Thailand’s competitiveness michael e porter

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  • Talking Points: 1) Low cost to high value: prosperous regions are not those with a low cost structure, but rather those with high innovation output. 2) Focus on regions: Important decisions are made in Washington DC, but increasingly it is local strategies that most affect a region’s competitiveness and prosperity. 3) The current economic troubles are cyclical not structural. Economic stimulus policies from Washington are important, but long term prosperity will depend more on increasing innovation. This depends largely on decisions made in the regions.
  • 7 7
  • 38 Government has worked to encourage sharing State markets the presence of this industry all around the world
  • Industry associations are not used to their full potential Evolve from industry/trade to cluster associations
  • Thailand’s competitiveness michael e porter

    1. 1. Thailand’s Competitiveness: Creating the Foundations for Higher Productivity Professor Michael E. Porter Institute for Strategy and Competitiveness Harvard Business School Bangkok, Thailand 4 May 2003 This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), “Building the Microeconomic Foundations of Competitiveness,” in The Global Competitiveness Report 2002, (World Economic Forum, 2002), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 1998), and joint work with Dr. Christian Ketels and the Sasin Graduate School of Business on Thai competitiveness financed by the NESDB. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of Michael E. Porter. Further information on Professor Porter’s work and the Institute for Strategy and Competitiveness is available at www.isc.hbs.eduCAON Thailand 2003 05-04-03 CK.ppt 1 Copyright 2003 © Professor Michael E. Porter
    2. 2. Thailand’s Economy in 2003 • Thailand has registered economic growth through the 1990s, and attracted substantial foreign investment • The economy has achieved high employment and comparatively low poverty rates despite the Asian Crisis BUT • The Asian Crisis hit Thailand first and harder, indicating the fundamental weaknesses of the historical approach • Growth after the Crisis was driven by devaluation and domestic stimuli packages • Despite the recent growth, GDP per capita remained flat over the period since 1995CAON Thailand 2003 05-04-03 CK.ppt 2 Copyright 2003 © Professor Michael E. Porter
    3. 3. Comparative Economic Performance Selected Asian Economies Annual Growth Rate of Real GDP 30% Countries sorted by 25% 1995-2002 GDP Growth: 20% China Myanmar 15% Vietnam 10% Singapore Taiwan 5% Malaysia 0% Philippines -5% Hong Kong Indonesia -10% Thailand -15% -20% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002Source: EIU (2002)CAON Thailand 2003 05-04-03 CK.ppt 3 Copyright 2003 © Professor Michael E. Porter
    4. 4. What is Competitiveness? • Competitiveness is determined by the productivity with which a nation uses its human, capital, and natural resources. Productivity sets a nation’s or region’s standard of living (wages, returns to capital, returns to natural resource endowments) – Productivity depends both on the value of products and services (e.g. uniqueness, quality) as well as the efficiency with which they are produced – It is not what industries a nation competes in that matters for prosperity, but how firms compete in those industries – Productivity in a nation is a reflection of what both domestic and foreign firms choose to do in that location. The location of ownership is secondary for national prosperity – The productivity of “local” industries is of fundamental importance to competitiveness, not just that of traded industries – Devaluation does not make a country more competitive • Nations compete in offering the most productive environment for business • The public and private sectors play different but interrelated roles in creating a productive economyCAON Thailand 2003 05-04-03 CK.ppt 4 Copyright 2003 © Professor Michael E. Porter
    5. 5. Challenges to Thai Prosperity • Prosperity has stagnated over the period 1995 – 2002. The harder impact of the Asian Crisis outweighed the relatively lower reliance on the sluggish world IT markets • Productivity is comparatively low and growing only slowly • While export market share has stabilized after falling between 1995 and 1998, devaluation has reduced the prosperity gain for Thailand • Foreign Direct Investment (FDI) inflows are reverting back to low pre-Asian Crisis levels. FDI stock is still below regional averages • Innovation and technology performance is weak, though showing some signs of improvement • Thailand’s fundamental challenge is microeconomic • Without an improvement in microeconomic fundamentals, current growth will be short-lived • Thailand must move to a new model of competitivenessCAON Thailand 2003 05-04-03 CK.ppt 5 Copyright 2003 © Professor Michael E. Porter
