Economic View

21 August 2019 Thailand

US-China Trade War Reshaping Global Supply Chain

 The worsening US-China trade war should reshape the global supply chain, as Economists manufacturers look at South-East Asia as the destination for relocation. Thailand could benefit from it, but faces stiff regional competition. Peck Boon Soon  Foreign investments have improved, while demand for logistics properties also +603 9280 2163 surged – an indication of a pick-up in relocation by manufacturers. We also see [email protected] a trade diversion happening from improved exports to the US. In 1H19, America overtook China as the main export market for Thailand.

 Established industries – like the auto sector – are likely to gain, while a skilled Billy Toh workforce with competitive wages should be an advantage. Challenges remain, +603 9280 2184 though, as the US-China trade war impact in the near term is likely to outweigh [email protected] the benefits from the manufacturers’ relocation to Thailand.

The US-China trade war has led to an exodus of manufacturers from China, as they look to avoid the higher tariffs. According to a recent survey conducted by the American Chamber of Commerce (AmCham) Shanghai and AmCham China, South-East Asia has Foreign investments applied with BOI become the top destination cited for relocation – followed by Mexico and India. Thailand increased might benefit from manufacturers considering to relocate their production bases out of China, but it faces challenges from its neighbours vying for the same thing. Foreign investments accelerated in 2018 and investment applications submitted to the Thailand Board of Investment (BOI) this year are on an uptrend, particularly from China. The number of projects proposed by Chinese investors to BOI surged 57.8% YoY in 2018 and 80% YoY during 1H19. A senior official highlighted that the intensified trade war has been an accelerator for Chinese companies to relocate their production bases. Demand for logistics properties also surged, amidst the relocation by China-based manufacturers. Major developers, such as Amata Corp and WHA Industrial Development, as well as CBRE’s research arm reported better demand for industrial estates. Amata said land prices were up 30% from 2018’s THB5,300/sq m to THB6,900. WHA reported a 247% YoY surge in earnings amidst strong industrial land sales. Source: Bank of Thailand, Board of Investment, CEIC Amidst the relocation of production bases, foreign trade data also showed Thailand has benefitted from the trade diversion to the US. This can be seen by the sharp increase in exports to America – the latter has overtaken China as the main export market for the kingdom during 1H19. While development has been positive, the Government has ordered BOI to establish a special task force to attract investors looking to relocate their manufacturing plants amidst the US-China trade war. Aside from investment incentives offered – in particular through the Eastern Economic Corridor (EEC) initiative – foreign investors planning to relocate to Thailand have stressed the importance of talent, infrastructure, and an established supply chain to support their industries. Given its established supply chain in the auto industry, investment in electric vehicles (EVs) through the EEC initiative could be accelerated. As it stands, Thailand is the largest producer of four-wheeler (4W) vehicles in ASEAN, and has positioned itself as a regional export hub. It is also the second-largest motorcycle producer in the region after Indonesia. Thailand also offers an attractive proposition in terms of a skilled workforce at competitive wages. The average monthly wages of USD399 for the manufacturing sector is at a 55% and 56% discount to Malaysia’s (USD895) and China’s (USD909) average monthly salaries. While it is at a 28% premium to Vietnam’s average monthly salary of USD311, Thailand offers a mid-level tech workforce to manufacturers. Challenges remain, however, remain as the near-term economic impact from the worsening US-China trade war outweighs the benefits from the relocation of manufacturers. At the same time, the stronger THB continues to add pressure to exporters and the tourism industry. Over the medium term, structural issues, such as an ageing nation, could become more critical and prove a drag to growth.

