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Executive Report on Strategies in Thailand
ICON Group International, June 2007, Pages: 393
How to Strategically Evaluate Thailand
Perhaps the most efficient way of evaluating Thailand is to consider key dimensions which themselves are composites of multiple factors. Composite portfolio approaches have long been used by strategic planners. The biggest challenge in this approach is to choose the appropriate factors that are the most relevant to international planning. The two measures of greatest relevance are “latent demand” and “market accessibility”. The figure below summarizes the key dimensions and recommendations of such an approach. Using these two composites, one can prioritize all countries of the world. Countries of high latent demand and high relative accessibility (e.g. easier entry for one firm compared to other firms) are given highest priority. The figure below shows two different scenarios. Accessibility is defined as a firm’s ease of entering or supplying from or to a market (the “supply side”), and latent demand is an indicator of the potential in serving from or to the market (the “demand side”).
Framework for Prioritizing Countries
Demand/Market Potential Driven Firm
Relative Accessibility
Accessibility/Supply Averse Firm
Relative Accessibility
In the top figure, the firm is driven by market potential, whereas the bottom figure represents a firm that is driven by costs or by an aversion to difficult markets. This report treats the reader as coming from a “generic firm” approaching the global market - neither a market-driven nor a cost-driven company. Planners must therefore augment this report with their own company-specific factors that might change the priorities.
Latent Demand and Accessibility in Thailand
This report provides an extremely detailed overview of factors driving latent demand and accessibility in Thailand. Latent demand is largely driven by economic fundamentals. But, latent demand only represents half of the picture. A country may at first sight appear to be attractive due to a high latent demand, but it is often less attractive when one considers at the macro level how easy it might be to serve that entire potential and/or general business risks.
Chapter 2 deals with macro-accessibility. While accessibility will always vary from one company to another for a given country, the following domains are typically considered when evaluating macro-accessibility in Thailand:
Openness to Trade in Thailand
Openness to Direct Investment in Thailand
Local Marketing and Entry Strategy Alternatives
Local Human Resources
Local Risks
Across these domains, a number of not-so-obvious factors can affect accessibility and risk. These are also covered in Chapter 2, which is presented from the perspective of an American firm, though it is equally applicable to most firms entering Thailand. This chapter has been authored by local offices of the U.S. Government. I have included a number of edits to clarify the provided information as it relates to the general strategic framework.
In Chapter 3, I summarize the economic potential for Thailand over the next five years for hundreds of industries, categories, and products. The goal of this chapter is to report my findings on the real economic potential, or latent demand, represented by Thailand when defined as an area of dominant influence. The data presented are the result of various spatial econometric and time-series forecasting models which, for each category presented, are applied to forecast and allocate latent demand across all countries of the world and major distribution centers or centers of dominant influence within each country. This is accomplished knowing that economic fundamentals (e.g. income) generally vary from one country to another within a given country over time. In this chapter, I report the allocation for each category for Thailand as an area of dominant influence in Asia and, potentially, the world.
The report concludes with trade indicators for Thailand. Often, the amount of trade flowing into and out of a country is a strong indicator of trading partners, trade openness, and related latent demand. Trade indicators are purely statistical in nature. Although international trade is not a direct measure of latent demand, it does provide an indicator of general market conditions with respect to trade flows and trade openness in Thailand.
As a whole, this report presents a strategic assessment of Thailand by considering an extremely broad set of factors affecting both latent demand and accessibility, as outlined in the following chapters.
MACRO-ACCESSIBILITY IN THAILAND
Economic Fundamentals and Dynamics
Continued Openness to Foreign Engagement
Thailand’s traditional strengths as a destination for foreign investment remain unchanged. Its location at the center of Southeast Asia makes it a natural export platform, and it has a sizeable domestic market that continues to grow and diversify as the recovery progresses. Transportation and communications infrastructure have improved dramatically over the past two decades, and additional expansion is underway. Thailand has no coordinated industrial policy to direct investment, and successive governments have committed the country to an open trade and investment regime. To be sure, investing and doing business in Thailand present challenges, but the government appreciates the importance of foreign investment, and providing an attractive foreign investment regime remains a central tenet of Thai economic policy.