    6. 6. Comparative Economic Performance Selected Middle- and Lower-Income Economies GDP per Capita, 2001, US=100 40% Hungary Argentina Slovak Republic 30% Estonia Chile Uruguay South Africa Russia Poland (30%, +4.3%) Mexico Malaysia Costa Rica Croatia Brazil Lithuania Botswana Latvia Romania 20% Thailand Namibia Tunisia (22%, +3.7%) Colombia Bulgaria Turkey Dominican Rep. Venezuela Peru El Salvador Jordan Ukraine Jamaica Philippines Morocco 10% Guatemala Sri Lanka China Ecuador Indonesia (12%, +4.5%) Honduras Bolivia Nicaragua India Vietnam Haiti Nigeria 0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% CAGR of GDP per Capita Relative to the US, 1995-2001Source: World Development Indicators 2002CAON Thailand 2003 05-04-03 CK.ppt 6 Copyright 2003 © Professor Michael E. Porter
    7. 7. Comparative Labor Productivity Performance Selected Asian Economies Labor Productivity (GDP per Employee), 2000 $60,000 Singapore Hong Kong $50,000 Taiwan $40,000 $30,000 $20,000 Thailand Malaysia $10,000 Philippines China Indonesia Vietnam Myanmar $0 -2% 0% 2% 4% 6% 8% 10% Growth of Labor Productivity, CAGR, 1995-2000 • Thailand’s labor productivity is far behind leading Asian economies and productivity growth is lagging badlySource: EIU (2002)CAON Thailand 2003 05-04-03 CK.ppt 7 Copyright 2003 © Professor Michael E. Porter
    8. 8. Thai Productivity Cluster Examples • Tourism – Thailand generates less revenue per tourist than leading competitors, for example Indonesia – Thailand has not been able to increase the revenue per tourists over time. Even after the 1997 devaluation, revenues in terms of Thai Baht only remained stable, while tourists reduced their spending in terms of US-Dollar • Automotive – Assembly plants in Thailand produce fewer cars per employee than the international benchmark countries (11 versus 45 per year). – Low labor cost allow Thai assembly plants to be cost competitive despite a much lower level of automation – Thai-based producers have low incentives to adopt world-class technology to improve productivity, but this perpetuates low wages • Food industry – Thai companies employ workers without specific training and pay close to the minimum wage, yet complain about high turnover – Thai food processors are trapped in a low-productivity, low-wage, low-skill system. Employees leave for more productive, better paying industriesSource: Sasin Study (2003)CAON Thailand 2003 05-04-03 CK.ppt 8 Copyright 2003 © Professor Michael E. Porter
    9. 9. Comparative Inward Foreign Investment Flows Selected Asian Economies FDI Inflows as percentage of GDP 20% 15% Singapore 10% Malaysia 5% Philippines China Thailand 0% Indonesia -5% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 • Thailand received strong FDI inflows in the years immediately after the devaluation in 1997 but is now falling back to the FDI inflow levels of its immediate neighborsSource: World Development Indicators, World Bank, SMC AnalysisCAON Thailand 2003 05-04-03 CK.ppt 9 Copyright 2003 © Professor Michael E. Porter
    10. 10. Annual U.S. patents International Patenting Output per 1 million population, 2001 400 350 USA 300 Taiwan 250 Japan Sweden 200 = 10,000 Germany 150 Finland patents Israel granted in Canada 2001 100 Singapore Netherlands South Korea UK 50 New Zealand Australia Thailand 0 0% 10% 20% 30% 40% Compound annual growth rate of US-registered patents, 1990 - 2001 • Thailand’s level of innovation as measured by U.S. patenting is insignificantSource: US Patent and Trademark Office (www.uspto.gov). Author’s analysis.CAON Thailand 2003 05-04-03 CK.ppt 10 Copyright 2003 © Professor Michael E. Porter
    11. 11. Thailand’s Competitiveness • Assessing Thailand’s Competitive Position • Thailand’s Competitiveness Agenda in 2003CAON Thailand 2003 05-04-03 CK.ppt 11 Copyright 2003 © Professor Michael E. Porter
    12. 12. Innovation and Competitiveness Prosperity Prosperity Productivity Productivity Competitiveness Innovative Capacity Innovative Capacity • Innovation is more than just scientific discovery • There are no low-tech industries, only low-tech firmsCAON Thailand 2003 05-04-03 CK.ppt 12 Copyright 2003 © Professor Michael E. Porter
    13. 13. Determinants of Productivity and Productivity Growth Macroeconomic, Political, Legal, and Social Macroeconomic, Political, Legal, and Social Context for Development Context for Development Microeconomic Foundations of Development Microeconomic Foundations of Development Sophistication Sophistication Quality of the Quality of the of Company of Company Microeconomic Microeconomic Operations and Operations and Business Business Strategy Strategy Environment Environment • A sound macroeconomic, political, legal, and social context creates the potential for competitiveness, but is not sufficient • Competitiveness ultimately depends on improving the microeconomic capability of the economy and the sophistication of local companies and local competitionCAON Thailand 2003 05-04-03 CK.ppt 13 Copyright 2003 © Professor Michael E. Porter