See important disclosures at the end of this report 1

Thailand Economic View

21 August 2019 Trade War Escalates Exodus From “The World’s Factory” South-East Asia a preferred destination, but Thailand faces competition from ASEAN neighbours A survey conducted by AmCham Shanghai and AmCham China in May – assessing the impact of the increase in US and Chinese tariffs on companies operating in China – showed that 40% of the firms surveyed indicated that they “have relocated or are considering relocating manufacturing facilities outside of China”. By comparison, only 30% were considering a “partial relocation” during a similar survey run in Sep 2018. It is worth noting that companies have already reconsidered their supply chain even before the trade war began, given rising wages in China and new options available – this is coupled with lower production costs associated with automation and robotics. However, it is likely that the shift of production outside of China has been escalated by the trade war between the latter and America, which has seen US President Donald Trump announcing 10% tariffs on USD300bn worth of Chinese imports effective September – although a part of it has now been delayed to December. This is in addition to the 25% already levied on USD250bn worth of Chinese goods. Data compiled by World Integrated Trade Solutions showed that exports of intermediate goods from China to ASEAN have more than doubled since 2008 to USD78.1bn in 2017, the year before the Trump administration first announced tariffs on imported solar cells and certain washing machines in 2018. With some of the manufacturing firms for the lower value-added industries based in China relocating to other ASEAN member states, the export of intermediates to the region has surged. In Thailand, a similar trend has been seen, where import of intermediate goods and raw materials from China jumped 122.5% over the same period. With the higher tariffs being imposed on China by the US since Jul 2018, more corporates are expected to move ahead with their relocation strategies, in our view. Figure 1: Intermediate goods arriving to ASEAN from China have more than doubled since 2008 – even before the US-China trade war began Countries Growth (2017 vs 2008) (%) Brunei 370.7 Cambodia 391.6 Indonesia 106.4 Lao PDR 584.0 Malaysia 122.7 Myanmar 329.3 Philippines 243.1 Singapore -2.4 Thailand 93.2 Vietnam 269.6 Source: World Integrated Trade Solutions

Figure 2: Companies planning relocation to Thailand amidst the US-China trade war Company Production based intending to move to Thailand Initial production base

Multifunction printers with copy machine, scanner, and Ricoh China fax capabilities for the US market

Watches - including the flagship G-Shock Casio China wristwatches - and musical instruments

Panasonic Car stereos and other automobile equipment China Harley-Davidson Motorcycles Kansas City, US Sharp Multifunction printers China Sony Smartphone unit China Ford Pick-ups (Ranger) and SUVs (Everest) The Philippines Source: RHB

See important disclosures at the end of this report 2

Thailand Economic View

21 August 2019

AmCham Shanghai and AmCham China’s survey shows that South-East Asia (24.7%) is the top destination cited for the relocation, followed by Mexico (10.5%) and the Indian subcontinent (8.4%). While Thailand is expected to see some of the relocation from China, the country faces competition from its fellow ASEAN neighbours, which are also looking to woo investors to relocate into their respective countries. Figure 3: South-East Asia is the preferred destination by most manufacturers Options Responses % No plans to relocate manufacturing facilities 144 60.3 South-East Asia 59 24.7 Mexico 25 10.5 Indian subcontinent (India, Bangladesh, Pakistan, Sri Lanka) 20 8.4 Elsewhere 15 6.3 US 14 5.9 East Asia 10 4.2 Europe 9 3.8 Source: AmCham China, AmCham Shanghai

Foreign investments accelerated in 2018 Foreign investors have shown interest in investing in Thailand, as witnessed by the accumulation of THB583bn worth of BOI applications throughout 2018. This represents an increase of 102% YoY in terms of the investment value applied with the board. The momentum continued into 1H19, where the value of foreign investment projects submitted to BOI jumped 109% YoY to THB147.2bn. The board also indicated that the number of investment applications it has received has been on an uptrend. Last year, it jumped 17% YoY to 1,040 projects worth THB583bn, while 1H19 saw numbers edging 4% YoY higher to 468 projects.

Figure 4: Foreign investment projects submitted to BOI have been on an uptrend since 2016

Investment value applied with the BOI Number of projects applied with the BOI Application Application Approved Application Application Approved THB bn 1,400 700 +102% +17% yoy 1,200 600 +68% yoy yoy -1% 1,000 500 +14% yoy +164% 400 yoy 800 yoy +4% 300 +109% 600 yoy yoy 200 400

100 200

0 0 2015 2016 2017 2018 1H2019 2015 2016 2017 2018 1H2019

Source: Bank of Thailand, BOI, CEIC

See important disclosures at the end of this report 3

Thailand Economic View

21 August 2019

Part of the increase in the number of projects submitted came from China – the number of applications submitted to the BOI from there surged 57.8% YoY in 2018 and 80% YoY in 1H19. A senior official highlighted that the intensifying trade war has been an accelerator for Chinese companies to relocate their production bases. Figure 5: Number of applications from China submitted to BOI surged

140 131

120

100 81 80

60

40

20

0 2018 1H19

Source: BOI Similarly, approvals for investment projects also increased 10.7% YoY to THB255.6bn in 2018.This was a reversal from the declines seen in 2016 and 2017 in terms of the value in foreign investment approvals. By comparison with its regional peers, the increase in foreign investment approvals last year was better than in Vietnam and Indonesia, but underperformed Malaysia and the Philippines. In 1H19, there was an 8.4% YoY dip in foreign investment approvals, mainly due to the drag from the political uncertainty at the time following the conclusion of Thailand’s general election. Our channel checks indicate that some of these investments will be approved in 2H19, now that the new Cabinet and Government have been formed. Figure 6: Approvals of foreign investments in 2018 for the Figure 7: Thailand’s approved investments improved in 2018, region but dipped in 1H19 on political uncertainty