Macro-Economic Accounts and Indicators
GDP
In recent years, the economy has seen little change in the sectoral contributions to GDP. Agriculture accounts for 11.0 percent of GDP, and manufacturing contributes 37.8 percent. The remainder is divided among various services, including wholesale and retail trade, transport and communications, financial intermediation, real estate, and others.
Employment
Thailand has a mobile labor market in which many workers migrate between agricultural sector jobs in the countryside and self-employment and/or light industry or service occupations in the city, depending on economic conditions.
The Government’s Role in the Economy
In addition to state-owned enterprises in the utilities, transportation, communications, energy, tobacco, and commercial banking sectors, the government retains an influential voice in Thailand’s industrial policy. In 1998, the government announced a policy of privatizing state-owned enterprises. In the financial sector, 75 percent stakes in four banks have been sold to foreign investors. Overall progress has been slow, however, and workers in some state enterprises are opposed to privatization.
International Trade
Major Thai exports to the U.S. include food products, raw materials, chemicals, and machinery and transport equipment - product categories that also dominate Thai imports from the U.S.
The U.S. is Thailand’s single largest export market, followed by members of the Association of Southeast Nations (ASEAN), the European Union (EU), Japan, Hong Kong, and China. Thailand’s largest sources of imports are Japan, ASEAN, the EU, and the U.S.
Sustaining the Economic Recovery
Although exports remain a key factor in the Thai economy, domestic demand is becoming an increasingly important motor for growth. The Thai corporate sector tends to focus on China as a competitor for a limited pool of global FDI, but China’s rapid growth and accession to the World Trade Organization (WTO) present long-term opportunities for the Thai economy. Bilateral Thai-Chinese trade is rising, and the two countries are now implementing a free trade agreement covering many agricultural products.
Political Risks
Economic Relationship with the United States
Friendly bilateral relations between Thailand and the United States date back more than 150 years. In fact, Thailand (Siam) was the first country in Asia to establish relations with the U.S. The economic and security aspects of this relationship remain important for both nations. The United States is Thailand’s most important export market.
The bilateral security relationship has been strong since the end of World War II. The two countries maintain an extensive bilateral military exercise program, and many Thai military officers receive training in the U.S. each year. American equipment is still the technology of choice for most Thai military purchases.
The U.S. and Thailand also work together to address a range of economic issues, including protection of intellectual property rights. Increasingly, cooperative efforts with Thailand on regional economic and security matters are undertaken through multilateral forums, such as the Asia-Pacific Economic Cooperation forum (APEC) and the ASEAN Regional Forum (ARF), complementing bilateral consultations.
Political Risks
Thailand’s external political view is increasingly centered on the development of a stronger regional economic and security foundation. Thailand is a major force in the Association of Southeast Asian Nations (ASEAN) and plays an active role in regional economic organizations such as the Asia-Pacific Economic Cooperation forum (APEC) and international organizations such as the World Trade Organization (WTO). With little immediate military threat to its sovereignty, Thailand has focused its international policy on trade development and investment, while addressing security concerns by strengthening bilateral ties with its neighbors and reducing tensions regionally through ASEAN and the ASEAN Regional Forum (ARF).
The Political System
Thailand is a constitutional monarchy. The King plays little part in day-to-day government operations, but serves as a powerful symbol of Thai national identity and commands enormous moral authority, which he uses on occasion to resolve internal crises or to draw the government’s attention to pressing social problems. Real power, however, lies in the hands of a democratically elected government led by a Prime Minister. Since World War II, Thailand has alternated periods of democratically elected civilian governments with authoritarian rule brought about by coups d’etat. The military last seized power in 1991, but after middle-class protests and royal intervention, civilian rule was restored in 1992. Since that time, the military’s role in politics has been greatly reduced, due to strong public opinion against coups d’etat, a vocal free press, and Thailand’s overall political maturation. One of the most significant steps in that maturation was the enactment of the 1997 constitution. This constitution, Thailand’s 16th since 1932, brought substantial reforms to the Thai political process and expanded the rights and civil liberties of Thai citizens. Reforms mandated by the 1997 constitution, including establishment of a National Counter Corruption Commission, a Constitutional Court, a national Human Rights Commission, and a new national Election Commission have helped Thailand move toward a more transparent and open system of government.