    14. 14. Integration of Macro- and Microeconomic Reforms Stability and confidence support investment and upgradingMacroreform Microalone leads Create the opportunity Required to achieve reform isto short for productivity productivity impeded byterm capital macroinflows Macroeconomic Microeconomic economicandgrowth reform reform volatility thatspurts reducesthat companyultimately investmentare not Productivity growth allows economicsustainable growth and rising incomes without inflation, making macroeconomic stability easier to achieveCAON Thailand 2003 05-04-03 CK.ppt 14 Copyright 2003 © Professor Michael E. Porter
    15. 15. Productivity and the Microeconomic Business Environment Context for Context for Firm Firm Strategy Strategy and Rivalry and Rivalry  A local context and rules that encourage investment and sustained upgrading – e.g., Intellectual property Factor Factor protection Demand Demand (Input) (Input) Meritocratic incentive systems  Conditions Conditions Conditions Conditions across all major institutions  Open and vigorous competition among locally based rivals  Presence of high quality,  Sophisticated and demanding local specialized inputs customer(s) available to firms Related and  Local customer needs that anticipate – Human resources Related and Supporting those elsewhere – Capital resources Supporting  Unusual local demand in specialized – Physical infrastructure Industries Industries segments that can be served nationally – Administrative infrastructure and globally – Information infrastructure – Scientific and technological  Access to capable, locally based suppliers infrastructure and firms in related fields – Natural resources  Presence of clusters instead of isolated industries • Successful economic development is a process of successive economic upgrading, in which the business environment in a nation evolves to support and encourage increasingly sophisticated ways of competingCAON Thailand 2003 05-04-03 CK.ppt 15 Copyright 2003 © Professor Michael E. Porter
    16. 16. The California Wine Cluster Winemaking Winemaking Equipment Equipment Grapestock Grapestock Barrels Barrels State Government Agencies (e.g., Select Committee on Wine Production and Economy) Fertilizer, Pesticides, Fertilizer, Pesticides, Bottles Bottles Herbicides Herbicides Grape Harvesting Caps and Corks Caps and Corks Grape Harvesting Equipment Equipment Labels Labels Irrigation Technology Irrigation Technology Wineries/Processing Wineries/Processing Growers/Vineyards Growers/Vineyards Facilities Facilities Public Relations and Public Relations and Advertising Advertising Specialized Publications Specialized Publications (e.g., Wine Spectator, (e.g., Wine Spectator, Trade Journal) Trade Journal) California California Educational, Research, & Trade Educational, Research, & Trade Tourism Cluster Tourism Cluster Agricultural Cluster Agricultural Cluster Organizations (e.g. Wine Institute, Organizations (e.g. Wine Institute, UC Davis, Culinary Institutes) UC Davis, Culinary Institutes) Food Cluster Food ClusterSources: California Wine Institute, Internet search, California State Legislature. Based on research byMBA 1997 students R. Alexander, R. Arney, N. Black, E. Frost, and A. Shivananda.CAON Thailand 2003 05-04-03 CK.ppt 16 Copyright 2003 © Professor Michael E. Porter
    17. 17. Levels of Clusters • There is often an array of clusters in a given field in different locations, each with different levels of specialization and sophistication • Global innovation centers, such as Silicon Valley in semiconductors, are few in number. If there are multiple innovation centers, they normally specialize in different market segments • Other clusters focus on manufacturing, outsourced service functions, or play the role of regional assembly or service centers • Firms based in the most advanced clusters often seed or enhance clusters in other locations in order to reduce the risk of a single site, access lower cost inputs, or better serve particular regional markets • The challenge for an economy is to move from isolated firms to an array of clusters, and then to upgrade the breadth and sophistication of clusters to more advanced activitiesCAON Thailand 2003 05-04-03 CK.ppt 17 Copyright 2003 © Professor Michael E. Porter
