Transcript Khon Kaen University International College International

Khon Kaen University International College
Business in the Greater Mekong Sub-region
Course number 050 451 - Second semester 2013
Wednesdays at 9:00 in room 823
Lecturer: Michael Cooke
office room 817
E-mail: [email protected]
Web: KKU.AC.TH/Michco
Business In GMS Final Exam
 Thursday Feb 27th at 9:00
 Room 926
 Paper dictionaries allowed
 30% of Course Grade
 Recommended Study: Review your Presentation Material

Find a successful industry in GMS, or one which shows potential to be
successful (13 Nov)





Explore reasons the industry located in GMS
What is the nature of the business (capital or labor intensive, etc)
Any spillover effects?
What was the mode of entry for the businesses?
Study a GMS country in which the industry is successful (4 Dec)
 What are the strengths of that country from a business perspective?
 What are the weaknesses?
 Look for barriers to further business success in the country

How do you see the business evolving (5 Feb)
 Effect of ASEAN or other alliances (trade, labor mobility, etc)
 Relevant demographic, economic, trade projections
 Infrastructure, education, and other changes as a result of government or
business initiatives
 Advice you would give to government units to encourage industry growth
Mekong Watershed
36% of the River’s Volume is from Laos
Mekong River Commission
Secretariat
Resources
• JETRO (Japan External Trade Organization) established 1958 helps small to
medium size Japanese firms maximize their global export potential
• JETRO-Institute of Developing Economies (IDE) Bangkok Research Center links
– http://www.ide.go.jp/English/Links/southeast_asia.html
– Good for links to government and university sites for the GMS countries
• Institute of Developing Economies (IDE) Bangkok Research Center publications
– http://www.ide.go.jp/English/Publish/Download/Brc/
– Relevant and relatively recent research reports
– Examples:
•
•
•
•
•
•
•
•
•
"Five Triangle Areas in the Greater Mekong Subregion" Edited by ISHIDA Masami / Published in 2013
"Economic Reforms in Myanmar: Pathways and Prospects" Edited by HANK LIM and YASUHIRO YAMADA / Published
2013
"Cause and Consequence of FIRMS' FTA Utilization in Asia" Edited by HAYAKAWA Kazunobu / Published in 2012
"Emerging Economic Corridors in the Mekong Region" Edited by ISHIDA Masami / Published in 2012
"Industrial Readjustment in the Mekong River Basin Countries: Toward the AEC" Edited by Yasushi UEKI AND TEERANA
BHONGMAKAPAT / Published in 2012
"Investment Climate of Major Cities in CLMV Countries" Edited by ISHIDA Masami / Published in 2010
"Economic Relations of China, Japan and Korea with the Mekong River Basin Countries (MRBCs)" Edited by KAGAMI
Mitsuhiro / Published in 2010
"Major Industries and Business Chance in CLMV Countries" Edited by UCHIKAWA Shuji / Published in 2009
"A China-Japan Comparison of Economic Relationships with the Mekong River Basin Countries" Edited by KAGAMI
MItsuhiro / Published in 2009
• Mekong Institute (on the KKU Campus) http://www.mekonginstitute.org/
Mekong Institute Focus on Labor
• http://www.mekonginstitute.org/images/abook_file/policy_bri
ef_labour_supply.pdf
• From a study of a Laos SEZ: “The breakdown in occupational skills indicate
mismatches in supply and demand for specific skills areas such as IT/computer
operators, maintenance mechanics, welders, sewers/dressmakers, gem
lapicides, and others. On the other hand, majority of students at TVET schools
enroll in accountancy and Business management courses.”
•
From a study of a Cambodian SEZ: “The new SEZs that have been set up in the
border areas with Thailand and Vietnam have reduced the pull factor to
migrate to Phnom Penh for work. The preference of students for enrolling in
academic courses such as management and accounting due to the
perception that vocational training will lead to a career of hard labor and
low wages in factories. In Laos, many prefer to migrate to Thailand where
they can earn more even without the necessary educational credentials.”