The maximum term of Parliament extends for four years. However, the Prime Minister may choose to dissolve the House and call elections before that date. All members of the Senate are elected concurrently for a set term of six years, and members are not eligible for reelection.
With the exception of the Democrat Party, Thailand’s oldest organized political party, Thai political parties have tended to be centered on individual personalities rather than ideologies. All Thai parties accept working within a framework of democratic principles and free enterprise economics. Frequent changes in government generally have not affected the country’s overall stability, largely because policies, for the most part, are designed and executed by a competent professional bureaucracy. Meanwhile, the democratic ethos continues to develop and expand in Thailand.
Marketing Strategies
Distribution Channel Options
Industrial Goods
Distribution and sales of industrial goods in Thailand are normally conducted through two channels:
From U.S. exporter to Thai importer, to Thai end-user
From U.S. exporter to Thai end-user
The selection of distribution and sales channels depends largely on the type of product and the end-user. Exporters of products that require after-sales service should have a Thai importer representing them locally. A local agent or distributor can respond more quickly to provide service and parts replacement. Accordingly, the end-user’s confidence will increase if there is a place where they can receive near-immediate assistance any time a machine breaks down. Also, the end-user normally feels more comfortable dealing with a local agent or distributor since there are no language or distance barriers. The agent or distributor also facilitates customs procedures for end-users. It should be noted that, in general, only local agents, distributors, or manufacturer’s branch offices in Thailand are eligible to enter day-to-day bidding for routine government tenders.
Consumer Goods
For consumer goods, there are generally three distribution and sales channels:
From U.S. exporter, to Thai importer, to Thai retailer, to Thai end-user
From U.S. exporter, to Thai importer, to Thai wholesaler, retailer, and end-user
From U.S. exporter, to Thai retailer, to end-user
Perishable consumer goods tend to go through the first channel, which is the fastest. In this instance, importers tend to act as wholesalers at the same time. Non-perishable consumer goods normally go through the second or third channel. The second channel seems to be the most favored, especially with lower-priced items, since there are over 250,000 (mostly small) retail outlets in Thailand. Working through wholesalers will promote better market coverage.
Pricing Issues
The market in Thailand is open and very competitive. Thai customers agree that price is a significant factor in selecting which products to purchase. U.S. firms need to study such factors as the channels of distribution, necessary sales and promotional techniques and the current pricing practices of key competitors. Standard credit payments, as in most international trade, apply in Thailand as well.
Importers of large equipment or machinery charge a commission of 5-10 percent and allow their customers to open L/Cs themselves. Manufacturers or wholesalers normally receive a 5-10 percent profit margin. Retailers and distributors of local products require a 30-40 percent margin.
Thai consumers are very price conscious. In fact, less than half of Thai consumers report buying based on brand-name recognition and first time buyers often buy on price alone. Consumers are often offered free gifts or extra options with their purchases. In addition, midnight sales or occasional sales have proven to be quite successful. Retailers’ pricing depends on the product and the frequency of turnover. In general, the margin structure is as follows:
Convenience Stores
18-20 %
Discount Stores
8-10 %
Department Stores
40%
Manufacturers or Wholesalers
5-10 %
Distributors of Local Products
10-15 %
Direct sale of Specialty Products
60-80 %
Direct sale of General Product
40 % max.
Importers of Large Equipment or Machinery
5-10 %
Importers of Luxury Products
60 % min.
Finding a Local Partner
Although Thai law does not require use of local agents and distributors, it is one of the most efficient and effective ways to enter the market in Thailand. The agent and distributor facilitate and expedite the market entry with their market knowledge and established network. Among many business cultures in Thailand, interpersonal relationships are a vital factor for successful business transactions. Local agents and distributors are accustomed to local business practices and requirements. They are in the market and can deliver what is required for a successful business arrangement that companies in the U.S. cannot conveniently provide from afar. In addition, local agents and distributors will take care of regulatory affairs and acquire import permits for U.S. exporters.