% YoY 20.0 Philippines 69.2%

10.0 Malaysia 37.2% 0.0 Thailand 10.7% 2014 2015 2016 2017 2018 1H19 -10.0

Vietnam -1.2% -20.0

Indonesia -9.1% -30.0

-20.0% 0.0% 20.0% 40.0% 60.0% 80.0% -40.0 % YoY Source: CEIC, Malaysian Investment Development Authority, BOI, Vietnam’s Source: BOI Foreign Investment Agency, Indonesia’s Investment Coordinating Board, Philippine Statistics Authority

See important disclosures at the end of this report 4

Thailand Economic View

21 August 2019

Japan (36.6%) was the largest investor to obtained approvals for investments in 2018, followed by Singapore (14.7%), China (12.8%), Europe (12.5%), Malaysia (10.1%), and the US (7.1%). The investment applications approved for some of these foreign investors have grown strongly. Figure 8: Japan was the biggest investor in Thailand last year

6.0% 7.1% Japan Singapore 10.1% 36.6% China EU 12.5% Malaysia USA Others 12.8% 14.7%

Source: BOI, CEIC

Figure 9: Investment applications approved for foreign investors from Japan, China, and the US have grown strongly Singapore (% Period Japan (% YoY) Europe (% YoY) China (% YoY) Malaysia (% YoY) US (% YoY) YoY) 2015 -18.1 149.9 -35.6 -26.5 2221.2 -35.7 2016 -45.8 -43.0 -13.0 91.4 -72.4 -21.5 2017 13.6 -10.0 0.9 -78.9 -20.8 -77.0 2018 2.0 79.9 -13.7 188.6 276.8 214.4 1Q19 60.3 -94.7 218.4 104.2 -37.3 827.8

Source: BOI, CEIC

See important disclosures at the end of this report 5

Thailand Economic View

21 August 2019

Demand surges for logistics properties Another indicator of the pick-up in relocation of manufacturers to Thailand from China – as a result of the escalating US-China trade war – is the increase in enquiries from multi- national and China-based Chinese companies for industrial properties in the kingdom. This can be seen in the reports by some of the major developers, such as Amata Corp and WHA Industrial Development, as well as CBRE’s research arm. Figure 10: Amata saw a surge in demand for industrial estates from Chinese firms

Sales of land in its industrial estates in 2018

10% YoY

THB6,900THB6,900 per sq per sq meter (current)meter (current) 30%30% THB5,300THB5,300 per sq per sq meter (2018)meter (2018)

Source: RHB, Company data

WHA is also another company that has seen a strong increase in earnings as a result of the relocation by China manufacturers. It recorded strong earnings during 2Q19 – net profit surged 247% YoY to THB1.05bn – amidst strong industrial land sales. Hong Kong-listed Prinx Chengshan Shandong Tire set up its first-ever overseas plant at the WHA’s industrial estate in Chonburi Province. The initial phase will see an investment of USD300m to produce 4m passenger car and 800,000 truck tires pa beginning mid-2020. The tire-maker is considered the 33rd-largest in the world, with fiscal sales of USD855m. It had previously considered Malaysia as a potential overseas site, but discontinued such plans due to the slow progress in setting up its business there. Prinx Chengshan Shandong Tire chose to move its production base to Thailand to avoid higher tariffs from the US amidst the intensifying trade spat between the two largest economies in the world. The company also believes that its Thai operations offer low raw material and transportation costs. Other benefits cited include the preferential policies in areas such as taxation and human resources. CBRE also pointed out that the modern logistics properties (MLPs) sector showed signs of improvement in 1Q19, as total supply continued to increase – it reached 3.66m sq m. Meanwhile, the vacancy rate has dropped to its lowest point in five years at 12.7%. Note that the demand for MLPs grew 16.1% YoY, while the total net absorption in 1Q19 alone was more than half of the total net absorption in 2018. MLPs’ strong growth is largely due to an increase in the number of e-commerce companies, as well as being one of the first beneficiaries of the relocation of manufacturers from China. Service industrial land plots and ready-built factories are expected to follow on from this uptrend.