Emerging Country Development Traps
 Rapid growth in emerging markets often fall into a middle income or
development trap
 Very few emerging economies sustain rapid growth longer than a decade
 Simple improvements such as roads raise low income levels
 To reach higher levels of income countries need advanced industries and institutions
 Brazil, South Africa, Russia each have slowing growth rates
 Many emerging economies rely on commodities for exports
 When the world economy grows, commodity exporters grow faster
 Countries that successfully reached high income since the 1960s were not commodity
exporters (Hong Kong, Singapore, Japan, Taiwan, S. Korea in Asia)
 Emerging countries often have short periods of commodity driven boom (most lower
income countries expanded rapidly from 2005-2010)
 Development traps can move higher income countries backward
 Argentina and Venezuela last century
 Philippines in the 1950s
Ruchir Sharma in the Wall Street Journal 23-1-2014
Vietnam’s 2014 Stock Market Rally
 Vietnam’s Ho Chi Minh Stock Exchange index is the world’s top
performer this year, up 10%
 Vietnam’s market is considered a frontier market (the most risky)
 Most emerging markets are having problems
 Vietnam sets limits on foreign ownership %
 Many of the top listed firms are at their limit
 The government is expected to soon raise the cap (from 49% to 60% in
most sectors, excluding financial)
 Several companies plan to make IPOs in Vietnam in 2014
 Several IPOs will be former state enterprises
 Vietnam Airlines works with Morgan Stanley and Citigroup to do the IPO
 Some state owned enterprises have governance and debt problems
 Foreign investors view the IPOs as opportunities to participate in VN’s growth
 Growth was greater than 5% in 2013
 Vietnam is expected to benefit from regional economic integration and the TPP
 PXP Asset Management and Dragon Capital are based in Vietnam
Wall Street Journal 23-1-2014 and Bloomberg
Why Technology Companies Can Move to High
Cost Areas
 As cheap as an assembly worker may be, an emerging trend
in manufacturing, specialized robots, promises to be even
cheaper.
 The most valuable part of the computer is the motherboard
loaded with microprocessors and memory
 This is already largely made with robots.
 People fit in batteries and snap on screens.
 As more robots are built, largely by other robots, "assembly
can be done in the USA as well as anywhere else," a
technology analyst said. "That will replace most of the
workers, though you will need a few people to manage the
robots."
NY Times 7-12-2012
The Way Poor Countries Catch-up
 All of the successful economies of the last six decades owe their growth to
rapid industrialization.
 In East Asia, Japan, South Korea, Singapore, Taiwan, and China all were very good at
moving labor from the countryside (or informal activities) to organized
manufacturing.
 Earlier cases of successful economic growth, (US or Germany) were the same.
 High productivity manufacturing is easy for poor countries to copy.
 High-productivity services require a wide array of skills and institutional
capabilities that developing economies accumulate only gradually.
 A poor country can easily compete with Sweden in manufacturing; but it takes
centuries, to catch up with Sweden’s institutions.
 Consider India, which demonstrates the limitations of relying on services rather than
industry in the early stages of development.
 The country has developed strengths in IT services, such as software and call centers.
 Most of the Indian labor force lacks the skills and education to be absorbed into such sectors.
 In East Asia, unskilled workers were put to work in urban factories, making several times what
they earned in the countryside. In India, they remain on the land or move to petty services
where their productivity stays low.
Project Syndicate: Dani Rodrik 8-8-2012
“No More Growth Miracles”
 Successful long-term development requires a two-pronged push.
 Long Term development requires an industrialization drive.
 Without an industrialization drive, economic takeoff becomes quite difficult.
 Industrialization forms the platform.
 It requires steady accumulation of human capital and institutional capabilities to sustain services-
driven growth once industrialization reaches its limits.
 Without sustained investments in human capital and institution-building, growth will cease.
 Developed economies are primarily service oriented – more than 60% of GDP from services
 The growth through industry model has become a lot less effective for several reasons
 First, technological advances have rendered manufacturing much more skill- and capital-intensive
than it was in the past, even at the low-quality end of the spectrum. As a result, the capacity of
manufacturing to absorb labor has become much more limited. It will be impossible for the next
generation of industrializing countries to move 25% or more of their workforce into
manufacturing, as East Asian economies did.