U.S. exporters must invest sufficient time and attention in selecting a qualified agent and provide training for marketing and technical support staff. Frequent contact with local representatives is essential in order to build a good relationship.
Participate in related trade exhibitions in Thailand. Trade exhibitions are a good means to test the market and locate serious agents and/or distributors in Thailand who visit the trade exhibitions to find new products and services.
Retail Distribution in Thailand
Non-US industry leaders, including Tesco Lotus Super Stores, Carrefour, Siam Makro and Big C Super Centres, dominate the hypermarket subsector. Department stores are of Thai or Japanese origin. The only visible American entities are three True Value DIY stores and Office Depot (Cash and Carry). U.S. products are very well received and widely promoted in nearly all types of retail outlets listed herein. For example, supermarkets such as Villa and Tops run frequent U.S. food promotions.
Provincial Thai department stores are lobbying for measures to control the expansion of the hugely successful hypermarkets, which contribute to a decline in the number of “mom and pop” variety stores and adversely impact the sales of supermarket and smaller department store chains. Recently, Tesco Lotus delayed the opening of one new hypermarket in Chanthaburi pending the passage of the Retail Act. The new law drafted by the Internal Trade Department of the Ministry of Commerce, which addresses four major concerns of smaller retail establishments, must be reviewed by the Minister and then approved by the Cabinet before it is sent to Parliament. Thailand remains open to expansion by the hypermarkets and the law seeks to redress concerns about price competitiveness and inability of smaller retailers to compete against the more sophisticated large-scale operators. The government is also seeking to educate smaller storeowners about effective retail management techniques and establish the Allied Retail Trade Company to help them gain lower pricing on volume purchases.
Leading Retail Stores in Thailand By Category
Department Stores: Central Department Stores, Robinson, Imperial Department Stores, The Mall Department Stores, Isetan, Tokyu, Tang Hua Seng.
Hypermarkets: Big C Super Centre, Lotus Super Stores, Carrefour, Siam Makro
Supermarkets: Tops, Foodland, Villa Market, Food Lion Supermarket, Jusco Super Market
Convenience Stores: 7-Elevens, Family Mart, Lemon Green, Select, Tiger Mart, Star Mart, Jeffy
Cash & Carry: Siam Makro
Specialty Product Stores: Super Sports, Active Nation, Sport Stadium, Power Buy, Office Macro Center, Office Depot, Boots, Watson’s, MAX Auto Express, Homemart, Home Pro, True Value, Marks & Spencer, etc.
Direct Marketing Options
Direct marketing is considered to be an effective means of marketing in Thailand. Since the onset of the Asian financial crisis in mid-1997, many of those made redundant joined the direct marketing workforce. Often, these people possess business experience and are highly motivated. Direct marketing is used widely in the sale of life insurance, cosmetics, health products, cleaning and household items, and electrical appliances. Major U.S. cosmetics brands that are sold via direct marketing are Amway, Nu Skin, Herbal Life, and Avon. Even though direct marketing has proved to be very successful in the Thai market, many problems still need to be solved such as poor product quality, loss during delivery, imitation, and poor enforcement of consumer protection laws by the government of Thailand.
Direct marketing and mail order sales to some extent have benefited from use of individual credit cards in Thailand. Credit cards stretch the buying power of Thai consumers and facilitate retail sales through non-traditional means, such as mail order and electronic commerce. Leading the market in this sector are American Express (Amex) and Citibank (which issues both Visa and MasterCard). Most major department stores in Thailand conduct direct marketing via mail order campaigns through their own networks of discount cardholders. Installment plan sales of household consumer goods and electrical appliances are gaining popularity among consumers, especially in rural areas.
TV home shopping was introduced a few years ago and has been moderately accepted. It generates an annual turnover of approximately US$4 million. The poor quality of products has discouraged consumer confidence. The Thai consumers’ buying pattern of seeing and touching products that they are buying is another limitation of the TV home shopping.
Globalization and the Internet have made E-commerce in Thailand more viable as a marketing channel because people can check product prices from everywhere in the world without adding transportation costs, fees and taxes. When local companies add transportation costs, handling fees and taxes to their products, local consumers will become more conscious of competitive pricing. At present, though, most Thai consumers still prefer to see goods before purchasing.