See important disclosures at the end of this report 6

Thailand Economic View

21 August 2019

Figure 11: Supply and demand for MPLs continued to grow while vacancy rate fell to a 5-year low of 12.7%

Source: CBRE

Exports to the US jumped 17.3% YoY in 1H19 – an indication of trade diversion While total exports for Thailand fell 2.9% in 1H19, exports to the US have jumped 17.3%, driven mainly by exports of principle manufacturing products (+20% YoY). This suggests that some of the trade diversion occurred to avoid the higher tariffs slapped on Chinese imports by President Trump. Figure 12: Export to the US jumped by 17.3% YoY in 1H19 Figure 13: Exports of principle manufacturing to US jumped by despite a decline of 2.9% YoY of total exports 20% during the 1H19 Agriculture Agro Industrial Export to US Total Export % YoY Principle Manufacturing Mineral Products & Fuel [RHS] 20 % YoY % YoY 25.0 500.0 15 20.0 400.0 10 15.0 300.0

5 10.0 200.0

5.0 100.0 0 2015 2016 2017 2018 1H19 0.0 0.0 -5 2015 2016 2017 2018 1H19 -5.0 -100.0

-10 -10.0 -200.0

Source: CEIC, Ministry of Commerce Source: CEIC, Ministry of Commerce

See important disclosures at the end of this report 7

Thailand Economic View

21 August 2019

While the 1H19 export data indicated that the higher tariffs have benefitted Thailand in terms of trade diversions, the latest June data saw exports to the US fall 2.1% YoY to USD2.4bn. This was led by a decline in principle manufacturing products during the month. Figure 14: US overtook China as second key export market for Thailand

ASEAN USA China Japan Europe Others

25.5

11.4

9.9 9.8

Source: CEIC, Ministry of Commerce

Need for a proactive role in tapping foreign investors While the surge in logistics properties and investment applications from China point to a relocation for some manufacturers – as well as the impact of trade diversions seen – Thailand’s officials have indicated that more work is needed to attract foreign investors considering a relocation of their manufacturing capacity in China. Deputy Prime Minister Somkid Jatusripitak said the existing perks were not attractive enough to lure large companies to invest in community businesses. In a Bangkok Post report, Jatusripitak said: “The BOI needs to play a more proactive role in tapping foreign investors, especially those from Japan and China ravaged by the ongoing trade row, who are expected to relocate their production bases out of China.” This had led to an order for the BOI to establish a special task force to rev-up investments from Japan and China – especially for firms from these two nations that are expected to relocate their production bases to other countries like Thailand.

See important disclosures at the end of this report 8

Thailand Economic View

21 August 2019

Figure 15 shows the existing investment benefits in the EEC region. Among them: Permission to own land for BOI-promoted projects, exemption from corporate income tax of up to 13 years, and the lowest personal income tax rate in ASEAN (17%) for certain employees. Figure 15: Investment benefits in the EEC

Exemption of import duties tax on Get the Matching Grants for Permission to own land for BOI Exemption from corporate income tax for up machinery, raw or essential materials that investment, R&D, Innovation promoted projects. to 13 Years. import for using in production and R&D. development and human resources

development in targeted industries.

Lowest personal income tax rate (17%) in ASEAN for executives, specialists and One-stop service centre to facilitate Have the rights to make the state's land researchers who qualified by the Director- foreign investors which provide useful lease agreement for 50 years, and Offer the attractive five-year general of Revenue Department under the information and issue the permits for renewable upon approval for further 49 work visa to investors, law which related to the nation's trading, export and import in one specialists and scientists. years. competitiveness enhancement in the location. promoted businesses or The Investment Promotion Act.

Source: EEC Office, RHB

Infrastructure essentials to attract investments During our recent visit to Thailand, we understood from some officials we met that infrastructure development is key to attracting the relocation of manufacturers. Some of the concerns highlighted were on whether the flagship EEC project has been overestimated and progress of stalled infrastructure projects, in part, due to the general elections in 1H19. Figure 16: The EEC has become the country’s most attractive industrial destination

Source: EEC Office

See important disclosures at the end of this report 9

Thailand Economic View

21 August 2019

On 5 Aug, the Japanese Chamber of Commerce (JCC) in Bangkok met with Jatusripitak. This delegation handed over a compilation of requests from Japanese companies in Thailand for the new Government to consider. They include a call for the continuation of the EEC policy, which has heightened interests from Japanese enterprises and companies based in Thailand. The JCC’s compilation of requests also called for the: i. Continuation of the incentive system and expansion of targeted industries and regions for investments based on the EEC Act; ii. Completion of major infrastructure projects, such as a high-speed rail network, Laem Chabang Port, U-Tapao International Airport, and expressways as originally scheduled; iii. Steady maintenance and improvements of the transportation infrastructure in the economic corridor. Figure 17: Snippet of JCC’s requests to the new government in Thailand

Source: Japanese Chamber of Commerce

Other areas that foreign investors are looking include available infrastructure and supply chain to manufacturing processes. On this note, Thailand has a competitive edge in the auto industry due to its established supply chain in this sector.