    18. 18. Levels of Clusters Leading Footwear Clusters Romania Portugal • Production subsidiaries • Production of Italian companies • Focus on short- • Focus on lower to production runs in the medium price range medium price range Italy • Design, marketing, and production of premium shoes • Export widely to the world market United States Vietnam/Indonesia • Design and marketing • OEM Production • Focus on specific market China • Focus on the low cost segments like sport and • OEM Production segment mainly for the recreational shoes and boots • Focus on low cost European market • Manufacturing only in segment mainly for the selected lines such as hand- US market sewn casual shoes and bootsSource: Research by HBS student teams in 2002 CAON Thailand 2003 05-04-03 CK.ppt 18 Copyright 2003 © Professor Michael E. Porter
    19. 19. Institutions for Collaboration General • Institutions for collaboration (IFC) are formal and informal organizations that • Chambers of Commerce - facilitate the exchange of information • Professional associations and technology • School networks - conduct joint activities • University partner groups - foster coordination among firms • Religious networks • Joint private/public advisory • IFCs can improve the business environment councils by • Competitiveness councils - creating relationships and level of trust that make them more effective - defining of common standards Cluster-specific - conducting or facilitating the organization • Industry associations of collective action in areas such as • Specialized professional procurement, information gathering, or associations and societies international marketing • Alumni groups of core cluster - defining and communicating common companies beliefs and attitudes • Incubators - providing mechanisms to develop a common economic or cluster agendaCAON Thailand 2003 05-04-03 CK.ppt 19 Copyright 2003 © Professor Michael E. Porter
    20. 20. Influences on Competitiveness Multiple Geographic Levels World Economy Broad Economic Areas Groups of Neighboring Nations Nations States, Provinces Cities, Metropolitan AreasCAON Thailand 2003 05-04-03 CK.ppt 20 Copyright 2003 © Professor Michael E. Porter
    21. 21. Specialization of Regional Economies Select U.S. Geographic Areas Denver, CO Denver, CO Chicago Chicago Leather and Sporting Goods Leather and Sporting Goods Communications Equipment Communications Equipment Oil and Gas Boston Boston Oil and Gas Processed Food Processed Food Aerospace Vehicles and Defense Analytical Instruments Analytical InstrumentsSeattle-Bellevue-Seattle-Bellevue- Aerospace Vehicles and Defense Heavy Machinery Heavy MachineryEverett, WA Education and Knowledge Creation Education and Knowledge CreationEverett, WA Communications EquipmentAerospace Vehicles Wichita, KS Pittsburgh, PA Communications EquipmentAerospace Vehicles Wichita, KS Pittsburgh, PAand Defenseand Defense Aerospace Vehicles and Aerospace Vehicles and Construction Materials Construction MaterialsFishing and FishingFishing and Fishing Defense Defense Metal Manufacturing Metal ManufacturingProductsProducts Heavy Machinery Heavy Machinery Education and Knowledge Education and KnowledgeAnalytical InstrumentsAnalytical Instruments Oil and Gas Oil and Gas Creation CreationSan Francisco-Oakland-San JoseBay AreaCommunicationsEquipmentAgricultural Raleigh-Durham, NC Raleigh-Durham, NCProducts Communications Equipment Communications EquipmentInformation Information Technology Information TechnologyTechnology Education and Education and Knowledge Creation Knowledge Creation Los Angeles Area Apparel Atlanta, GA San Diego Atlanta, GA Building Fixtures, San Diego Construction Materials Leather and Sporting Goods Construction Materials Equipment and Leather and Sporting Goods Transportation and Logistics Power Generation Houston Transportation and Logistics Services Power Generation Houston Business Services Education and Knowledge Heavy Construction Services Business Services Entertainment Education and Knowledge Heavy Construction Services Creation Creation Oil and Gas Oil and Gas Aerospace Vehicles and Defense Aerospace Vehicles and DefenseNote: Clusters listed are the three highest ranking clusters in terms of share of national employmentSource: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School CAON Thailand 2003 05-04-03 CK.ppt 21 Copyright 2003 © Professor Michael E. Porter
    22. 22. Stages of Competitive Development Factor-Driven Investment- Innovation- Economy Driven Economy Driven Economy Input Efficiency Through Unique Cost Heavy Investment Value Source: Porter, Michael E., The Competitive Advantage of Nations, The Free Press, 1990CAON Thailand 2003 05-04-03 CK.ppt 22 Copyright 2003 © Professor Michael E. Porter
    23. 23. Thailand’s Competitiveness Agenda • Upgrade the Business Environment • Activate Cluster Development • Transform Company Strategies • Redefine the Roles of Business and Government • Decentralize More of Economic Policy to the Regional Level • Lead a Cross-National StrategyCAON Thailand 2003 05-04-03 CK.ppt 23 Copyright 2003 © Professor Michael E. Porter
