Textile producers in Thailand are used to being told that they’re part of a sunset industry. They’ve been hearing such talk for two decades or more. Some companies have faded away and those that remain face new threats to survival as overhead and fixed costs continue to surge while China’s dominance grows.
Equipment used in textile production at a Bangkok factory
Despite the mounting challenges, Thai textile companies are still doing everything they can to keep their heads above water. While the future is still foggy, some are more optimistic than others.
“The industry has not been an easy one for years and although there’s not much of a cash flow problem for those players that remain in the market, they are not reporting a lot of profit either,” Teeraparp Eowpittayakul, the managing director of the textile exporter Jong Pattana told Asia Focus.
Some of the factors that have contributed to the decline of the industry include the strengthening of the Thai baht, higher electricity costs, higher minimum wages, and the lack of protective non-tariff barriers. The exodus of garment producers from Thailand to lower-cost countries has also dented a major market for Thai textile makers.
Among the country’s competitors, Vietnam and Indonesia have moved up rapidly, but China dwarfs all players in Asia. China’s textile exports are approaching $200 billion against the $7 billion forecast this year for Thailand, which would be down from $8 billion last year.
Declining exports were the main reason that the Thai Chamber of Commerce cited when it ranked textiles first on a list that it compiled in 2011 of sunset industries with the lowest prospects for future growth. The trend has continued this year with a 2.4% year-on-year decline in shipments from January to April, according to the Thai Textile Institute.
The political tensions that culminated in the May 22 coup also disrupted business for many sectors including textile exporters, said Somsak Srisuponvanit, president of the Thai Weaving Industry Association.
Exchange-rate volatility is also a major headache for Thai textile producers. Since Thailand is unable to produce its own cotton fibre, most input materials are imported from Africa, Pakistan and central Asian countries.
Meanwhile, cost competitiveness in Europe will take a hit when Thailand’s tariff benefits under the EU Generalised System of Preferences (GSP) expire at the end of this year.
In the absence of GSP advantages, Thailand needs to negotiate more bilateral free trade agreements or take part in multilateral arrangements such as the US-backed Trans Pacific Partnership (TPP), says Kitti Kamolsantisuk, the general manager of K. Cotton and Gauze Co Ltd. Otherwise, he says, customers will be inclined to purchase from countries with these trading privileges.
CURRENCY IMPACT
Weak margins have deterred many firms from upgrading to newer technology.
In the near term, exchange rates pose a severe problem. The baht has strengthened by 3.4% against the US dollar this year and with the economy on the mend the currency is likely to strengthen further.
Devadas Dhamodaraswamy, the chief operating officer of Lucky Spinning, believes that the decline is industry wide. Even though his own company’s exports are still rising, profitability has gone down in terms of both exports and the domestic market.
Because many garment factories have closed or moved to other lower-cost countries such as Cambodia and Myanmar, this affects the upstream industry (spinning, weaving and dyeing) that manufactures their materials. Numerous textile companies have shut down in the past three years and others are heading in that direction.
Some companies such as Lucky Spinning, which markets viscose yarns, have also struggled because of anti-dumping duties imposed on viscose yarns by countries such as Turkey and Brazil. India and Indonesia also have set high import duties against textile imports.
In contrast, Thailand allows duty-free import of yarns. Cheap textile goods are also being smuggled into the country through neighbouring countries via their porous borders with China.
The increase in the minimum wage to 300 baht per day at the start of 2012, a rise of 40-50% depending on where plants were located, has added to already high costs.
“The 300-baht minimum wage has affected the Thai textile industry severely. The increase in manufacturing costs has also contributed to the industry’s rapid decline,” said Phichai Leangtong of Sawang Textile Co Ltd, adding that electricity costs are extremely high.
“It would be great if we could lower the production costs, but I don’t know how we’re going to do that. We’ve never been able to do it before.”
Dhamodaraswamy says that labour costs have increased despite the lack of a corresponding rise in skill levels, which has also hurt the industry.
Textiles are a labour-intensive industry but most of the workers these days are older. Younger people tend to seek more attractive working conditions with employers such as department stores, said Thongyoo Phongranon, the director and sales manager at Jong Pattana.