Franchising Activities
The franchise industry is still very popular among Thai investors because it is perceived as an attractive and relatively safe form of investment. International franchises control 70 percent of the total market. The U.S. dominates with 65 percent of the international franchising market. The quality, standards, brands, and innovations offered by U.S. franchises are well known to potential Thai investors. However, franchising fees required by U.S. companies are perceived as very high and start-ups require a huge capital investment.
There is a 25 percent failure rate for local franchise operations, due to their poor standards and low quality. Nevertheless, local franchises have better growth potential than international franchises under tight economic conditions for several reasons. Investing in a local franchise requires a comparatively smaller franchise fee. In addition, the devaluation of the Baht currency increases the non-Baht denominated franchise fee payments. Thus, the franchisees’ costs rise significantly. The already tight competitive market, due to the economic downturn, limits the opportunity for franchise operators to pass on this burden to the customers through price increases.
Those already in the market, particularly those in fast food and consumer goods, are experiencing diminished revenues because the Thai people are being more cautious and selective in their spending. It is probably more difficult to start new international franchises in Thailand now but U.S. franchises are advised to keep a close eye on market developments and learn who might be the most promising potential partners. This is because franchising will be seen as an attractive, relatively safe way to get back into business for many Thai investors and the best prospects should be in the following industries:
Hotel management
Education and computer schools
Automotive after market
Telecommunications
Retail stores
Creating a Joint Venture
Joint ventures (JVs) and licensing agreements are important market entry strategies for American exporters to Thailand. In many cases, the only way to overcome costly freight charges, high tariffs and competition from cheaper local goods is via local production. Thai firms need to become more technologically advanced to offset competition from lower cost producers. Thailand’s Civil and Commercial Code has a section on General Contracts, which broadly governs all contractual business relationships and transactions. Depending on the nature of the contract, the Public Companies Act and Alien Business Act include provisions pertaining to joint venture agreements which American firms should be aware of before signing with any local partners. Joint venture partnerships with funding support, technology transfer and training components are effective mechanisms to achieve this.
Many Thai firms are actively seeking U.S. joint venture partners which, along with much needed capital, can also bring technical, marketing and management skills to a business relationship. In turn, Thai firms generally offer assets, valuable local vendor and government contacts, and established business relationships throughout the region. A number of aggressive U.S. companies have already entered into strategic joint-venture relationships with Thai partners in Indochina and China.
Creating a Sales Office
The primary organizational forms for commercial enterprises are the sole proprietorship, partnership, limited liability company, joint venture and foreign branch. All are similar in nature to those found in the United States. Limited liability companies, however, are more often privately held rather than public corporations. The majority of foreign corporations operating in Thailand do so through private limited liability companies.
There are 3 major forms of partnership in Thailand:
Unregistered ordinary partnership
Registered ordinary partnership
Limited partnership
As in the United States, each form of partnership has different levels of liability for partners and different tax consequences for the partners and partnership. If a firm chooses a more formal type of organization, it may decide to form a private limited company or a public limited company. Generally speaking, a private limited company is similar to a U.S. privately held corporation while the latter may offer shares to the public.
Thailand also offers the possibility of establishing a representative or regional office for those companies engaged in non-revenue generating activities. These may be offices engaged in market research and assessment, providing quality control or purchasing services to a head foreign office, providing warranty support services for products sold by its head office to the Thai market.
In any process of establishing an office, individuals and firms are strongly advised to consult at an early stage with legal or other professional advisors to ensure compliance with all applicable laws and regulations and to ensure selection of the optimal business structure for their activities in Thailand. The U.S. Commercial Service Web site (www.buyusa.gov/thailand/en) offers listings of law firms operating in Thailand. Other considerations for American firms are to ensure there are no restrictions on foreign entity participation in a particular sector; whether there are import or other special licenses required and whether there are any special incentives available from Thai organizations such as the Board of Investment (BOI) and the Industrial Estate Authority (IEAT).
