On the road to the AEC...how can SMEs adapt and thrive?

The road to the AEC: How should Thai SMEs plan?  

Thailand ' s small and medium-size enterprises (SMEs) today face domestic and international conditions that are changing rapidly.  Now more than ever, it is worth considering whether these SMEs are prepared to handle the challenges, and just how they might seek benefits from any opportunities that would arise.    

SMEs face increasing challenges. The rise of the minimum wage to 300 baht per day is a domestic factor that will directly affect operating costs, especially for SMEs in the services sector and in labor-intensive industries. Another challenge is rising shortages of labor, as more and more workers turn to self-employed jobs, and as high turnover rates result from skilled workers moving into larger production industries. Thailand's integration into the ASEAN Economic Community (AEC) will also have both positive and negative impacts on SMEs. There will be more opportunities for trade and investment, but at the same time, pressures will increase.

An analysis of the effects of the rise in the minimum wage shows that there will be both direct effects from increased labor costs and indirect effects from costs passed through via other businesses in the supply chain. Direct effects will inevitably hurt companies that rely heavily on unskilled labor and those that have labor costs as their main cost, such as these in the agricultural services, and construction sectors. Businesses with long, complicated supply chains will be affected more from indirect costs. These businesses, such as food and beverage and vehicles and vehicle parts, will see higher costs for goods and services on the form of rising price of raw materials and logistics pushing through the supply chain. As a result, profits of these businesses will be affected by both direct and indirect effects of the raise in the minimum wage to 300 Baht. We expect that overall costs may increase up to 8% if companies are able to pass through 100% of costs. However, If the ability to pass through costs is less than 100%, the effect on costs may be reduced to 3%, but companies will still see a 4% reduction in their profits due to the burden of costs that cannot be passed through.

Aside from the rise in the minimum wage, labor shortages also present a challenge to SMEs. As the Thai labor force begin decreasing after 10 to 15 years from now, a scarcity of workers will become a large problem, especially in the manufacturing sector, where the effects can already be seen. Many Thai workers have turned to self-employed jobs. And there is a significant skill mismatch issue, involving an insufficient supply of the skills and experience that businesses need from workers. This means that workers will be harder to find and SMEs will have to pay more attention to increasing labor productivity

SMEs that suffer direct and indirect effects from the minimum wage hike should act promptly to increase labor productivity. They can do go by such methods as using technology to reduce reliance on labor. These companies should also value-added to their products and services, while training workers and upgrading skills to enhance labor efficiency.

SCB EIC has surveyed the opinions of SMEs regarding business prospects and their readiness to handle both domestic and external factors. Overall, SMEs are optimistic about the next one to two years, despite the challenges, especially the rise in the minimum wage. SMEs assess that the higher minimum wage will raise manufacturing costs by an average of 12%, which is higher than overall industries impact estimated by EIC. The service sector expects to be affected the most, because it relies on high levels of labor and is less able to pass through costs to consumers. SMEs also face the issue of labor shortages, especially among companies that require skilled labor, because they are unable to meet this need with foreign unskilled workers. However, most SMEs have started to implement new technologies to reduce long-term costs.

Regarding the AEC, most SMEs have little understanding or knowledge about it, and believe that liberalizations will have either a positive impact or none on their business. Businesses in the agricultural and manufacturing sectors foresee opportunities for exporting into ASEAN, while retail and services businesses see prospects to build new business alliances. On the other hand, Thai SMEs are also concerned about an increase in competition from within ASEAN. Most SMEs have prepared for this pressure by finding cheaper raw materials in ASEAN and improving their internal structures.

Beyond getting ready for new challenges, Thai SMEs need to look into opportunities to expand trade and investment in many different forms, such as through border trade, by operating businesses in response to global trends, and expanding investment into neighboring countries.

Border trade is an opportunity that SMEs should not overlook. Trade routes with neighboring countries still offer plenty of potential for growth, especially for various consumer products and construction goods. Demand in both categories has been growing a lot recently. Cross-border trade is another interesting channel for SMEs, especially the opportunity to trade with an economic superpower like China, which has a large consumer market with ever higher purchasing power. If overland transportation to China improves and becomes more convenient in the future, opportunities for trade will increase. Moreover, the establishment of Special Economic Zones over the border in neighboring countries will also add additional channel for trade and investment for SMEs that can supply raw materials, products and services to accommodate growth in these zones or construct amenities in them.

Global trends generate a variety of opportunities for Thailand ' s SMEs.  For example, innovations in communications technology, such as social networks, are marketing tools that can empower SMEs to become more competitive. For example, these innovations present new opportunities to respond to fast-growing demand in emerging markets. There is also rising demand in niche markets, such as among environmentally conscious consumers, which generates growth potential for "green" businesses.  Opportunities even result from the changing demographics of aging societies. These are all quite major opportunities for SMEs.

Thai SMEs should also utilize opportunities from liberalizations under the AEC to expand trade and investment into neighboring countries with lower manufacturing costs, which can help competitiveness. The best trade and investment opportunities for Thai SMEs are in Cambodia, Laos, Myanmar and Vietnam, known as the CLMV countries. Industries that present opportunities for market penetration include trading, especially consumer goods and goods related to housing and construction materials, as well as construction services, vehicle repairs, travel services and businesses which create linkages with export manufacturers. In considering investment destinations, companies should study which competitive advantages they can best build upon, in order to choose the appropriate country and find the right business alliances.  SMEs should target business investments to best suit the business sectors that the destination country is officially supporting. If companies invest in businesses that enjoy the support of the target country's government, barriers will be reduced and investment returns will be higher.

It is now time for Thai SMEs to transform negative impacts from such factors as rising labor costs into motivators to develop to the next level. In reality, Thai SMEs have many channels through which to expand, such as via border trade, capturing new markets and adapting to changes in consumer behaviors, as well as seeking opportunities from AEC liberalizations. Because of increasing competition in regional and global markets, consumers can more easily purchase goods from many different suppliers. Prices of goods will therefore likely decrease, unless entrepreneurs increase the value of their products to support higher prices. So now is the time for SMEs to leave their comfort zone in traditional domestic markets to find new channels to increase earnings and counter profit erosion from rising domestic costs.

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