 Second, globalization and the rise of China, has greatly increased competition on world markets
 Rich countries are unlikely to be as permissive towards industrialization policies as they were in the
past.
 Policymakers in the industrial core looked the other way as rapidly growing East Asian countries
acquired Western technologies and industrial capabilities through unorthodox policies such as
subsidies, local content requirements, reverse engineering, and currency undervaluation.
 Core countries also kept their domestic markets open, allowing East Asian countries to export freely
the manufactured products that resulted.
Project Syndicate: Dani Rodrik 8-8-2012
Wage Increases in Thailand
BKK Post
27-1-2014
The Effect of Higher Wages in Labor
Intensive Industry
 The trend among exporters of relocating to neighboring countries
continues, said Sukij Kongpiyajarn, president of the Thai Garment
Manufacturers Association
 He said over the past five years, large garment manufacturers have invested
in Cambodia, Laos, Myanmar and Vietnam.
 This year, about 10 medium-sized enterprises are preparing to follow suit,
mainly to tap the lower wages in these neighboring countries, said Mr. Sukij.
 The low wages are a big incentive for Thai entrepreneurs, who have seen
their labor costs spike dramatically at home in recent years.
 As well, they have an opportunity to benefit from the Generalized
System of Preferences (GSP) in European countries and the US. The EU
plans to lift the GSP this year, meaning the import tariff will rise to 12%
in 2015 from 9.6% now.
 But Mr. Sukij said GSP privileges for Thai garments is on the list of free trade
agreement negotiations between Thailand and the EU.
 "If these talks are successful, the import tariff on Thai garment exports to
the EU will be eliminated," Mr. Sukij added.
Moving up the Value Chain
 As labor becomes more expensive, companies have incentive to
become more capital intensive
 Higher labor costs force companies to invest in automation and
productivity
 Labor intensive businesses include garment manufacture, furniture,
leather
 According to the TDRI these labor intensive businesses tend to relocate
 Most Thai businesses are small and medium enterprises, though
these generate only about 1/3rd of GDP
 Larger firms are better able to invest in automation and compliance
 Yet SMEs are where much innovation and employment occurs (OECD)
 Since 2005 nearly all job creation in Thailand came from small enterprises
 Thailand, and in particular the Bangkok area, has one of the highest rates of
entrepreneurship in the world
 Thailand has one of the lowest rates of unemployment in the world
OECD Studies on SMEs and Entrepreneurship © 2011
The Shifting Landscape of Tariffs
 GSP (Generalized Scheme or Generalized System of Preferences) are designed to
promote economic growth in the developing world through duty free treatment of
certain products *
 The US program was set to expire in July 2013, and included Thailand and Cambodia in
the GMS
 The US program did not apply to textiles or apparel
 The EU scheme was modified in January 2014 to include human rights and environmental
considerations
 Myanmar has been eligible for EU GSP since July 2013, after labor reforms
 Thailand, Vietnam, and Cambodia are eligible in certain product categories
 Cambodia has GSP status with the EU and US
 From next January, many products exported from Thailand to the EU will lose their
tariff privileges as the GSP system is reformed. Those products include meat, fish,
precious stones, pearls, tuna, shrimp, and rubber products. (1)
 Thailand is expected to exit from the EU GSP in 2015 as the country achieves middle
income status.
 In 2014 the tariff for frozen shrimp will increase from 4.2 per cent to 7.12 per cent.
 While a director of CP Foods (UK) Limited, said the loss of GSP privileges would cause
difficulty for Thai exporters, the head of the EU Delegation to Thailand said this country
would be eligible for reduced tariffs after forming an FTA with the union.
* US and EU trade representative web sites; (1) Nation 7-9-2013
FTAs and the GMS
Partners
In Effect Notes
1
Laos-Thailand
1991
2
AFTA (ASEAN Free Trade)
1992
3
ASEAN-China
2004
4
Thailand-India
2004
Low utilization (13%)
5
Thailand-Australia
2005
Thai auto exports to Australia – why?
