training. Top trainers are sent from Denso and other members such as SAT to do in-housetraining at member firms. Although training is actively provided, it takes a long time for member
firms to absorb new technology and skills. Most of the member firms are SMEs, and it is not easy forthese firms to introduce automation or robotization.

Table 12. Summary of subcontracting: Automobile parts industry
Opportunities

Challenges• Job creation• Further demand in ASEAN and Thailand• Higher technological level than competitors in
ASEAN• Technological know-how acquired by local Thai
firms
• Transparent governance of TNCs in the industry• Standardization of some automotive parts andlower requirements for integral manufacturingmodels (particularly for Japanese TNCs)• Flexibility of being SMEs (for some Thai firms)• Severe competition among suppliers in ASEAN countries• Continuous investment required to update technologicallevel and know-how• Investment required to deal with electric and other newly
developed automobiles• Investment required to deal with new regulations in foreign
customers’ markets, e.g. environmental issues, quality
issues• Government support needed for dealing with thesechallenges (e.g. substantial investment for new
technologies)• Still room for improvement in Thailand 4.0 implementation

Source: AJC, based on company interview.

(4) Subcontracting: Jewellery industry
Over the past 30 years, Thailand’s jewellery industry has developed from the cottage level,comprising artisans who applied their skills to incorporating gems into jewellery, to a large-scale,
export-oriented industry. Skills have been handed down through generations and, combined withmodern manufacturing techniques, they have helped the country become a global production andtrade centre for jewellery.
According to the Gem and Jewellery Institute of Thailand, there are about 2,200 registered
manufacturers and thousands of household businesses, with 800,000 jobs throughout its supply
chains. In the domestic market, the gem and jewellery trading system has been growing, with over
8,000 retailers and wholesalers in the system and many thousands outside it. However, 80% of ThaiN O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A P R I L 2 0 2 0
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gem and jewellery production is export oriented. Large and medium enterprises focus on exports
and generally have foreign ownership and the resources to invest in machines and to stock raw
materials (gemstones).
Some areas in Thailand where gemstones were available and the mining industry was very lively
are no longer active. For example, in Kanchanaburi, which used to have good sapphires, the mining
industry has lost its vigour, and in Chanthaburi, which used to have good rubies and yellow sapphires,the mining industry is already gone. Chanthaburi is transitioning to become a centre for cutting
gemstones. Originally, Bangkok was where one found craftsmen to cut gemstones, and some still
are found there (about 30% of all craftsmen). In the former mining areas, firms are small to medium
size, with 1 to 100 employees. The dealers are all Thai, but the buyers are from India and China.
Jewellery is one of the top 10 export industries in Thailand. In 2016, gems and jewellery were thethird most important export category and accounted for 7% of overall exports. In 2016, the valueof these exports increased by 19% to $14 billion. The trade balance was positive at $5.6 billion,
the third consecutive year of surplus (figure 13). The export of unwrought or semi-manufactured
gold constituted the largest share of exports at 51%, worth $7 billion, followed by jewellery (25%),
diamonds (12%), colour stones (7.5%) and costume jewellery (3%). Thailand is also one of the largest
global centres for coloured stones, specializing in gemstones and semi-precious coloured one,particularly rubies, sapphires and emeralds. The major trade partner is Switzerland. It has become
the major destination for Thai gem and jewellery exports, accounting for 30% of all such exports in
2016. It was followed by Hong Kong and the United States, with 17% and 9%, respectively.

Figure 13. Thailand’s gem and jewellery trade balance, FY2005–FY2017 (US$ million)
25,00020,00015,00010,0005,000
0-5,000

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

-10,000
Import value

Export value

Trade balance

Source: UN Comtrade.

Business model of the industry
Gem and jewellery production plays a crucial role in the Thai economy through the creation of jobs
and the development of related industries. The industry has three segments: (1) gemstone heating,cutting and polishing; (2) jewellery design, casting (modelling, smoothing and plating), setting,polishing, quality control and packaging; and (3) sales and marketing in domestic and international
markets. Figure 14 illustrates the business model of the industry in Thailand.

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Figure 14. Business model of the gems, precious stones and jewellery industryin Thailand

Miningprecious stones(diamonds, coloredstones, pearls andprecious metals)

Selectingand gem cutting
sawing, bruiting(shaping roughly)
and cutting

Jewellery
manufacturing
design, logistics
and quality

Distribution:
domestic
market (20%),
foreignmarket (80%)

Sales andmarketingSource: Fiscal Policy Research Institute.

According to the Gem and Jewellery Institute of Thailand, exports to China through Hong Kong,
China are increasing significantly. Firms in Hong Kong import loose stones and process them there.
For Japanese customers, who require high-value items, products are designed in Japan, processedin Thailand and exported from Thailand. Thai firms have OEM roles and NEM relationships withJapanese customers. United States customers buy large quantities of products that are designed in
Thailand, with OEM and ODM roles for Thai firms. As for European firms, it is interesting to see thatmost European TNCs have conducted FDI primarily to manufacture products in Thailand. They arehighly concerned about design and do not collaborate with or outsource to Thai firms.
Thailand has been known for having the highest-quality rubies, pink sapphires and yellow sapphires.
In Myanmar, coloured gemstones such as rubies and sapphires as well as jade are trimmed andexported to Thailand, where products are processed by Thai firms. Recently, some gold and silver
has been imported from Uzbekistan and Africa; in addition, major rough stones supplied from Africa,
which are usually small, are then trimmed in Thailand.
Two jewellery companies using NEMs in Thailand are examined as cases: Pranda Jewellery (box 12)
and Goldfine Manufactures (box 13).

Box 12. Pranda Jewellery
Pranda Jewellery PCL, founded in 1973, has its group headquarters in Bangna, on the outskirtsof Bangkok. The company engages in the production, distribution and retailing of fine jewellery
in Thailand, the United States, Germany and other countries. Its core business is the production,
distribution and retail of fine jewellery; it also manufactures costume jewellery. The company is
one of Thailand’s leading jewellery exporters, with 3,534 employees in Thailand in 2018 (2.1% of thetotal workforce in the industry) and a total of about 5,000 employees worldwide. The company also
operates retail and franchise outlets in Asia and the Middle East, as well as offering its products
through e-commerce.