See important disclosures at the end of this report 10

Thailand Economic View

21 August 2019

Automotive industry dominance strengthens Thailand’s offer to manufacturers Countries with the required labour, infrastructure and supply base capabilities to support more complex manufacturing are factors that may put them at an advantage as manufacturers consider relocating into the region. For Thailand, its manufacturing capabilities lie in the auto, electronics, and food manufacturing industries. Figure 18 compares some of the manufacturing capabilities of countries in the region that are also trying to lure manufacturers looking to relocate their manufacturing plants outside of China. Figure 18: Summary of manufacturing capabilities in the region Countries Manufacturing products Indonesia Automotive, textile & garments, food Vietnam Electronics, food processing, apparel Thailand Automotive, electronics, food Malaysia Electronics, production from resource based industries (petroleum, chemical, rubber), food (palm oil) Philippines Electronics, transport equipment, garments Singapore High-end manufacturing Source: RHB

The relocation decision involving auto manufacturing could favour Thailand, given its existing vibrant (and competitive) foreign original equipment manufacturer (OEM) segment and extensive network of supporting industries. The auto market here is dominated by Japanese automakers that have established Thailand as their production base. Vehicles manufactured in the kingdom range from 1-tonne pick-up trucks to eco cars for export. The US and European marques – manufacturers of large, luxury cars – also gaining ground in Thailand. Figure 19: Snapshot of Thailand’s auto sector

EXPORT PRODUCTION

USD20,575mn Passenger Vehicles: USD11,172mn Commercial Vehicles: USD7,930mn Motorcycles: USD1,474mn

Motor vehicle, exclude motorcycles: 2,167,694 units NO. 1 Motorcycles: 2,063,076 units Commercial Vehicles: 1,290,679 units Passenger Vehicles: 877,015 units

DOMESTIC MARKET

Motorcycles:1,788,323 units Commercial Vehicles: 560,093 units Passenger Vehicles: 481,646 units

Source: CEIC, RHB, Thai Automotive Industry Association,Vecteezy.com

See important disclosures at the end of this report 11

Thailand Economic View

21 August 2019

Zhongce Rubber Group Thailand is an example of a company in the automotive space that is relocating to Thailand. The company started building its new factory at the beginning of this year in Rayong, and will use rubber latex to produce motorcycle tires. Commercial operations are expected to start at the end of this year. Most of the products are for export to the US, Europe, and neighbouring countries in South-East Asia. Prinx Chengshan Shandong Tire is another company that has set up a plant in Thailand – Chonburi Province to be specific – as a measure to avoid the higher tariffs from the US. This is as trade tensions with China intensifies. Aside from that, Harley-Davidson will also open a new plant in Thailand this year. The plant was initially designed to supply the South-East Asian market to avoid high import tariffs of foreign-made motorcycles in ASEAN, but will now add capacity for the European market as well – this will give its made-in-Thailand motorcycles a more favourable tariff treatment than if they were made in the US. America-made Harley-Davidson motorcycles that are shipped to the European market are subjected to a 31% tariff – this will increase to 56% in 2021. Those made in Thailand are subject to a 6% tariff only.

Figure 20: Harley-Davidson to open new plant in Thailand to avoid high tariffs and facilitate easy access to China

Europe

US China Harley-Davidson made-in-US subject to 31% tariff Thailand Easy access Harley-Davidson to China made-in-Thailand subject to 6% tariff

Source: RHB

The US motorcycle maker will also partner with China’s Qianjiang Motorcycle to build a new smaller motorcycle than its trademark “big hogs”. The partnership is aimed at capturing a bigger share of the Chinese market. This is also another reason why Harley-Davidson boosted investments in its Thailand plant – to serve the China market and avoid additional import duties. Thailand is also keen on expanding its automotive manufacturing industry to produce green vehicles through its EEC initiative, which emphasises on the next-generation automotive industry, particularly the EV sector. Aside from the auto industry, other sectors – such as electric & electronics – should also see some relocation into Thailand amidst the US-China trade war. Manufacturers are planning to relocate their China-sited plants to the kingdom – and other South-East Asian countries – for goods exported to the US. This is to avoid the higher tariffs placed by the US Government on China-made products. Ricoh, for example, has shifted production of its key multi-function printer (MFP) portfolio destined for the US market to Thailand – this is to hedge any risk associated with the US- China trade issue. Previously, Ricoh Asia Industry (Shenzhen) produced the higher-speed models of the firm’s key MFP portfolio, whereas Ricoh Manufacturing (Thailand) produced the lower- to mid-speed models.