    24. 24. National Business Environment Overview Thailand’s Relative Strengths and Weaknesses Context for Context for Firm Firm Strategy Strategy and Rivalry and Rivalry + Inward foreign investment has raised the level of competition – Most companies compete on low Factor Factor input costs and invest little in creating capabilities Demand Demand (Input) (Input) – Complex, high tariffs and weak anti- Conditions Conditions Conditions Conditions trust laws impede competition – Government bureaucracy and + Thailand has a rich wildlife, corruption create significant costs beautiful locations, and some – Local Thai demand tends to be natural resources unsophisticated and does not + Physical infrastructure, especially generally lead international trends roads, is good Related and Related and + In pick-up trucks, however, – Infrastructure in Bangkok is overtaxed Supporting Supporting Thailand is one of the most – The general skill level of the Thai Industries developed markets in the Industries labor force is low, and educational world programs do not match company needs – Most Thai clusters are focused on a – Communication networks are few labor-intensive stages of their expensive and weak outside of industries’ value chain Bangkok – Cluster organizations exist, but tend to – Inadequate development of financial be focused solely on lobbying markets – Low level of domestic technologicalCAON Thailand 2003 05-04-03 CK.ppt 24 Copyright 2003 © Professor Michael E. Porter
    25. 25. Educational Performance Selected Asian Countries Gross Enrolment in Primary, Secondary, and Tertiary Education, 1999 100 90 82 82 80 75 73 70 67 66 65 63 60 58 60 55 55 40 20 0 R) ar a . f nd ia na ia am n a e s ep .o di k pa ne or es ys nm A la an hi In R p N (S ap pi Ja a ai n C Re ya iL al do et ilip Th . ng a em M M Vi Sr in a, In Ph Si Ch D re Ko s g, le n op Ko Pe g on o La HSource: UN – Human Development IndicatorsCAON Thailand 2003 05-04-03 CK.ppt 25 Copyright 2003 © Professor Michael E. Porter
    26. 26. Educational System Quality Employer Satisfaction Very satisfied Satisfied 3 9 8 29 41 63 Neutral 28 35 7 Dissatisfied 12 Very dissatisfied 3 28 19 12 Vocational Under-graduate Post graduate level level level • Many Thai employers are unsatisfied with the quality of the education system at the more advanced levels, especially at the vocational levelSource : TDRI Survey 2001 CAON Thailand 2003 05-04-03 CK.ppt 26 Copyright 2003 © Professor Michael E. Porter
    27. 27. Quality of the Educational System Cluster Examples • Tourism – Graduates from many educational institutions are not trained for tasks that are essential in tourism-related businesses – More than 40% of tourism-related courses prepare graduates for management positions. However, management positions account for only 3% of the workforce needs in the Thai tourism cluster • Automotive – The capabilities of production engineers and technicians graduating from local educational institutions are often insufficient – Companies are forced to provide extensive in-house training to integrate new hires • Information Technology – IT executives report that nearly 50% of all graduates need to be significantly retrained before being usefulSource: Sasin Study (2003)CAON Thailand 2003 05-04-03 CK.ppt 27 Copyright 2003 © Professor Michael E. Porter
    28. 28. Factor Factor (Input) (Input) Science and Technology Conditions Conditions Thailand’s Relative Position Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita Country Ranking, Country Ranking, Arrows indicate a Arrows indicate a change of 5 or more change of 5 or more ranks since 1998 ranks since 1998 University/Industry Research Collaboration 29 Availability of Scientists and Engineers 55 Quality of Scientific Research Institutions 45 Quality of Math and Science Education 41 Intellectual Property Protection 38 • Thailand is only slowly moving towards a system with high-quality research institutions and the appropriate incentives for R&D and commercialization Note: Rank by countries; overall Thailand ranks 35 out of 80 countries (35 on National Business Environment, 53 on GDP pc 2001) Source: Global Competitiveness Report 2002CAON Thailand 2003 05-04-03 CK.ppt 28 Copyright 2003 © Professor Michael E. Porter
    29. 29. Context for Firm Context for Firm Strategy Strategy Context for Firm Strategy and Rivalry and Rivalry and Rivalry Thailand’s Relative Position Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita Country Ranking, Country Ranking, Arrows indicate a Arrows indicate a change of 5 or more change of 5 or ranks since 1998 more ranks since 1998 Cooperation in Labor-Employer Relations 9 Costs of Other Firms Illegal/ 46 Unfair Activities Extent of Locally Based Competitors 14 Favoritism in Decisions of Government 46 Extent of Distortive Government Subsidies 17 Officials Decentralization of Corporate Activity 28 Hidden Trade Barrier Liberalization 45 Intensity of Local Competition 29 Efficacy of Corporate Boards 37 Tariff Liberalization 31 Effectiveness of Anti-Trust Policy 35 Note: Rank by countries; overall Thailand ranks 35 out of 80 countries (35 on National Business Environment, 53 on GDP pc 2001) Source: Global Competitiveness Report 2002CAON Thailand 2003 05-04-03 CK.ppt 29 Copyright 2003 © Professor Michael E. Porter