…/

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Box 12. Pranda Jewellery (Concluded)
ODM (Original design manufacturing-subcontracting):
In the first decade of its establishment, Pranda Jewellery set up a product development centre
dedicated to creating original designs and pioneering differentiated products. The company
quickly became renowned for being a high-quality and original design supplier. In the following
decades, the company continued expanding into massive production by setting up new facilities
in key locations, including not only Thailand but also Indonesia and Viet Nam. Over the years,
Pranda has established a fully integrated value chain involving designing, producing, distributing
and retailing its own products. Conducting ODM contributes to the success of Pranda today, andcreates growth opportunities for partners.
OBM (Original brand manufacturing-brand owner):
Pranda Jewellery owns many well-known jewellery brands such as Prima Gold, Prima Diamond,Prima Art, Gringoire, Gemond, Merii, Ariva, Julia and Esse. It runs the business by offering
differentiated products that suit target markets. The company’s sustainable strategy is to achievea balance of sales, 50% ODM and 50% OBM.
The company’s subsidiaries in Thailand, Viet Nam and Indonesia are proficient in retailmanagement, operating more than 100 of its own retail shops and franchise businesses.
Note: AJC organized an “ASEAN Showcase” on 27 November 2014 in Tokyo, in which this company participated.

Box 13. Goldfine Manufacturers (GM)
Goldfine Manufacturers PCL manufactures, imports and exports ornaments and jewellery inThailand and internationally. It is also involved in manufacturing and processing various cuttingstones. The company manufactures gold, silver and platinum jewellery sets with diamonds,
precious stones, semi-precious stones, pearls and other stones. It also develops designs to suitcustomers’ requirements.
Goldfine was founded in 1989 and is based in Bangkok. The company employ about 250 workers.
It has a 100% directly owned subsidiary in Viet Nam. In 2015, Goldfine recorded revenue of B 1.4
billion.
Goldfine is working in OEM and ODM: In OEM, the company produces about 1 million pieces
annually. In ODM, the company has a collection of more than 2,000 designs for customers; as
noted, it also manufactures customers’ own designs and supports customers in developing
designs before manufacturing. The company designs items on the basis of current fashion trendsof customers in its main export markets.

From the case studies, the following commonalities were identified:• The markets for Thai firms are currently two, one for exports and the other for consumption in Thailand
but targeting tourists from overseas. Therefore, demand is heavily dependent on foreign customers.
• Thai firms take on the role of OEM for foreign TNCs.
• Foreign TNCs (including retail stores in foreign countries) are the main customers for Thai firms.
• Thai firms have capabilities to design jewellery to meet foreign TNCs’ requests and to conduct
ODM (table 13).

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Challenges for Thai suppliers
Most manufacturers are SMEs, which means that 90% of jewellers cannot afford high-tech machines
for production or investment for R&D. It was noted that there has been a reduction in skilled workers.
The industry needs to invest more in R&D and training to sustain a skilled labour force.
The precious metals and mining industry in Thailand comprises gold, silver, platinum, palladium,rhodium, and industrial and gem-quality diamonds. Precious metals are predominantly used in thejewellery, electronics and automobile industries. In 2016, gold metals accounted for the majority of
the industry’s production value (89%), followed by silver metals (10%).23 However, very few domestic
companies specialize in exploration, development and production of precious metals in Thailand.
These companies rely on the technical expertise of the foreign players that dominate Thailand’smining industry.
In the interviews for this report, it was found that the roles of Thai suppliers in Thailand are changing.
Originally Thailand had locational advantages related to the availability of gemstones (table 13). Thailand
became a location for gemstone heating, cutting and polishing followed by jewellery design, casting(modelling, smoothing and plating), setting, polishing, quality control and packaging. Previously all
activities in the value chain were conducted in Thailand; however, the original business model and theavailability of various functions of the value chain within Thailand have completely changed. Recently,
the availability of gemstones has been limited, in Thailand as well as in neighbouring countries suchas Myanmar and Cambodia. Therefore, suppliers have to import gemstones in order to apply existingskills to produce jewellery products. This shift is reflected in the growth of imported stones and in
the trade balance of the industry. In order to improve the trade balance, high value added products
must be produced and exported. In addition, as the local market is limited, the foreign market isimportant for Thai jewellery. Although European jewellery TNCs are still investing in Thailand though
FDI, competition among foreign TNCs is already severe in this market.
Roles of associations and government
The Thai Gem & Jewellery Traders Association has played an important role in integrating a typicallyfragmented industry by promoting Thai jewellery at jewellery fairs outside the country. Other
organizations supporting the industry include the Thai Diamond Manufacturers Association, theThai Gem & Jewellery Manufacturers Association, the Gold Traders Association, the Thai Jewellers
Association and Jewel Fest Club, and the Gems, Jewellery and Precious Metal Confederationof Thailand.
The industry also receives strong support from the government of Thailand. The Ministry ofCommerce, in collaboration with the Thai Gem & Jewellery Traders Association, set up the Gem andJewellery Institute of Thailand in 1998 to develop and promote gem and jewellery exports. Clusters ofgems and jewellery producers have formed around gem processers, training institutions and retailjewellery companies. These have been recognized as international centres for gemstone processing
and trading.
The Thailand BOI offers attractive non-tax and tax incentives to investors. In particular, to attract
new projects for sustainable growth, the BOI and the Industrial Estate Authority of Thailand
grant comprehensive benefits and privileges to gem and jewellery investors. The Department ofExport Promotion, under the Ministry of Commerce, also supports the industry’s development.

23“Mineral Statistics of Thailand 2015-2016”, Department of Primary Industries and Mines.

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Exporters are exempted from or pay reduced import duties and value added tax on raw materials.
The abolition of import and export duties on diamonds in 1991 strengthened Thailand’s status as acentre where gemstones from around the world are shipped to be processed. Similarly, value added
tax on gold bullion imports was abolished in September 2000. These supports helped local firms
integrate into foreign TNCs’ GVCs.

Table 13. Summary of contract manufacturing: gem and jewellery industry
Opportunities

Challenges• Job creation• Compliance of Thai suppliers (since they are TNCs as well)• Opportunities for SMEs and micro firms• Availability of gemstones• Potential OEM role for foreign TNCs

• Need to look for higher value added to correct tradebalance• Potential ODM role for foreign TNCs
• Possibility to have more Thai brands throughlearning from ODM• Access to foreign markets through NEM
relationships and Thai firms’ FDI• Need government support for dealing with thesechallenges (e.g. substantial investment for learning new
designs, easier imports of gemstones)• Still room for improvement in Thailand 4.0 implementation

Source: AJC, based on company interview.