See important disclosures at the end of this report 12

Thailand Economic View

21 August 2019

Skilled workforce with competitive wages Among some of its regional peers, Thailand offers an attractive proposition in terms of skilled workforce at competitive wage levels. The average monthly wage of USD399 for the manufacturing sector is at a 55% and 56% discount to Malaysia (USD895) and China’s (USD909) averages for the manufacturing sector. While it is at a 28% premium to Vietnam’s USD311 average, Thailand does offer a mid-level tech workforce to manufacturers based in the country. Figure 21: Manufacturing wages in Thailand are much lower than in China and Malaysia, but at a competitive level with Vietnam

USD per 2015 2016 2017 2018 month 1,000.00 900.00 800.00 700.00 600.00 500.00 400.00 300.00 200.00 100.00 - China Malaysia Thailand Vietnam Philippines Indonesia

Source: CEIC, RHB The EEC Policy Committee has also allocated THB725m to train and improve the quality of teachers, lecturers, and students within the economic corridor. This is to address the problem of labour shortages within this region. According to feedback passed to BOI by companies planning to relocate to EEC, there is a need to bring in foreign workers for departments such as software engineering. This is due to the lack of local talent. EEC Office Secretary General Kanit Sangsubhan said, at the beginning of the year, that the targeted S-curve industries in the economic corridor will require an additional 1m workers. The THB725m allocated will be used to cover 16 projects within the EEC, with the aim of producing 26,043 workers by 2020.

Relocation provides opportunity to move up the value chain The relocation of manufacturers based in China could provide an opportunity for Thailand to move up the value chain in areas where the kingdom has a strong network of supporting industries, eg auto. During 1H19, about 33% and 30% of applications to BOI for the EEC focused on smart electronics and next-gen autos. Figure 22: Application for investment in EEC focus on smart electronics and next-gen autos

Smart Electronics

Next-Gen Automotive 33.0 Biofuel & Biochemical Tourism

Digital

Food Processing

Advance Agri & Biotechnology

Comprehensive Healthcare

Auto Machines & Robot

30.6 Aviation & Logistics

Source: CEIC, RHB

See important disclosures at the end of this report 13

Thailand Economic View

21 August 2019

Mitsubishi Motors is among one of the first automotive players to start large-scale production of EVs in Thailand. It is planning to produce its plug-in hybrid EV for the domestic market once it is granted BOI’s tax privileges. The Government aims to produce 1.2m EV cars by 2036. There is also interest among other automotive players – such as Toyota, Honda, Mazda, Suzuki, Mercedes-Benz, and BMW – to venture into this sector here.

Short-term risks from the trade war and strong THB outweighs benefits from China relocation Amidst the US-China trade war, the relocation by China-based manufacturers to Thailand will take time, as demand might be hurt by the escalating tensions between the two countries. Aside from that, it will also take time for manufacturers to build up capacity in a new location. Various news reports have highlighted the situation where – in looking to avoid higher tariffs and take advantage of lower costs – manufacturers that relocated to Vietnam have struggled to match their previous production capacities. A similar experience is expected for manufacturers that relocate to Thailand. In the meantime, the US-China trade war is negatively impacting business sentiment in the near term, causing a decline in global trade. The downgrades on the global economy, as well as the worse-than-expected economic data released recently, coupled with the stronger stance taken by both the US and China, are likely to weigh on short-term economic growth. The latest export data shows that shipments to the US have also fallen when compared to a year ago. This was despite some trade diversion effects, as well as relocations that occurred early this year and at end-2018. The stronger THB is an additional pressure to exporters already struggling to cope with the escalating tension between the world’s two largest economies. YTD, the THB has strengthened about 6.8% against the USD and emerged as the strongest currency in the region so far. This was despite some of the measures introduced by the Bank of Thailand and recent rate cut during the Monetary Policy Committee meeting. It also weighs on the tourism sector, which has been impacted by China’s economic slowdown.