DIVERSIFICATION
The largest threat is from China, which dominates the world market with giant factories and an abundance of labour, although wages there have also surged in recent years. Because of high competition, some large Thai textile groups that can afford to are turning to invest in other businesses.
Suwan Spinning is still in operation but the owner’s sons have diversified by investing in The Circle Ratchapruek shopping centre. Others such as Krit Srichawla, the chief executive of Fico Corporation, has diversified into the hospitality industry with hotels across Thailand and now expanding to Europe.
However, other producers are still holding out hope of some kind of aid for the industry.
The Thai Weaving Industry Association has approached the government for help with research and development investment into innovative processes such as applying scents to fibres, or creating anti-bacterial fibres for medical purposes.
With some applied research, Thai factories still have some interesting opportunities to develop fibres from locally available materials such as banana trees, which are tougher and more durable when wet, as well as pineapple, lotus, galangal and many others.
At the same time, Lucky Spinning’s Dhamodaraswamy says it’s important for the Thai government crack down on smuggling. He also believes the government should impose safeguard duties against countries that compete unfairly in order to level the playing field, as well as negotiate with countries that have imposed anti-dumping duties.
Ultimately, Dhamodaraswamy hopes that the textile industry, which still employs more than one million people, can change the government’s viewpoint that the sun is setting on textiles.
However, the focus of government promotion these days is on high-tech, knowledge-based and value-added industries. Textiles are becoming increasingly unpopular partly because the sector uses chemicals, which may cause environmental damage, concedes Thongyoo.
Meanwhile, prices of commodity textiles such as cotton, polyester and viscose are rapidly going down. In spite of this, many producers are still hopeful for what the future may hold.
THE FUTURE
Equipment used in textile production at a Bangkok factory
While unable to compete with low-labour-cost countries, Thai textile mills may have the upper hand when it comes to higher-quality products due to an increasing demand for upper-end garments from countries such as China. Many believe that Thai mills have the necessary infrastructure to become leading exporters of high-end fabric and yarns.
At Jong Pattana, the focus is on assuring better service, quality and design, targeting higher-end markets in Italy, Germany and Hong Kong, said Thongyoo. The company frequently exhibits its products at international forums such as the Paris Texworld Fabric Fair and the Intertextile Shanghai Apparel Fabrics Fair.
Pornsak Khongpit, the assistant manager of Erawan Textiles, a subsidiary of the Saha Pattana Group, believes the domestic market can also help save the industry. He suggests a programme to promote consumption of locally made garments in the country. For example, he suggests policies similar to the “first car” policy, or having Thai companies purchase Thai-made uniforms for their workers.
Erawan Textiles’ profits are derived equally from domestic and international sales, although exports to Europe have decreased significantly decreased since the European economy began slumping in 2008-09. As a result, the company these days pins more of its hopes on Japan. Responding to the growth in Japanese innovation, factories maintain their market share by investing in new technologies such as Kevlar gloves and yarns that reduce heat.
Another textile company, Kangwal Textile Co Ltd, foresees that in the future, textile factories will have to adapt to competition and higher input costs. Experience in managing the market and understanding production technology is crucial to reinvestment and development.
To deal with increasing electrical and power costs, Kangwal Textile employs a cogeneration system, which uses PTT Gas to generate electricity. The waste heat is then converted into steam and chilled water that can be used with other production processes. This system allows for more cost-effective use of power.
Mr Somsak of the Thai Weaving Industry Association said that in the future, factories would need to invest more in new machinery for more efficient production while employing less human labour, which could potentially ease one cost problem. He also believes there are ways to encourage research and innovation for better fibres.
Lucky Spinning’s Dhamodaraswamy believes the industry could potentially end up shifting its focus on supplying fabrics.
“It is still possible that the Thai textile industry could end up as a supplier of fabrics to the growing garment industry in Laos, Cambodia and the emerging Myanmar,” he said.
“The Thai textile industry can be a prime supplier of value-added finished textile fabrics to Bangladesh and Sri Lanka. Eventually if all the tax and non-tariff barriers are removed by the government of India, the industry can end up supplying various textile products (which are not competitively made in India) to India which has huge domestic consumption.”
He also noted that Thai producers of infants’ and babies’ clothing were still thriving because they focused on quality. “The Thai garment industry, if it shifts to high-grade-value added products, can still survive.”