(5) Other types of NEMs: Offshoring
In addition to contract farming, subcontracting and contract manufacturing, other types of NEMs
are already integrated into the Thai economy. Franchising and licensing are common, as mentioned
earlier. Offshoring businesses are also emerging in some industries, reflecting advances in design
power, information technology skills and a wide range of consumer interest. One such example isthe entertainment content industry (box 14).

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Box 14. Thai entertainment content industry
The Thai entertainment content industry started with the film (motion picture) industry some three
decades ago. Current segments are (1) motion picture, (2) television broadcasting, (3) games, (4)music and karaoke, and (5) animation. The total revenue of the industry in 2017 was B 207 billion($6.3 billion).

Box Figure 14.1. Revenue, employment and number of organizations in theentertainment and content industry, 2017
Revenue(B millions)

Employment

Number of firms(organizations)

26,03926,600

8,919

Film

..

22,000

8,794

Animation

..

4,600

125

Internet (for purchasing
and accessing content)

80,000..

..

Music and karaoke

10,59331,900

9,217

Game

24,50041,00019,017TV (advertisement)

65,78618,000

1,228

Total

206,918

117,500

38,381Category
Film and animation

Source: D2E (p. 13).
Note: License fees paid to foreign partners are not included in revenue.

In the music and karaoke industry, 84% of revenue came from Thai music and 16% came fromimported music (non-Thai) in 2017. However, in the Thai film and animation industry, 89% of revenue
came from imported films (non-Thai) and 11% from local Thai films (D2E). TRUE Corporation has
a master franchisor agreement with Pokemon (Japan), which is broadcast on its cable TV network(with B 500 million ($14.3 million) in sales in 2015).a In the game industry (B 24 billion ($0.72 billion)
in revenue), most games are imported from Japan, China and the Republic of Korea; only about 1%
of games are Thai products.
In the film industry, there are some 9,000 firms and many related smaller firms. There are
125 firms in the animation industry, which has a labour union with strict regulations. The numbersof jobs in TV and film firms are shrinking, whereas the number in the internet industry is growing.
Japanese animation companies (such as those producing Doraemon, One Piece, Pokemonand some other characters) and Pachinko machine companies have been outsourcing part oftheir value chain functions to Thai firms. These functions include colouring or painting, but notdesigning. Some Thai companies have created their own design characters for Japanese firms
and sold the copyrights to them.
aNikkei MJ, 10 December 2014, p. 10.

…/

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Box 14. Thai entertainment content industry
Japanese film and animation (particularly animation) have been popular in Thailand; however,recently films from United States and China have been growing. Hollywood movie companies
have offices in Thailand for promoting their products and have contractual agreements directlywith Thai firms. For example, the licensing firm of Doraemon (Japan) is not in Thailand but inHong Kong, China.
In the music industry, D21, for example, has a licensing agreement with Japanese TNCs,
which operate 300 karaoke stores in Thailand. About 700 rooms in those stores have Japanesesongs only.
In Japan and the Republic of Korea, there are organizations to support copyright-related matters
as well as to promote products. In Japan, the Content Overseas Distribution Association was
founded to reduce piracy problems thought cooperating with content holders and copyrightrelated organizations, and to actively promote the international distribution of Japanese content,such as music, films, animation, TV programs and video games. In the Republic of Korea, there isa similar organization, the Korea Creative Content Agency.
In Thailand, there are some regulations for the supporting industry. However, these regulations
are very outdated and insufficient to support the current environment for the industry.

Box figure 14.2. Revenue structure of D21

B 7,000 (incl. tax)
machine/month

D2I
B 4,400 (before tax)
+ machine rental fee

Manufacturers
e.g. Joy Sound BrotherB 1,100 (before tax)

Source: AJC, based on company interview.

Music Composer Thailand
B 1,500 (before tax)

Production
rightsReproduction
rightsJASRAC
B 375

Composers andpublishers(e.g. Sony Music)
B 1,125

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2.3 Crucial factors affecting the capacity development of local Thaifirms: Backward linkages
Analysis of the industry-specific development of local Thai firms reveals that Thai NEM partner
firms have developed capabilities so that they can differentiate themselves from competitors inneighbouring host countries. The question is whether Thai firms have acquired capabilities that
TNCs and NEM partners consider as requirements for partner firms.
There are two patterns of acquiring such capabilities. The first pattern is having the experience ofbeing a joint-venture partner with TNCs. Before becoming NEM partners, many local Thai firms werepartner firms in joint ventures with TNCs that had interests in investing in Thailand. This can be seenin the chicken meat industry, where local Thai firms operate both in joint ventures with TNCs and on
their own as integrators. The second pattern is establishing backward linkages with subsidiaries of
TNCs. Thai firms in the automotive parts industry have been suppliers to TNC subsidiaries directly
as tier 2 or 3 suppliers. The apparel and garment industry and the gem and jewellery industry bothhave backward linkages through supplier-customer relationships.
In both patterns, local Thai firms have experienced capability-building and technological learningfrom having (1) direct technological transfer from TNCs through FDI in the form of joint ventures,or (2) backward linkages with TNC subsidiaries in Thailand or customers outside Thailand. The
development of capacities and capabilities is key to both attracting FDI and increasing technologicalspillovers24 from TNCs. An organization’s technological capability comprises the knowledge, skills
and experience necessary to organize marketing, to innovate and to produce (Lall and Wignaraja,
1998; Ernst et al., 1998).
“Technological learning” refers to the way organizations accumulate or acquire technologicalcapabilities (Malerba, 1992). Concerning the process of technological learning in industry, Bell andPavitt (1995) distinguish between technological capabilities and production capacity, as illustrated
in figure 15. Technological capabilities include skills, knowledge and experience, and the particularinstitutional structures and linkages necessary to generate and manage technical change.
Production capacity incorporates the resources used to produce industrial goods at given levels of
efficiency and with given input combinations: equipment that embodies technology, operational andmanagerial know-how and experience, product and input specifications, and organizational methods
and systems (Bell and Pavitt, 1995). In industrialized countries, these two kinds of capability areloosely linked; however, in developing countries, these capabilities are not necessarily effectively
linked (Bell and Pavitt, 1995).

