The Effect of Minimum Wage Hike on Auto Industry

ผู้เขียน: Dr. Sutapa Amornvivat

It has been half a year since the government embarked upon the 40% nationwide minimum wage increase.  Another surge is scheduled for January.  Many have expressed concerns over threats of companies relocating production base; some have argued in its favor for subsequent productivity improvement.  Today, I would like to revisit its impact on Thailand's automotive industry-largely concentrated in the provinces wherein the minimum wage rate was raised to 300 baht: who shared the gain, who suffered the pain, and what adjustments we have seen in light of this policy's implementation.

The on-going labor shortage together with the positive outlook for car production has somewhat strengthened the bargaining power of workers in the auto industry.  Consequently those initially earning a minimum wage have benefited from the scheme, but unskilled labor constitutes less than one-third of total workers employed in the auto industry, mostly in small and medium-sized labor-intensive auto parts manufacturers.

However, the lack of clear enforceable guidelines for the wage increase could make these minimum wage earners' gains lower than what the scheme originally intended.  Instead of simply bumping up the wage, employers incorporated pre-scheme non-financial benefits such as free lunch, medical welfare, life insurance into the supposed wage increase. Such practice is not illegal as the minimum benefits enforced by law consist only of contributions to the Social Security Fund and the Workmen's Compensation Fund.

Hardly have the newly-employed been sharing the gain, as companies opted to covert them to part-time workers in order to cut the burden on other welfares.  In addition, these part-time workers usually do not participate in labor union, thus weakening their negotiation power and offering little incentives for employers to engage them in skills training.  On the whole, existing labor development programs were cut in an attempt for companies to cope with higher labor costs-effectively impeding labor skills improvement necessary for Thailand's auto industry to step up to become a higher value-added industry in the future. 

Firm size is also key to determine the impact of wage increase.  While automotive assembly plants and Tier 1 suppliers - most of which are large-scaled enterprises - had already been hiring workers at above the minimum wage, the adverse impact mainly weighed in on smaller firms in Tiers 2-3 auto parts suppliers who are highly labor-intensive and limited by diseconomies of scale. Thai companies that have grown together with its first-generation workforce are often reluctant to replace their aging labors with machinery.  An auto parts entrepreneur shared a case about his Japanese partner withdrawing ownership from the firm blaming on inability to reduce the substantial share of labor cost to below 40 percent of total production cost.  This also reflects more worrisome deficiency in managing costs among SMEs.  Not only are costs of energy and electricity deemed uncontrollable, prices of raw materials are also predominantly determined by the global market.  They can be pre-agreed only 3 months in advance.  In this regard, the larger enterprises tend to be more adept in managing non-labor costs, let alone the higher potential of upgrading to more capital-intensive production.

Fortunately for auto parts suppliers, a rosy medium-term outlook for car demand presents a silver lining for minimum wage hike.  The announced production target of 3 million car units by 2015 will boost demand for auto parts along the value chain including those SMEs in Tiers 2-3 and lower. 

Having mentioned the disadvantages of minimum wage increase on the marginalized workers in small- and medium-sized auto parts manufacturers, one question remains whether there is a threat of relocating the production base. 

Yes, and it would not stay just a threat if Thailand's competitiveness were to remain stagnated. Global sourcing is not new; severe meteorological disasters in recent years both in Thailand and abroad helped underline the importance of diversifying production base.  Relatively cheap labor had formerly been the comparative advantage of Thai automotive suppliers; it is no longer the case.  Yet, cheap labor is not the only factor. If only a lower wage counted, there would rarely be successful bidding for Thai suppliers.  Adaptive and more advanced skills of Thai workers still hold an edge over the lower labor wage.

This edge may not last, as skilled workforces in our neighboring countries with markedly lower labor costs are fast growing. Take the motorcycle production as an example.  Thanks to its less complex production process, a larger share of motorcycle production has been expanded or even moved from Thailand to Vietnam, enjoying nearly 60% less of labor costs.  This expansion is partly due to the huge potential for motorcycle sales in the Vietnamese market.  Accordingly, relocation of the production base for automotive & parts industry to lower-wage countries will depend on how quickly those countries can develop prerequisite labor skills for auto manufacturing.  Nevertheless, relocation necessitates close relationship and effective logistics among units along the value chain of car production- not an easy task to achieve for newly open markets. 

A downward trend in the profit margin of small- and medium-sized auto parts suppliers is indeed our concern in the longer term.  Although the selling price of auto parts to assemblers is contractually specified, assemblers normally ask for a cut after the first year excusing no longer R&D expenses for designing products to fit the new car model in subsequent years. 

While evidence of increased productivity has not been apparent, the wage increase has put additional pressure on profit margin and eventually eroded Thai auto parts competitiveness, especially among small suppliers.