    30. 30. Bureaucracy in Thailand Evidence % of executives’ time • Thailand ranks 79 out of 80 spent with government official countries on the extent of bureaucratic red tap in the 2002 15.5% Small Global Competitiveness Report • Bureaucracy inflicts the largest 15.0% All Thai companies burden on smaller domestic 14.5% companies 14.0% Medium 13.5% • Many examples show that 13.0% corruption and bureaucracy thrive 12.5% Large in an environment with elaborate, complex regulations and 12.0% Thai Firms Foreign Firms administrative procedures Source: Thailand : Business Environment and Governance Survey, Corruption in Thailand Report, Office of Civil Service Commission, 2001CAON Thailand 2003 05-04-03 CK.ppt 30 Copyright 2003 © Professor Michael E. Porter
    31. 31. Tariff Barriers Sectors Tariff Rates (March, 2003) General WTO AFTA Food products 60 % 30 – 40 % 5% Textile and Apparel 100 % 30 – 44 % 5% Foot ware 100 % 30 % 5% Diamonds 0 – 20 % 1 – 10 % 0% Automotive 100 -200% 80 % 5% • Historically, Thailand followed an import-substitution strategy based on high tariffs and domestic content requirements • In the 1990s, the policy changed to support the creation of manufacturing export industries. Export industries could import machinery and inputs tariff-free • Currently, Thailand is in the process of reducing regional tariff rates in accordance with the ASEAN free trade agreement. However, tariff protection remains significant in many industries and is blunting competitionSource: Sasin Study (2003)CAON Thailand 2003 05-04-03 CK.ppt 31 Copyright 2003 © Professor Michael E. Porter
    32. 32. Barriers to International Trade Automotive Industry • The Thai automotive industry was born as a result of trade protection • While the industry consists of a large number of assembly plants and suppliers, its ability to compete internationally rests almost entirely on low labor costs that compensate for low levels of productivity • The industry began to export only after the devaluation of the Thai Baht in 1997. Thai-based operations have relatively weak positions in international markets • Thailand’s progress in becoming the ASEAN automotive production hub is still fragile • The potential for growth will be limited until Thailand significantly improves its sophistication and technologySource: Sasin Study (2003)CAON Thailand 2003 05-04-03 CK.ppt 32 Copyright 2003 © Professor Michael E. Porter
    33. 33. Automotive Clusters in the World Economy Top 25 Exporting Countries by Export Value, 2000 Revealed Comparative Advantage (RCA), 2000 2.5 Japan 2.0 Spain Germany Canada France Mexico 1.5 Poland Czech R. Hungary Austria UK Italy Portugal Brazil 1.0 Korea USA Sweden Belgium Finland 0.5 Netherlands Switzerland Singapore China Australia Thailand 0.0 -3% -2% -1% 0% 1% 2% Change in World Market Share, 1995-2000 D D = $35 billionNote: RCA is defined as a country’s market share in the cluster divided by the country world market share across all exports export volumeSource: UNCTAD Trade Data. Author’s analysis.CAON Thailand 2003 05-04-03 CK.ppt 33 in 2000 Copyright 2003 © Professor Michael E. Porter
    34. 34. Domestic Competition in Thailand • Foreign investors have significantly improved the level of competition in a number of sectors such as retail • The increased focus of Thai business groups on markets where they have dominating positions has reduced competitive intensity in some industries • The Competition Committee has few effective instruments to act against companies with market power – The Competition Act does not, for example, apply to state owned companies Source: Global Competitiveness Report 2002, McKinsey 2002, Sasin Study 2003CAON Thailand 2003 05-04-03 CK.ppt 34 Copyright 2003 © Professor Michael E. Porter
    35. 35. Thai Policy Toward FDI • Some foreign investors have been encouraged to use older technology to create more (lower paying) jobs • Historically, the government tried to channel FDI to different parts of the country – Recently the preferences for investing outside Bangkok have been removed • Investment incentives are less attractive than, for example, Malaysia and Singapore • The new strategy seeks to attract regional headquarters without offering any compelling advantages versus other locations. • Government is searching to promote technology transfer in, for example, electronics but success so far is limited • No convincing cluster-based approach to FDI attraction is in place – Special incentives exist in textiles, footwear, and food productsSource: Sasin Study (2003)CAON Thailand 2003 05-04-03 CK.ppt 35 Copyright 2003 © Professor Michael E. Porter