24

Spillovers occur when local firms benefit from the TNC subsidiary’s superior knowledge of a product or process
technologies or markets, without incurring a cost that exhausts the gain from the improvement (Blomström
et al., 2000).

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Figure 15. Technological accumulation: basic concepts and terms

Technologicalaccumulation (learning)Technologicalcapabilities

TechnologicalchangeResources needed togenerate and manage
technological change:

Resources needed to generate
and manage technologicalchange:1) Knowledge, skills andexperience

1) Introduction of technology
embodied in new products
and/or new plants through“major” investment projects

2) Institutional structuresand linkages:
within firms, amongfirms, outside firms

2) Incremental adaptation andimprovement of existingproduction capacity

Production
capacities

Industrial
outputComponents of given production
system:- fixed capital- operating labour skills andknow-how- product specifications/design- input specifications- organization and procedures of
production

Source: Adapted from Bell and Pavitt (1995, p. 55).

It is commonly observed that firms rely on innovation, moving along a supply chain that includes
the conduct of R&D, the development of new products, the search for resources in the hosteconomy and the improvement of manufacturing processes. Final products are usually refinedand marketed in the home or host economy or on the international market. Within this process,a TNC subsidiary as well as NEM relations create vertical linkages, both backward and forward,25
as outlined in table 14.
Upstream or downstream process links as well as backward or forward product links are usuallydescribed as vertical linkages (von Tunzelmann, 1995). Firms have been driven to develop closer
relationships with upstream suppliers and downstream customers (von Tunzelmann and Acha,2005). In Thailand and other developing host countries, however, given the existence of a technology
gap between suppliers and subsidiaries, the evidence shows little flow of technological knowledge
from subsidiaries to local suppliers.
Local suppliers are involved in the process of manufacturing at the level either of the sourcing ofparts or components, or the manufacture under subcontracting arrangements, depending on the
supplier’s technological capability and the TNC’s clients’ strategies. The technological capability of a
local supplier affects a subsidiary’s decision as to whether to source components locally in the hostcountry or to source regionally or internationally. With the rapid global technological advancementin the examined industries (chicken meat, apparel and garment, automotive parts, and gem andjewellery industries) and the ongoing process of globalization, it is critical for local firms to be more
technologically capable if they wish to participate in the industry, for it is too easy for TNCs to find25

Backward linkages refers to all relations established with supplier firms and that exist when TNC subsidiaries
acquire goods or services from local suppliers, whereas forward linkages describes the relations established withcustomers in the host country or in the global market.

Outsourcing from domestic firms
to foreign affiliates

Joint venture with distributor orend-customer

Subcontracting of the productionof final or intermediate products

Joint venture with supplierLonger-term linkage

Source: UNCTAD (2001).

Spillovers

Competition effects

Enterprise spin-offs

Effects due to mobility of trained human resources

Demonstration effects in unrelated firms:- Spillovers on processes (including technology)- Spillovers on product design- Spillovers on formal and tacit skills (shopfloor and managerial)

Establishment of new distributionaffiliate (by existing foreign
affiliate)

Longer-term (contractual)
relationship with local distributor
or end-customer

Longer-term (contractual)arrangement for the procurementof inputs for further processing

Equity relationshipOnce-for-all or intermittent sales(on contract)Once-for-all or intermittent
purchases (on contract)

Short-term linkage

Establishment of new
supplier-affiliate (by existing
foreign affiliate)“Off-the shelf” sales“Off-the-shelf” purchases“Pure” market transaction

Forward(distribution)

Backward(sourcing)

Form

Relationship of TNC subsidiary to local firms

Establishment of new
affiliate (by existing foreign
affiliate) for the productionof same goods andservices as it produces

Horizontal joint venture

Joint projects withcompeting domestic firm

N/A

N/A

Horizontal(cooperation in production)

N/A

Joint public-private R&D
centres, training centres,
universities• Traineeships for students infirms• Training programmes byuniversities for firms• R&D contracts with local
institutions such as universities
and research centres

N/A

N/A

Relationship of foreign affiliate tonon-business institution

Table 14. Backward linkages and other relationships between TNC subsidiaries and local suppliers and organizations

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other suppliers, in other regions or countries, with which to interact. The development of local
suppliers’ capacities and capabilities is a key to both attracting FDI and NEM, and to increasing
technological spillovers from subsidiaries.
One of the factors in the influence of local suppliers’ technological capabilities on a subsidiary’s
motivations to engage in backward linkages is the need for cost efficiency in procuring inputs inhost countries. Local suppliers play a crucial role in meeting subsidiaries’ demands, such as for
quality and delivery, through backward linkages. A supplier’s technological capability to meet thesedemands contributes to the strengthening of backward linkages between subsidiaries and local
firms. Such interactions further benefit local suppliers in terms of exposure to the subsidiary and to
the standard of the TNC group’s manufacturing operations in the global market.
How backward linkages worked for Thai firms
The upgrading of technological level, knowledge level and managerial skills can take a long timeand is not easy to achieve. The process of upgrading occurs through technological learning. In order
to upgrade subsidiary and supplier capabilities, there are various ways in which backward linkages
between subsidiaries and suppliers can be formed and strengthened. The realization of the fullpotential benefits derived from such linkages by the supplier also involves the transfer of the capacity
to understand, use and improve upon a given technology (Komoda, 1986). It involves the adoption of
the acquired technology, as well as its absorption by the supplier (Baranson and Roark, 1985).
Assets such as technology, knowledge and managerial skills flow from a subsidiary to linked local
suppliers through backward linkages of different qualities. Backward linkages take several different
forms: pure market transactions, short-term linkages and long-term linkages (table 13). In contrast
to pure market transactions and short-term linkages, long-term linkages are often preferred by
local suppliers and are typically more beneficial.
The experiences of Thai firms suggest that it is necessary to have a form of long-term backward
linkage with foreign TNCs (either with subsidiaries in host countries or a headquarters in a homecountry) that has influenced the capacity-building of local suppliers. Long-term linkages, as shownby NEMs, mean long-term buyer-supplier relationships, such as contractual arrangements forthe procurement of inputs, and the subcontracting of production of intermediate or final products.
Within long-term linkages, different types of linkages exist within the broader backward linkage.
There are seven possible categories of linkage and the means by which these assets flow from thesubsidiary to suppliers, based on the nature of what the subsidiary can offer for local suppliers(figure 16). In each category, a subset of categories relating to technology or knowledge flows can bederived according to the areas of technology involved. How and in what form backward linkages are
created in the focused four industries are explained in turn.
Experiences of capacity-building in the chicken meat industry
The various types of backward linkages in figure 16 reflect the fact that the main Thai firms thathave linkages with TNCs are not SMEs, but larger firms. Some have diversified their value chain
functions from production of chicken meat to retail sales of chicken meat products. Most of the Thaifirms have vertically covered different levels that relate to the production of chicken meat, so they
have contracted with many farmers. In the earlier industrial development phase, local Thai firms
built capabilities through having joint ventures with TNCs. In this phase, rather than building theircapabilities through having backward linkages, they learned required technologies directly from the
TNCs. At the same time, Thai firms were acting as integrators to distribute chicken meat in theThai market. Most large Thai integrators have both joint-venture and 100% local-owned firms. In
the mature industrial development phase, for TNC partners in a home economy such as Japanor Europe, the risks of NEM relationships with local Thai firms are lower than those with firms