Figure 23: The THB is the best-performing currency in the region

THB 6.8 IDR 5.07 JPY 4.04 PHP 4.02 INR 2.34 HKD 1.05 MYR 0.71 CNY -0.38 SGD -0.67 TWD -2.13 KRW -7.92

-10 -5 0 5 10

Source: RHB, Bloomberg

Competition from regional peers

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Thailand Economic View

21 August 2019

Aside from that, there is also emerging competition from Indonesia and Vietnam, especially on the automotive front. Indonesia is planning a slew of incentives for EV manufacturers and drivers with the intention of becoming the dominant force in South-East Asia. Some news outlets have reported on Toyota and Softbank’s interest in investing in there. Recently unveiled made-in-Vietnam autos – manufactured by Vingroup subsidiary VinFast – have also sparked concerns among some auto players and authorities in Thailand. The worry has been amplified by a recent free trade agreement (FTA) between Vietnam and the EU, which promises to lower tariffs in both directions. This includes tariffs on autos made in the South-East Asian nation. Conversely, Thailand has yet to enter into an FTA with the EU. This was partly due to the military coup five years ago that toppled the administration of the country’s first female prime minister, Yingluck Shinawatra. The Trade Policy & Strategy Office has warned of a need to enter into an FTA with the EU to avoid relocation to Vietnam by some of the foreign carmakers – this as they seek to take advantage of the country’s FTA deal with the EU and cheaper labour costs.

Push for EVs facing setbacks on slower demand The Government’s push for EVs could also face some setbacks. During one of our channel checks, it was understood that some consumers – potential EV buyers – were still concerned over various issues surrounding such vehicles. This ranged from battery life and driving range to its maintenance costs. China scaled back its subsidy programme – designed to promote green vehicle adoption – in June. This led to a downturn in the new-energy vehicle (NEV) segment last month. Fewer buyers were seen visiting electric car dealerships during this period. This followed from a surge in NEV purchases, as consumers rushed to beat the 26 Jun deadline for the reduction in subsidies. Forecasts for NEV sales in 2019 by China Association of Automobile Manufacturers, a government-backed industry consortium, was cut to 1.5m units from 1.6m previously. Thailand has also yet to establish itself as a leader in the EV industry, as seen by British electrical appliance pioneer Dyson’s decision to go to Singapore for its maiden electric car plant. The firm, which is known for its cordless vacuum cleaners, hand dryers and fans, aims to launch an EV in 2021, with its factory scheduled for completion in 2020. The announcement last year was a reality check on the attractiveness of Thailand’s position as a manufacturing hub for the EV industry.

Structural challenges remain

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Thailand Economic View

21 August 2019

While there is a lot of potential from the relocation to Thailand by some manufacturers, it is worth noting that the structural challenges in the kingdom remain. Over the last two decades, the number of people aged 65 years or older has more than doubled. The country’s ageing society, moderate competitiveness, and labour shortages will weigh on economic growth over time. To make matters worse, while Thailand is approaching the status of an ageing society, it has yet to reach the level of a high-income nation. In fact, the country’s per capita income is lower than Malaysia’s – this is partly due to its high dependence on agricultural employment, which makes up about a third of overall employment in the kingdom. Figure 24: Thailand is approaching ageing society status, but has yet to reach a high-income nation level

Median Age (years) 50 USD39,286.70 GDP per capita below USD12,376, the limit used to measure high-income economy 45

USD64,581.90 40 USD7,273.60

35 USD2,563.80 30 USD3,893.60 USD11,239

USD3,102.70 25

20

15

10

5

0 Japan Singapore Thailand Vietnam Indonesia Malaysia Philippines

Note: Showing GDP per capita in 2018 Source: CEIC, RHB, World Bank

See important disclosures at the end of this report 16

Thailand Economic View

21 August 2019

Figure 25: Regional economic indicators ASEAN & CHINA ECONOMIC INDICATORS Exchange rate Country GDP growth (%) Inflation (%) Policy rate (end period,%) (end period, vs. USD) 2017 2018 2019E 2020F 2017 2018 2019E 2020F 2017 2018 2019E 2020F 2017 2018 2019E 2020F Indonesia 5.1 5.2 5.1 5.2 3.8 3.2 3.0 3.5 4.25 6.00 5.75 5.50 13588 14417 14400 14100