    36. 36. Demand Demand Conditions Demand Conditions Conditions Thailand’s Relative Position Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita Country Ranking, Country Ranking, Arrows indicate a Arrows indicate a change of 5 or more change of 5 or more ranks since 1998 ranks since 1998 Consumer Adoption of Latest Products 21 Laws Relating to Information Technology 48 Stringency of Environmental Regulations 39 Presence of Demanding Regulatory 36 StandardsNote: Rank by countries; overall Thailand ranks 35 out of 80 countries (35 on National Business Environment, 53 on GDP pc 2001)Source: Global Competitiveness Report 2002CAON Thailand 2003 05-04-03 CK.ppt 36 Copyright 2003 © Professor Michael E. Porter
    37. 37. Thai Demand Conditions Pick-up Trucks • Thailand has heavy demand for pick-up trucks that are used for multiple commercial and private uses • Manufacturers react to the demand by offering more varieties of pick-up truck models in Thailand than in any other national market • Thailand has a strong and growing position for pick-up trucks in the world market – This is the only segment (apart from tires and rubber-related products) in the automotive industry in which Thailand has a revealed comparative advantage – Thailand is the second largest producer of pick-up trucks worldwide behind the United States • Seek such opportunities in other parts of Thai industrySource: Sasin Study (2003)CAON Thailand 2003 05-04-03 CK.ppt 37 Copyright 2003 © Professor Michael E. Porter
    38. 38. Related and Related and Supporting Supporting Related and Supporting Industries Industries Industries Thailand’s Relative Position Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita Country Ranking, Country Ranking, Arrows indicate a Arrows indicate a change of 5 or more change of 5 or more ranks since 1998 ranks since 1998 Extent of Product and Process 17 Local Availability of Specialized 40 Collaboration Research and Training Services Local Availability of Components 18 Local Availability of Process Machinery 37 and Parts State of Cluster Development 23 Local Supplier Quantity 29 • Thailand is home to an array of clusters, but clusters are shallow and are characterized by weak linkages among cluster participants Note: Rank by countries; overall Thailand ranks 35 out of 80 countries (35 on National Business Environment, 53 on GDP pc 2001) Source: Global Competitiveness Report 2002CAON Thailand 2003 05-04-03 CK.ppt 38 Copyright 2003 © Professor Michael E. Porter
    39. 39. Moving Beyond Factor Competition Policy Imperatives Factor- Investment- Driven Economy Driven Economy • Openness to trade and • Increased local rivalry FDI • Improving factor quality, • Competition policy education • Protection of physical and • Advanced financial intellectual property infrastructure • Communications and • Specialization of human transportation capital infrastructure • Cluster development (buyers, • Streamline government suppliers) regulation • Establish infrastructure for • Regional trade innovationCAON Thailand 2003 05-04-03 CK.ppt 39 Copyright 2003 © Professor Michael E. Porter
    40. 40. Some Immediate Steps • Negotiate ASEAN Open Skies agreement • Reduce distortive taxes for particular product groups • Reduce capital gains tax for venture investments in smaller companies • Open the telecommunication market • Negotiate FTA agreement with the United StatesCAON Thailand 2003 05-04-03 CK.ppt 40 Copyright 2003 © Professor Michael E. Porter
    41. 41. Thailand’s Competitiveness Agenda • Upgrade the Business Environment • Activate Cluster Development • Transform Company Strategies • Redefine the Roles of Business and Government • Decentralize More of Economic Policy to the Regional Level • Lead a Cross-National StrategyCAON Thailand 2003 05-04-03 CK.ppt 41 Copyright 2003 © Professor Michael E. Porter
    42. 42. Thailand’s Export Performance By Broad Sector 1995-2000 Thailand’s average change in World Export Share, world goods export share: 2000 - 0.069% Office 3.0% (3.7%, +1.3%) Food/Beverages 2.5% Textiles/Apparel Entertainment 2.0% Semiconductors/Computers 1.5% Personal Housing/Household Power Thailand’s average goods export share: Materials/Metals Multiple Business 1.24% 1.0% Petroleum/Chemicals Telecommunications Forest Products 0.5% Health Care Defense D D = $1.5 billion Transportation export volume 0.0% in 2000 -1.0% -0.5% 0.0% + + 0.5% Change in Thailand’s World Export Share, 1995 - 2000Source: UNCTAD Trade Data. Author’s analysis.CAON Thailand 2003 05-04-03 CK.ppt 42 Copyright 2003 © Professor Michael E. Porter