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Figure 16. Different types of backward linkages

1) Marketing/purchasing linkages
2) Product technology-related linkages
3) Process technology-related linkages

A TNC
subsidiary4) Training linkages

A local SME
supplier

5) Innovation/collaborativeg linkages
6) Managerial and organizational7) Other linkages

Source: Compiled and modified from Lall (1980) and UNCTAD (2001).

in neighbouring countries, as TNCs know them well – and local Thai firms also make efforts tomaintain high levels of quality to sustain relationships with their customers as well as joint-venture
partners.
Experiences of capacity-building in the apparel and garment industry
Local firms that have NEM linkages with foreign TNCs include both SMEs and larger firms. Someof them have conducted FDI in neighbouring countries and become Thai TNCs with subsidiaries
overseas. This implies that Thai firms create their own backward linkages and at the same time
are involved in the backward linkages created by foreign TNCs. In the industrial development
stage, the linkages that Thai firms had with foreign TNCs in this industry were seen as longer-term(contractual) arrangements for subcontracting of the production of final products. Their relationshipwas a supplier-customer one; therefore, the initiative for ordering products was coming from foreign
TNCs. As Thai firms continued to have linkages with foreign TNCs, TNCs have started to require
lower costs for their products that Thai firms produce. This is why Thai firms started to invest inneighbouring countries, so that they can meet TNCs’ demand for lower costs. Through longer-term
linkages with TNCs, Thai firms have learned and acquired the capabilities to design products. For
some firms, foreign TNCs have been helpful in teaching design technology, when it was too costly forforeign TNCs to produce in their home countries. In the mature industrial development phase, Thaifirms have divided their roles into (1) lower-cost production for their subsidiaries in neighbouring
countries and (2) higher value added production for Thai firms in Thailand. Currently, Thai firms
continue to have NEM relationships with foreign TNCs for value added products manufactured in
Thailand (ODM) and for lower-cost bulk production manufactured in their subsidiaries (OEM). As aresult, Thai firms have acquired design capabilities and hence have developed a “Thai brand” in theindustry, which is very popular in ASEAN countries. This development is partially solving one of thecritical problems of the industry, the fact that all the customers are located outside Thailand.

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Experiences of capacity-building in the automotive parts industry
Local Thai firms have developed their technological capability typically through having backward
linkages with TNC subsidiaries in Thailand. As discussed, due to local content requirements by thegovernment, many foreign TNCs have invested in the country, which has encouraged the growthof long-term (contractual) arrangements for the procurement of inputs for further processing in
subsidiaries in Thailand. In the industrial development phase, subcontracting of the productionof final parts or intermediate products has been actively initiated by subsidiaries of foreign TNCs.
Because of its large local firms with diversified value chain functions in related areas, Thailand has
become an active exporter of automotive parts within ASEAN and to other automotive-producing
countries in ASEAN such as Indonesia, the Philippines, and Malaysia and outside ASEAN such as
India and China.
Experiences of capacity-building in the gem and jewellery industry
Unlike in the automobile parts industry, the main local Thai firms that have linkages with TNCs are
not large firms but rather small or medium ones. Those that have linkages with local Thai firms in
Thailand are either SMEs or micro firms. These SMEs or micro firms have the roles of gem cuttingor craftsmanship tasks necessary for Thai suppliers that have linkages with foreign TNCs. Although
the industry is one of the important exporting industries, the size of the firms at each level is smaller
than the other industries focused on in this report. The linkages that local Thai firms have withforeign TNCs involve once-for-all or intermittent purchases (on contract). Although this relationshipdoes not seem to be a pure market transaction, the linkages are short-term due to the severe
competition. Local Thai firms’ capabilities have been developed through having foreign customers(since local demand is limited), but their design or technology capabilities are not transferred,as other industries have experienced. A similar case can be found in the furniture industry in
the Philippines.26

3. OPPORTUNITIES AND CHALLENGES FOR NEMS
IN THAILAND
By establishing NEM agreements with TNCs, each industry can benefit from a number of opportunities.
However, there are also challenges for local firms, particularly because of the characteristics ofNEMs and the experiences of industrial development in Thailand.
The issues faced by local Thai firms range from those related to contractual agreements to thoserelated to industry characteristics and TNC strategies. Both opportunities and challenges can befound for each category, which can be grouped into issues of (1) continuity, (2) NEM characteristics,(3) capacity-building and (4) local firms’ initiatives and local embeddedness (figure 17).
In their quest to take advantage of the opportunities, local NEM firms will also face challenges if theyseek to strategically appropriate TNCs’ know-how and technological skills for their use by linking
with them (figure 18). They may also build capacities to deal with these challenges and even promote
their business by using TNCs’ networks of GVCs. In addition, national NEMs can use their supply
chain experience.

26

See AJC, Non-Equity Modes of Trade in ASEAN: Paper 7. Philippines.

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Figure 17. Summary of opportunities and challenges for NEMs in Thailand

Local companies/
Local employees

Agreements between
TNCs and local firms
exist through NEMs
Opportunities

TNCs

Challenges
Contract farming
Chicken meat industry

Job creation
New markets and new demand
Relationship with foreign TNCs

Compliance issue
Production cost
Safety and quality control issues

Non-equity modalities in Thailand

Subcontracting
Textiles and garment industries
Job creation
Additional roles as OEM/ODM
Trend in transparent complianceby foreign TNCs

Compliance issue
Labour cost
Substantial investment in R&D

Subcontracting
Automobile parts industry
Technology standardization
New markets and new demand
Trend in transparent complianceby foreign TNCs

Severe competition
Substantial investment in newtechnology
Inflexibility of diversified
large firms

Contract manufacturing
Jewellery industry
Job creation
Additional roles as OEM/ODM
Access to foreign markets
through NEMs and Thai FDI

Source: AJC.
Note: Major industries only.