6
Thailand-New Zealand
2005
7
ASEAN-South Korea
2007
8
Thailand-Japan
2007
9
ASEAN-Japan
2008
10
ASEAN-Australia-New Zealand
2010
11
ITA – 70 partners
1996
Low utilization by Thai companies
WTO – imported IT components may
be exempt from tariffs.
Adapted from Shiino, K. 2012 “Overview of Free Trade Agreements in Asia” BRC Research Report #9, IDE-JETRO Bangkok
Background to GMS Joining AFTA
 Thailand is the only founding member of ASEAN in the GMS (Bangkok 1967)
 Vietnam joined ASEAN in 1995, Lao PDR and Myanmar in 1997, and
Cambodia in 1999
 The new members are often collectively referred to by their initials CLMV.
 By joining ASEAN, they have all committed to the ASEAN Free Trade Area (AFTA) agreement,
though on a different timetable than Thailand
 Lao PDR adopted their New Economic Mechanism in 1985
 Vietnam initiated the Doi Moi (renovation) policy in 1986
 Cambodia recognized the private sector in 1986 and began to have trade
relations with the West after nearly a decade of isolation
 Thailand had begun to transform its economy to focus on export-oriented
industry in the 1970s.
 In the mid-1980s major inbound investment took place, as
 Companies from Japan and other newly industrialized economies in East Asia saw
opportunities in a market economy and relocated their factories to Thailand
 China began their transition from a command economy to a market-oriented
system under the reforms initiated by Deng Xiaoping, in the late 1970s.
http://www.mekongmigration.org/finalised%20BEZ%20pdf%20file.pdf
What are the Implications of an FTA?
 Thai exporters response to FTAs are limited by rules of origin
requirements
 Cost of compliance with rules of origin paperwork is effectively a
tariff of 2-7% (a)
 Use of an FTA is highly concentrated among a few products
 The costs of ROO compliance varies among partners
 Importing countries may create obstacles
 Utilization of FTAs is often low
 FTAs are rarely utilized outside of existing trade relationships
 Primary users of FTAs are large local firms (not global firms)
 FTAs mostly benefit large companies due to COO costs
(a) Kohpaiboon, Archanun 2010 “Exporters' response to FTA tariff preferences : evidence from Thailand”
SE Asia
Trade routes from East Asia
to South Asia, the Middle
East, and the Suez Canal
pass through the Straits of
Malacca, northwest of
Singapore. The area is a
haven for pirates. In
November two large tankers
were hijacked there. The
East-West corridor would
connect East Asia to the
Indian Ocean well north of
the Straits.
GMS Corridors – High Level
Source: Chiang Mai University
USER 2007
GMS Corridor Map – East-West
The Role of IA in GMS Investment
 In a December 2013 GMS-Japan meeting, Japan agreed to provide
660BB yen (212 BB baht) in financial assistance to the GMS
 Priority for these funds is infrastructure linking GMS countries
 A favored project is the Southern Corridor linking Cambodia,
Thailand, Myanmar, to India
 A recent project is the Mekong River bridge between Mukdahan and
Savannakhet, is part of another E-W corridor
 The Japanese have backed micro finance in the poorest areas
 China invests significant resources in North to South infrastructure,
especially into Myanmar and Laos
 These tap natural resources in both countries and provide trade links
 A railroad project in Myanmar financed by China will cost $20BB
 Revenues will be used to pay back the loans over 50 years
 Ultimately, the railroad will provide China access to the Indian Ocean (bypassing
Singapore)
What Are Special Economic Zones?