The U.S.-Thai Treaty of Amity and Economic Relations of 1966 allows U.S. majority-owned businesses, incorporated either in the United States or in Thailand, to operate on a nearly equal footing with Thai corporate entities. As a result, U.S. corporations may establish wholly owned subsidiaries or branch offices in Thailand without the constraints that other foreign firms face from the Alien Business Law. However, there are still government restrictions in the communications, transport and banking sectors, the exploitation of land and natural resources and the trade of domestic agricultural products. To register under the Treaty of Amity, a U.S. company needs to obtain documents from the U.S. Commercial Service office and to file an application with the Department of Commercial Registration at the Thai Ministry of Commerce. The U.S. Commercial Service at the U.S. Embassy in Bangkok has further information available for interested firms or individuals.
Selling Strategies
To differentiate themselves from local and third country competitors, U.S. firms should emphasize their strengths in quality, innovation, technology enhancements and customer service. Thai customers have come to expect more, and better, styles and designs, regular product upgrades and updated technology from U.S. companies. They will often choose U.S. products and services on the basis of “value for money,” not solely on cost factors. To gain a competitive advantage in the marketplace, U.S. firms should develop and maintain good customer relationships and be able to reference success with existing customers when seeking new clients. American companies should also choose strong local partners or distributors offering high service standards and capabilities.
A competent marketing strategy is important for doing business in Thailand because the market structure is changing rapidly in several respects. Successful companies used the following techniques and strategies to maintain and expand their market shares in Thailand:
Identify potential customers in the appropriate business community(ies)
Understand end users’ behavior and their cultural environment in order to offer the most suitable products to them
Promote themselves in business communities by advertising through the media, participating in trade shows, and organizing seminars to launch new products
Educate buyers on new technologies, and provide high reliability and unbiased advice through direct sales to end users
Sell consulting services together with solutions
Identify the features and benefits of specific product or service solutions
Use training as an effective means to make potential customers aware of the quality of products and services
Create end user awareness in order to expand services
Large U.S. firms have their own subsidiaries in Thailand to sell products and provide technical services. Opening a representative office and a company-owned support facility will also underscore the company’s commitment to the market. Due to the 1997-98 Asian financial crisis, most Thai buyers require longer-term or more flexible and creative financing terms. Thai distributors prefer to deal directly with U.S. vendors, but not with a regional distributor and to be appointed as a sole distributor in most cases.
Thai law permits all foreign companies, with or without a local representative, to submit bids on public sector tenders. A consortium of U.S. companies is acceptable for the supply of a wide range of products in large tenders. For example, when bidding was conducted for the New Bangkok International Airport, the U.S. bidders were able to submit without having a local agent but many had a joint venture partner in place even though this was not a condition of the tender. Direct international bids have also been accepted for major power plants. Conversely, day-to-day procurements by public sector agencies and ministries almost always make local representation a condition for bidders. The U.S. Commercial Service can certify notarized documents presented by American firms and their local partners prior to bid submissions to meet the requirements of the agency or ministry tendering the bid. Most foreign firms have found it advantageous to appoint a local agent who can deal with problems related to communications, bureaucratic procedures, local business practices and marketing when competing and bidding on government projects.
U.S. firms should be aware that while the purchasing company may simply accept the lowest bid that meets specifications, it might also attempt to bargain with one or more of the lowest bidders to negotiate better terms. Therefore, U.S. firms should be prepared to empower their agents to take measures to increase competitiveness. On major contracts, it is advisable to have an American representative involved when such bargaining ensues. In addition, the public agencies may request credit in their procurement tenders. A supplier who offers credit will have a better chance of winning bids. Sales without credit are sometimes made if other factors such as price, quality, and delivery schedules are of greater importance.
The most important requirements for new U.S. suppliers are: continuous upgrading and development of new products; suitable promotional activities; good service, and hiring qualified representatives in the local market. In addition, flexible sales policies are also important to attract potential long-term users. A Thai language manual for users is also important.
Advertising and Trade Promotion
Advertising and trade promotion are important marketing tools in Thailand, especially for the sale of consumer goods. In particular, foodstuffs and consumer products should be promoted heavily via a full range of mass media. In Thailand, advertising on television
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