Compliance issue
Production cost
Substantial investment in R&D

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Figure 18. Opportunities and challenges for local firms engaged in NEM

Opportunities

Typical industries concerned

Challenges

Continuity (footlooseness) problems
Easier to find TNC partners both inand outside the country through, forexample, matching events (since
TNCs do not directly invest in thebusiness).

Textile and garment;
gem and jewellery

Easy for TNC to terminate thecontract and long-term relationship is
not guaranteed, if quality of services
or goods do not meet TNC’s standard
and if local firms in other countries
are more competitive.

NEM’s characteristic issues
Easier to enter a new market or new
area even when demand is notpresent in the country. Skills, talentsor resources that are available but
not required in the country can be
usefully utilized outside the country.

Chicken meat;
textile and garment;
gem and jewellery

Demand and markets are outside thecountry.
Demand from TNCs may change
depending on the interest and taste of
their customers.

Capacity-building issues
Easier for local employees to work inbusiness activities in the chicken
meat industry and textile andgarment industries because of the
low skill requirements at the entry
level.

Chicken meat;
textile and garment

Not easy for local firms to build
further capacity apart from receiving
orders from customers, as theyreceive only relevant know-how atbest (e.g. upgrading value chain
activities through their own efforts is
not easy).

Initiatives and local embeddedness issues
Local firms adapt to foreign design
and management and do not need tothink about local values and alocalization strategy (that is, it isquicker for local firms to make aprofit by using a TNC’s businessmodel).

Source: AJC.

Textile and garment;
gem and jewellery

Local firms may lose their initiative,
creativity and traditional values, apartfrom designing for their own brandproducts in both industries.

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3.1 Ownership/non-ownershipIf business activities are not owned by TNCs, it is easier for TNCs to enter the market through NEMs.
If TNCs can find local firms that can produce products instead of their own affiliates, TNCs cancontract with local firms without owning an affiliate in a host country. This is one of the advantagesof having a NEM for TNCs in a host country. In the textile and garment industries and the gem andjewellery industry, TNCs are looking for partners that produce products for them at a lower cost than
the TNC at the required level of quality. For these industries, there are potential opportunities for local
firms to have contract agreements with TNCs and export products produced in Thailand. Althoughsuch opportunities can be viewed as attractive by local firms, those firms need to have a minimum
level of management skills, including autonomy and initiative, as well as technological skills andcapacity, because TNC support is limited. In addition, TNCs’ decision making about selecting local
partners and terminating contracts with them can be volatile, as the contracts are not guaranteed
for long terms and can be terminated anytime. One of the characteristics of NEMs is that demandfor particular products or services comes from outside the country and is not predictable. Since
demand cannot be controlled, local firms have to build capacity without having exact knowledge ofthe size of NEM operations with potential customers.

3.2 Relationships between NEMs and industries
Particular modalities are linked to particular industries in Thailand. For the chicken meat industry,some modalities are present at the same time. Through FDI, there are joint-venture firms between
foreign TNCs and local Thai firms whose target market is partly in the TNC’s home country, such as
Japan, and partly in Thailand. This creates opportunities for local employees to be integrated into thesubsidiaries’ business activities; at the same time, it provides opportunities for capacity-building for
local firms. Through NEMs, local Thai firms (which also may have joint ventures with foreign TNCs)
have contract agreements with TNCs that create exports of products to the TNC’s home country.
This creates opportunities for local firms to receive orders from customer TNCs located outside
Thailand. For both modalities, since their target markets are outside the country, food security andquality controls should be secured by the government. Having both modalities in Thailand, local Thaifirms in the chicken meat industry have been learning from TNCs and have been linked into TNCs’
strategies in their home countries.
Different types of modalities are also linked to the automotive parts industry. Foreign TNCs have used
FDI for assembly plants to produce automobiles in Thailand. At the initial industrial development
stage, most tier 1 suppliers of foreign TNC subsidiaries are from TNCs’ home countries. These
suppliers (e.g. Aisin, Denso, Bosch) have to find tier 2 suppliers in Thailand. Local Thai firms aretrying to be joint-venture partners with foreign TNCs to supply to tier 1 suppliers or be pure Thaitier 2 suppliers. The industrial structure creates similar modalities for tier 3, 4 and even 5 suppliers.
Because of the industry’s requirements (e.g. technological awareness and quality control), allplayers need to work towards industrial and technological development.
In the textile and garment industries and the gem and jewellery industry, subcontracting and contract
manufacturing are typical modalities engaged in by TNCs in Thailand.

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3.3 Ownership and control
One of the salient features of a NEM is that foreign TNCs do not directly own the business activities
of local firms but have indirect control over them. Local firms are not controlled through equity
but by contract agreement. This presents a number of challenges for local firms, as the contracts
between local firms and TNCs can easily be jeopardized. For instance, if local firms do not meet thequality of products required by TNCs, TNCs can easily terminate their contracts. If the demand of the
TNC shifts to a new product and local firms do not have the capacity to meet the new demand, then
TNCs can easily terminate their contracts and make new ones with competitors in another country.
This is related to the fact that TNCs are utilizing the local firms through NEM for their strategy, andthe choice of modality reflects in part the stages of GVCs.
Where TNCs own firms (or affiliates) in a country, TNCs directly control their activities. TNCs makeefforts to control quality by, for example, investing further in human resources to improve quality.
TNCs may change their overall strategies so that the positioning of their affiliates in Thailand isready to meet possible new demand. In the chicken meat industry and the automotive parts industry,
TNCs either have both modalities in Thailand or have already invested substantially in transferring
technologies or know-how. TNCs have been making efforts to upgrade local Thai firms businessactivities to meet such a shift.
Under NEMs, local firms have many opportunities for new businesses. In order to sustain theiroperations or activities without direct support from TNCs, local firms should create their own
business activities such as creating their own brands. Some examples are seen in the textile andgarment industry and the chicken meat industry. Whether local firms can strategically utilize TNCs
by linking with them or build the capacity to do so remain the challenges for local firms.