 Special Economic Zones (“SEZs”) are geographical areas that offer
special trade incentives to firms located within them
 The most important fiscal goal of an SEZ is to facilitate economic growth
through reduced tariffs and more efficient customs controls (customs
clearance is often cited as an obstacle to trade between GMS countries)
 SEZs often help developing nations rework inefficient trade policies and
dilapidated or non-existent infrastructure
 Since 1942 (Puerto Rico) over 3,000 zones have appeared in 135
countries, many of them emerging markets
 Types of Special Economic Zones Zones
 Free Trade Zones are tax-free areas that provide logistics facilities for
trade, shipping, and import/export operations in a reduced regulatory
environment, with less stringent customs controls
 Export Processing Zones offer fewer tax benefits than an FTZ. These
provide manufacturers geographic concentration – such as Lat Krabang
Industrial Estate
 Freeports may arise out of old military bases and tend to be more services
oriented (Clark and Subic in the Philippines)
Successful SEZs
 The GMS has hundreds of SEZs in operation or planned with 300 in VN alone
 China has had the most success in implementing and profiting from SEZs
 Most of China’s SEZs are very large and specialize in products and services labor
intensive, assembly-oriented products
 China’s Shenzhen Village transformed a small fishing village into a booming urban
metropolitan area with an export-oriented economy
 Successful SEZs specialize in a specific product or industry, and are located close to
transportation outlets and supported by dense and efficient infrastructure.
 Manufacturers using SEZs with undeveloped infrastructure and poor access to global
commerce will fare poorly.
 The SEZs that must build the infrastructure in addition to the SEZ unit development
also incur additional costs that reduce the overall profitability of the SEZ for the host
country.
 Successful SEZs provide access to employees
 SEZs that have communities within them enable better access to employees than SEZs
where employees must commute great distances to and from the developments.
 The development of service industries inside an SEZ or very nearby also helps to
increase the profitability and economic efficiency of the corporations doing business
within the zone.
Megan Murray, 2010 http://www.princeton.edu/~achaney/tmve/wiki100k/docs/Special_Economic_Zone.html
Who is Amy Chua?
 What drives success (NYT 25 January, 2014)?
 Michael Johnson is generally considered one of the greatest
and most consistent sprinters in the history of track and field
 What was his frame of mind before a race?
 How does this relate to business?
Growth of a Laos Business
 From http://www.daoheuanggroup.com/history/
 Dao-Heuang was founded in 1991 by Mrs. Leuang Litdang as a small import-export
company in the Laos PDR
 The original company specialized in importing wine and perfume from France, as well
as alcohol and cigarettes from Singapore.
 The company also handled a wide range of household goods imported from Thailand.
 Dao-Heuang Group (DHG) was organized in 1998.
 It began to diversify into other products and begin exploring opportunities for
producing coffee, tea, agricultural products and industrial goods.
 In 2008 DHG began new service industry businesses for hotels and food and beverages
establishments.
 Duty Free shops in Pakse and Savannakhet
 Bottled water, fruit drinks
 In 2010 the company signed international partnership agreements to grow, refine, and
package its coffee through all production steps in-country (Pakse) for the first time.
 DHG planned to join the new Lao Securities Exchange in 2011, and opened a hotel in
Pakse.
 Rebranding efforts
 Expansion of Duty Free in Vientiane
Why Planned Listing Did not Happen
 The LSX opened in late 2010 and by June 2013 had only two listed
companies
 A power company and a bank joined in 2011
 Laos World Plc was added in December 2013
 Founded by a Thai businessman
 Operates convention and exhibition facilities under a BOT agreement
 Laos limits foreign share ownership to 5%
 Few companies will disclose the information required for listing
 The Korean head of the LSX said company owners don’t understand
why they have to reveal their financial statements to the public.
 Company leaders need to understand the mechanism of the stock
market, as well as the need for compliance and transparency in trading.
International Business Times 25-6-2013
SE Asian Currency Volatility Affects Airline Profit
 Currency is a defining issue for SE Asian carriers because
$US costs exceed $US revenues
 Most airlines in SE Asia will report 2013 losses if $US keeps
rising relative to their home currencies
 For Indonesia’s Garuda Airlines
 Rupiah fell 14% versus $US from June to September, 2013
 50% of revenue is in rupiah (travel originating in Indonesia)
 60% costs are in $US (fuel and aircraft leases are in $US)
 Garuda lost $11.4MM in the 3rd quarter
 In late September Indonesia’s government began to allow hedging (losses
on hedging would be considered normal business risk)*
 The $S has been relatively stable versus the $US.
 Singapore Airlines 3rd quarter profit was $161M
*Jakarta Post 26 September, 2013