Malaysia 5.9 4.7 4.5 4.3 3.7 1.0 0.9 2.0 3.00 3.25 3.00 2.75 4.06 4.14 4.15 4.00 Philippines 6.7 6.2 5.8 6.0 3.2 5.2 3.5 4.0 3.00 4.75 4.25 4.25 49.83 52.38 52.00 51.50 Singapore 3.6 3.2 0.8 2.0 0.6 0.4 0.8 1.2 - - - - 1.34 1.36 1.40 1.38 Thailand 3.9 4.1 3.0 3.8 0.7 1.2 1.2 1.4 1.50 1.75 1.50 1.50 32.57 33.4 31.5 31.0 Vietnam* 6.8 7.1 6.6 6.4 3.5 3.5 3.4 4.0 6.25 6.25 6.25 6.50 22709 23210 23300 23400 China** 6.9 6.6 6.2 6.3 1.6 2.1 2.5 2.6 4.35 4.35 4.35 4.35 6.51 6.90 6.80 6.75 *prime rate; **1-yr lending rate Unemployment rate Country Exports growth (%) Imports growth (%) Industrial Production growth (%) (% labour force) 2017 2018 2019E 2020F 2017 2018 2019E 2020F 2017 2018 2019E 2020F 2017 2018 2019E 2020F Indonesia 17.1 7.1 -9.0 3.0 15.6 18.0 -7.0 5.5 5.1 2.0 4.5 5.3 5.5 5.3 5.3 5.3 Malaysia 18.8 6.7 2.2 1.5 19.7 4.9 1.4 2.0 4.3 3.1 2.9 3.3 3.4 3.3 3.3 3.4 Philippines 9.5 8.0 6.5 6.8 10.2 9.0 7.0 7.5 6.2 3.6 3.3 3.5 5.7 5.6 5.5 5.4 Singapore* 9.2 4.4 -10.0 4.5 12.4 10.6 0.0 6.0 10.4 7.2 -1.0 5.0 2.1 2.0 2.0 2.0 Thailand 9.9 7.0 -1.1 3.5 14.7 8.6 1.2 3.9 1.6 3.3 2.5 3.0 1.0 0.9 0.9 0.8 Vietnam 21.6 13.2 6.3 9.1 21.4 11.1 5.8 9.4 9.4 11.0 9.4 8.5 2.2 2.0 2.2 2.2 China 8.1 11.2 5.0 5.2 16.8 16.6 5.5 5.7 6.6 6.2 5.2 n/a 4.0 3.8 4.2 n/a *Non-oil Domestic Exports Country Fiscal Balance (% GDP) Current Acc. (% GDP) FX Reserves (USD bn) External Debt (USD bn) 2017 2018 2019E 2020F 2017 2018 2019E 2020F 2017 2018 2019E 2020F 2017 2018 2019E 2020F Indonesia -2.5 -1.8 -1.8 -1.6 -1.7 -3.0 -2.7 -2.5 130 121 125 132 353 360 380 420 Malaysia -3.0 -3.7 -3.4 -3.0 3.0 2.2 3.0 2.7 102 101 108 117 216 221 238 256 Philippines -2.2 -3.2 -3.0 -3.0 -0.8 -2.4 -2.3 -2.0 82 80 74 77 73 71 70 70 Singapore 2.4 0.4 -0.7 -0.2 19.6 17.9 16.6 17.3 280 288 265 276 - - - - Thailand -1.8 -2.9 -2.7 -2.8 9.7 6.4 5.5 5.3 203 208 227 230 155 159 164 169 Vietnam -3.5 -3.9 -4.0 -3.9 2.9 3.5 2.4 2.2 49 60 66 73 104 104 107 108 China -2.9 -3.3 -2.6 n/a 1.3 1.1 1.3 n/a 3139 3072 3000 n/a 1710 1843 1380 n/a

Country Deposit Growth (%) Loan Growth (%) L/D Ratio (%) Money Supply (%) 2017 2018 2019E 2020F 2017 2018 2019E 2020F 2017 2018 2019E 2020F 2017 2018 2019E 2020F Indonesia 9.8 6.9 11.0 12.5 8.2 11.7 11.0 8.0 91.9 94.3 95.4 95.0 9.9 6.9 8.0 6.0

Malaysia 4.0 7.5 5.7 5.3 4.1 5.6 4.9 4.5 88.9 87.3 86.7 86.0 4.7 8.0 5.5 5.0 Philippines 11.9 11.8 9.0 9.5 18.1 18.0 12.0 12.5 74.1 74.1 78.7 78.5 11.9 9.5 8.0 9.0 Singapore 3.2 5.4 5.0 5.0 8.0 5.3 5.0 6.3 104.5 104.9 107.6 108.2 7.3 5.0 4.0 5.0 Thailand 4.1 5.3 5.0 5.2 4.1 5.1 4.8 5.0 93.1 92.9 93.0 93.1 5.2 5.3 4.5 5.0 Vietnam 10.0 14.5 10.8 9.0 18.7 14.0 14.0 13.5 81.0 83.0 83.5 83.5 17.0 12.5 9.6 8.0 China 9.7 8.6 8.5 n/a 12.9 13.0 9.5 n/a 73.0 77.0 73.0 n/a 8.1 8.1 7.5 n/a

Note: As at 19 August 2019 Note 2: For money supply, M2 is used for all countries except for Thailand (M1), Philippines(M3) & Singapore (M3) Source: International Monetary Fund (IMF), Oxford Economics, Various central banks, FocusEconomics Consensus, RHB

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