3.4 Localization strategies
Local firms’ operations or activities constitute part of TNCs’ global operations, whether they are
undertaken through FDI or NEMs. If local firms need to implement localization strategies or local
firms’ activities need to reflect locally embedded factors to meet TNCs’ demands, local firms will
have initiatives for the operation, which in turn will create more opportunities. In the textile andgarment industries and the gem and jewellery industry, firms’ operations or activities in Thailand
do not need to implement a localization strategy. What local firms do is meet the requirements ofor order from TNCs, which is one of the characteristics of outsourcing. However, the initiatives that
local firms can take are limited, and they will face challenges if any negative factors arise on the
TNCs’ side.
Whether farming in the chicken meat industry or subcontracting in the automotive parts industry,
operations or activities are required to accord with TNCs’ global strategy and with local regulations,whereas that is not necessarily required in the textile and garment industries and the gem andjewellery industry. In both of these, firms with operations or activities in Thailand do not need to
implement a localization strategy because their products are largely destined for abroad. In both,
however, local firms should make efforts to build their production capacity.
Foreign TNCs can outsource a part or the whole of any production or services, or even part of their
GVCs to Thailand, since localization is a low priority as they are not directly present in the local
economy. However, although TNCs may terminate their agreements with contracting firms, TNCs
nonetheless need their own localization strategies, even in NEM operations for the continuation of

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their business in the country. Local NEM firms have to be equally as important as TNCs’ affiliates in
the formation of GVCs. Local firms should undertake initiatives independently from TNCs in order
to integrate their operations and activities into TNCs’ overall production networks and into GVCs.

4. POLICY IMPLICATIONSThe Thai government has implemented tremendous efforts to further develop the industries focusedon here (automotive parts, chicken meat, textiles and garments, and gems and jewellery) throughstrengthening technology, knowledge and industry-specific business associations. In addition to
current policies that focus on developing potential employees through education and training, thechallenges that local firms will face in the medium to long run centre on developing local firms’
overall capabilities and mainstreaming sustainable development in NEM operations.

4.1 Enhancing capacities of local firms
Local firms’ capabilities in both technological and management skills should be enhanced to meet
TNCs’ current and potential demand. Once these necessary capabilities have been attained, firms
can have more initiative or autonomy in their operations; they can find potential customers throughnetworks; and independently from TNCs in terms of autonomy or initiatives, they can then create
their own business activities or create their own Thai brands in the long run.
In order to enhance local firms’ overall capabilities, the government needs to provide support at twolevels – the individual firm and the industry.
At the individual firm level, the government needs to support the following efforts:• Implementing continuous internal training for employees within local firms. Local firms need totrain employees for higher-skilled jobs. Judging from the results of the interviews done for thisstudy, not all local firms implement continuous or regular training because of the costs incurred.
Furthermore, local firms that have contracts with foreign clients do not necessarily implement
training for the micro firms or SMEs or individual farmers (craftsmen) with which those local
firms have contracts, (and that thus have indirect NEM relationships with TNCs). Direct or indirect
financial supports for training would help local firms focus on internal training tailored to theneeds of the firms themselves or the demand from their client TNCs.
• Establishing a learning centre where local firms can learn about NEM operations or activities.
Local firms need to be aware of the changes and future demand in their industries rather thanfocusing only on current operations. The government can support this learning by being a facilitatorthat connects individual firms with potential customers. A learning centre could cover all aspectsof NEMs in forming, executing and evaluating contracts, as well as operating.
• Creating a conducive environment for local firms, to facilitate their globalization and localization
strategies. To meet current and potential demand by TNCs and to integrate with TNCs’ current
and potential GVCs, local firms need to be familiar with TNCs’ changing strategies. Each firmneeds to learn about their customers’ strategies. The government can offer support for different
types of strategies, introducing good practices in different industries at the individual level, rather
than simply offering support for an industry as a whole.

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At the industry level, industrial or business associations and the government can work toward thefollowing goals:• Creating an environment for competition and cooperation between local firms. Local firms need toensure continuity in their operations or activities by enhancing their capabilities, as they compete
among themselves. Local competition implies that a number of firms will become competitive
enough to become TNCs’ partners or vendors. The government could help create a better
environment for firms to compete against each other and cooperate with each other so that NEM
industries as a whole become more competitive.
• Promoting local firms to a higher position in GVCs. Shifts in demand by TNCs and changes in
TNCs’ GVCs in Thailand derive mostly from TNCs’ requests for cost reduction. If each local firm can
upgrade its value added activity, they can attain higher levels in value chains, both horizontally andvertically. The government can promote local firms’ capabilities explicitly by supporting innovationand technical upgrading. Only then may such firms partner with foreign TNCs in NEM operations.
• Putting an innovation policy in place for local firms to encourage and protect technologies theyneed in order to operate under NEMs. Competition to become a TNC’s NEM partner is high. For
example, in the textile and garment industry there are competitors who offer products at lower
prices. Particularly if the products offered by local firms are standardized and are not required
to be localized, competition will be much more severe. A strong innovation policy is required as
Thailand is trying to overcome the middle-income trap, like other advanced ASEAN member
states. Innovations flourish only when they are protected by a proper framework of intellectual
property rights. Such protection is still at a premature stage, as the country is classified as being
in “transition from stage 1 to stage 2” (the second lowest in terms of development stage), in theWorld Economic Forum’s Global Competitiveness Index 2017–2018. In addition, on innovation andsophistication factors the country is ranked 32nd, with a score of 4.72.27• Protecting local employees from unreasonable conditions. There are some benefits to being
employed by NEM firms. In recent world trends of transparent governance policy for foreign
TNCs, lists of suppliers are disclosed and foreign TNCs are aware of local employees’ working
conditions. However, the governance policies of foreign TNCs affect only local firms that havedirect NEM relationships; they do not yet apply to micro firms or SMEs or individual farmers orcraftsmen who have indirect contracts with foreign TNCs. Therefore, local employees need to beprotected by a labour policy for the industry, as current working environments or conditions do notnecessarily meet global standards.

