Electronic products have been among Thailand's top export items for many years, with a competitive workforce and excellent logistics system encouraging the world's largest players to locate large production bases in the kingdom.
Even though local electronic manufacturing facilities were severely hit by devastating floods in Thailand in late 2011, the industry has revived gradually with production now close to pre-flood levels. Nonetheless, some producers and suppliers fled the country after being hit by the catastrophe and won't be back.
Figures from the Electrical and Electronics Institute showed that Thailand's electronics exports rose 2% in 2012 after falling 0.5% a year earlier, before sliding again in 2013 due to weak economic conditions in major export markets.
Thailand is still the world's second largest exporter of storage units after China and for integrated circuit (IC) products, the country ranks third among exporters in Asean. Electronics exports edged up by 1% in the first half of 2014 to $15.2 billion with the major export items being computer peripherals, ICs and printed circuits.
With nearly 800 factories and more than 600,000 workers, the electronics sector is one of the largest industrial employers in Thailand.
Unfortunately, the industry doesn't seem to be able to enjoy sustainable growth in Thailand due to a number of factors. First, it relies mostly on export markets with nearly 100% of output in some businesses shipped overseas. Some parts suppliers mainly serve Thailand-based customers that are export-oriented, so their products are considered indirect exports.
That means the electronics sector is highly sensitive to global economic conditions; it cannot avoid the impact if world demand drops. This is in contrast with the automotive industry, another major export revenue generator with hundreds of thousands of workers and a big network of suppliers. When orders from abroad decline, Thai-made vehicles serve the huge domestic market.
As well, the electronics industry has relied heavily on imported parts. Before the 2011 floods, local content amounted to 30-40% of total industry sourcing, compared with 70-80% in the automotive sector. Consequently, the more electronic goods are exported, the more imports are required. The gain in net income for Thailand is not significant as a result.
In 2011, when electronic export values fell 0.5%, imports still increased 5.8% from the year before, and a year later, imports grew by 9.3% when exports rose only 2%. This year, electronic exports are projected to grow 2.9% but imports will rise 3.7%.
Another disadvantage is that the sector relies on high technology, which changes swiftly. Companies thus face the cost of frequent production line upgrades and other improvements.
The problems in this capital-intensive industry are hardly limited to Thailand, of course. Malaysia is one of the world's leading producers of semiconductors with export value of $27.46 billion in 2013, accounting for 9.1% of the $306 billion in global semiconductor sales in that year, according to Word Semiconductor Trade Statistics.
However, the industry in Malaysia remains dominated by contract manufacturers and units of multinationals while no Malaysian electronics brands are widely recognised.
By integrating deeply with the global supply chain, the Malaysian industry could move up the value chain and make more complicated goods rather than only components. This is the path that peers in Thailand should also take to remain healthy as competition intensifies, especially within Southeast Asia.
In terms of cost, the Thai industry experienced an increase of labour cost following the 40% rise in the daily minimum wage nationwide in early 2013. Also, multinationals have complained about rising costs including labour in China.
Companies already in Thailand say the country has remained a competitive site. According to the 24th survey of investment-related costs in Asia and Oceania, the productivity of Thai labour is rising more than that of neighbouring countries. Local wages are rising at higher rate too, at about 7% per year.
Meanwhile, the shortage of skilled labour has become a growing constraint for the industry in Thailand while China has an abundant supply of skilled labour.
Companies such as Hana Microelectronics have begun to tap the lower cost of labour in neighbouring countries starting with Cambodia. This seems to be the right strategy for others in the sector, who can use Thailand instead as a centre for high value-added products.
Instead of a single production base, the trend for the industry in the future should be toward production networks in Asean countries such as Malaysia, Singapore, Thailand, Cambodia and Vietnam, that complement each other.