    43. 43. Threats to Traditional Clusters • Thailand is losing world market position in some of its traditional areas of strength, such as textiles/apparel and food products • In these clusters, Thailand firms focus on a few, labor-intensive steps in the value chain. They use either imported (e.g., gold, tuna) or locally-produced raw materials, and sell undifferentiated products on anonymous world markets • Technology is low and not being upgraded • While these clusters provide many jobs, wages are close to the Thai minimum wage • Thailand is losing market share both to lower cost locations such as China and to more focused, higher cost locations such as Austria (Leather) or Australia (Food/Beverages)Source: Sasin Study, UNCTAD Trade Data. Author’s analysis.CAON Thailand 2003 05-04-03 CK.ppt 43 Copyright 2003 © Professor Michael E. Porter
    44. 44. Cluster Development Efforts in Thailand • Tourism – Thailand is home to many of the components of a well- functioning tourism cluster – There is no overarching strategy for the cluster, despite the existence of many industry associations for different parts of the cluster, and of many different strategic plans – The absence of a clear strategy is a key factor in the inability of the cluster to capture more value from tourists • Food – Government policy and private sector efforts are poorly coordinated in many segments of the cluster • Import tariffs for inputs and uncoordinated government positions in international trade negotiations hurt food industries • Lack of coordination between government institutions and industry associations create ineffective cluster strategiesSource: Sasin Study, Author’s analysis.CAON Thailand 2003 05-04-03 CK.ppt 44 Copyright 2003 © Professor Michael E. Porter
    45. 45. Economic Performance of the Thai Tourism Cluster Revenue per Tourist over Time Receipts per Tourist in Thailand $1,201.12 In Thai Baht $749 In US-Dollar 80 82 84 86 88 90 92 94 96 98 00Source: TAT, World Tourism OrganizationCAON Thailand 2003 05-04-03 CK.ppt 45 Copyright 2003 © Professor Michael E. Porter
    46. 46. Agricultural Productivity Selected Countries Agricultural Productivity, 1999 $40,000 $35,000 Australia $30,000 Japan $25,000 New Zealand $20,000 $15,000 Korea $10,000 Malaysia $5,000 Thailand South Africa China $0 0% 1% 2% 3% 4% 5% 6% 7% Change in Agricultural Productivity, CAGR, 1995-1999Source: World Development Indicators, World BankCAON Thailand 2003 05-04-03 CK.ppt 46 Copyright 2003 © Professor Michael E. Porter
    47. 47. Thai Agriculture • Thai agricultural production is low and stagnant • Thai agriculture acts as an overflow valve for the industrial labor market – Agricultural productivity increased somewhat in the 1990s when subsistence farmers left agriculture to work in manufacturing – In the downturn after the Asian crisis, the outflow from agriculture slowed and productivity growth fell back • Thai agriculture is divided in two groups: a few large food companies serving foreign markets, and many small farmers serving domestic markets • The Thai Ministry for Agriculture has a history of corruption and inefficiency. It is currently being restructured • There are local colleges that provide training for agriculture, but there activities are controlled centrally and are not well coordinated with local needsCAON Thailand 2003 05-04-03 CK.ppt 47 Copyright 2003 © Professor Michael E. Porter
    48. 48. Thailand’s Cluster Vision: World Leader in Niche Markets Selected Niches Food: Food: • Important sector with declining world market position Kitchen of the Kitchen of the • Insufficient value chain presences and lack of brands key issues World World Fashion: Fashion: • Three (Textiles/Apparel, Jewelry, Leather) important sectors with Asia Tropical Asia Tropical declining world market share and few linkages Fashion Fashion • Insufficient value chain presence and inconsistent policy key issues Tourism: Tourism: • Important sector with potential for significantly higher value creation Tourism Capital Tourism Capital • Lack of shared vision is critical constraint Asia Asia • Growing sector with small world market share moving gradually out of Automotive: Automotive: protection Detroit of Asia Detroit of Asia • Low level of productivity and innovation key issues Software: Software: • Very small sector of few companies World Graphic World Graphic • Uncompetitive business environment and lack of linkage to existing IT Design Center Design Center activities are critical issues • Concentrating on areas of existing strengths provides the right basis for success • Focus of government policy should be on increasing Thailand’s attractiveness for the cluster, not on the strategic choices of companies in the clusterCAON Thailand 2003 05-04-03 CK.ppt 48 Copyright 2003 © Professor Michael E. Porter

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