4.2 Mainstreaming sustainable development
As local NEM firms and their foreign clients have no equity relationship, the typical TNC governanceof foreign affiliates in host countries is sometimes almost absent. Despite this, the firms interviewed
for this study follow customers’ compliance levels and guidance, not their local standards. Customers(foreign TNCs) from the United States and Europe, and recently from Japan, have increased themonitoring of human rights in suppliers outside their own countries and presented their own
guidance, based on international guidelines. In the gem and jewellery industry, subcontracted
workers of local NEM firms are part of foreign clients’ supplier networks; however, those clients
have no direct contact with these subcontracting workers (a similar situation was found in the textile
and garment industries, particularly those for employees of Thai subsidiaries in neighbouring hostcountries). Even though some foreign clients have implemented corporate social responsibility

27

Singapore is ranked 3rd and has a score of 5.71. Malaysia is ranked 23rd with a score of 5.17. Viet Nam is ranked
55th and has a score of 4.36. The Philippines is ranked 56th and has a score of 4.35 (World Competitiveness Report).

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principles at local NEM firms, these principles are not necessarily conveyed to subcontractors. The
Thai government cannot rely only on foreign clients’ compliance levels and guidance, as they often
do not provide an appropriate level for the whole society.
The foreign clients of NEM firms have their own compliance standards. The business community
needs to have guiding principles such as the UN guiding principles on business and human rights.
According to the UN’s guidance,28 human rights due diligence “should cover adverse human rights
impacts that the business enterprise may cause or contribute to through its own activities, or which
may be directly linked to its operations, products or services by its business relationship” (p. 17).

4.3 Improving the institutional setting
Thailand has been an attractive FDI destination for foreign TNCs. As a result, a number of TNC
subsidiaries have backward linkages with local Thai firms.
Two directions of policy implications emerge from these characteristics. The first direction is
promoting NEM policy as well as FDI policy. In addition to the current industrial policy encouraging
FDI, the government could pursue industrial policy to encourage NEM agreements with foreign
NEM clients. Competitive advantages can be found in the country in the areas of manufacturing
where supporting industries are integrated and where subcontracting and franchising have a long
history in diversified industries. In addition to the government’s current industrial policy encouraging
the sophistication of industrial structure in manufacturing, the government can possibly pursue
industrial policy to encourage NEM agreements with foreign NEM clients. Further contributions
to economic development, industrial development and employment creation could be expectedwith NEMs. In this context, policies in areas such as innovation and technological readiness andgovernance guidelines in all suppliers (including micro and SMEs that subcontract with local NEM
firms) under NEM agreements are therefore important.
The second direction is that the adoption of the Sustainable Development Goals by the United Nations
provides opportunities for the government to shape the conduct of NEM firms to mainstream suchgoals. In building resilient infrastructure, promoting inclusive and sustainable industrialization andfostering innovation are key elements. Environmental standards have already become important inbilateral trading relationships. Such monitoring by TNCs has increased over the years.
Pressure on environmental standards has also mounted because of problems of global warming
and climate change. Thailand has ratified the 2015 Paris Accord (and the subsequent time-deferredversion of the Marrakech Proclamation in 2016) under the United Nations Framework Convention
for Climate Change. Hence, the government should raise awareness, as well as promote innovation
towards the formation of a major standards organization to coach and certify NEM firms.
The government should consider implementing and strengthening the regulatory framework for
NEM firms to export, promote innovation, expand employment and upgrade technologically. Thisinitiative should start with a profound evaluation of the critical policy pillars shown in table 15.
This would be the first step for the government to decide whether it should strengthen the policy
framework of NEM promotion and, if so, to decide what, how and to what extent to do so in order
to meet a certain level of international standards, from the viewpoints of foreign NEM clients, local
NEM firms, local NEM firms’ subcontracting firms and local employment standards.

28

United Nations (2011), “Guiding Principles on Business and Human Rights: Implementing the United Nations‘Protect, Respect and Remedy’ Framework”, United Nations Human Rights Office of the High Commissioner. New
York and Geneva.

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Table 15. Checklist for NEM agreements and operations to maximize benefits fromand minimize costs with NEM
Whether there is an agreement on contract performance
Whether there is an agreement on contract terms (duration)
Compliance with laws

Whether there is an agreement on contract termination and its
process
Whether there is an agreement on contract arrangement (additional
contracts) and its process
Whether there are rules on non-discrimination

Respect for humanrightsWhether there are rules on basic human rights
Whether there are rules on harassment (power balance between
local NEM firms and TNCs)
Whether there are guidelines on air pollution by local NEM firms

Environmental
consideration

Whether there are guidelines on water contamination by local NEM
firms
Whether there are guidelines on environmental friendly goods orservices by local NEM firms
Whether there are employment rules (laws) on age under the NEM
agreement
Whether there are employment rules (laws) on gender under the
NEM agreement
Whether there are guidelines on a safe and pleasant work
environment for local NEM firms
Whether there are employment rules (laws) on working
environments under the NEM agreement

NEM policy of theThai government

Whether there are employment rules (laws) on working conditions
under the NEM agreement
Work environment

Whether there are employment rules (laws) on working hours under
the NEM agreement
Whether there are employment rules (laws) on taking holidays under
the NEM agreement
Whether there are employment rules (laws) on treatment of absence
under the NEM agreement
Whether there are employment rules (laws) on maternity-related
leave under the NEM agreement
Whether there are guidelines on provision of support system ofchildcare and nursing care
Whether there are employment rules (laws) on terminating
employment contracts under the NEM agreement
Whether there is a program through local NEM firms can improvetheir technology and capacity

For local firms’
development

Whether there is a program through which local NEM firms’
employees can learn
Whether there is a program through which local NEM firms can gain
an understanding of NEM policy
Whether there is a program through which local NEM firms can gain
an understanding of the business environment of the industry

Subcontractors/
suppliers

Whether there are guidelines for similar NEM policy for local
subcontractors and suppliers…/PA P E R 9 T H A I L A N D

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Table 15. Checklist for NEM agreements and operations to maximize benefits fromand minimize costs with NEM (Concluded)
Earning the trustof customers andconsumers

For TNCs,
required by theThai government

Whether there are guidelines for TNCs to provide correct informationon their products or services
Whether there are guidelines for TNCs to respect free and fairtrading rules

Mutual growth withpartner companies

Whether there are guidelines for TNCs to provide relevant
information required for trading
Whether there are guidelines for TNCs to develop relationships
based on trust with local NEM firms

Coexistence with local
communities

Whether there are guidelines for TNCs to establish and maintain agood relationship with local communities where local NEM firms arelocatedSource: Adapted from “Corporate Code of Conduct, the Third Edition”, Tokyo Chamber of Commerce and Industry (2013).

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