Cablegate: High-Tech Lamphun Shows Competitive Potential and Investment

DE RUEHCHI #0160/01 2910653
P 170653Z OCT 08



E.O. 12958: N/A


CHIANG MAI 00000160 001.2 OF 003

Summary and Comment

1. As host to many foreign high-tech manufacturing firms, the
Northern Regional Industrial Estate (NRIE) of Lamphun province
is both a model for the potential of northern Thailand as a
producer of sophisticated electronics products as well as a
reality check of the challenges foreign investors face in the
region. The competitiveness of electronic components produced
in Lamphun in the global supply chain of consumer electronics is
evidence of the potential for the northern region as a high-tech
manufacturing hub. However, the crowdedness of the NRIE, the
red tape that limits the construction of new estates, and the
on-going political crisis in Bangkok are barriers to the
expansion of high-tech manufacturing in northern Thailand.

2. Comment: The success of the Northern Regional Industrial
Estate, measured by the loyalty of firms functioning on the
estate and the estate currently operating at maximum capacity,
suggests that Lamphun can be a model for the construction of new
estates in northern Thailand. Moreover, the niche industry that
foreign electronic parts-producing firms have developed in
Lamphun over the past twenty years is an indicator that labor in
the region can be competitive in the global production chain of
small, high-tech electronics. However, the expansion of the
Lamphun estate and the construction of new estates in the north,
as government-initiated projects, will likely remain on hold
until the on-going political crisis in Bangkok has subsided and
some degree of normalcy returns. Remaining red tape that
hinders NRIE expansion will also need to be addressed in order
for northern Thailand to reach its full potential in this niche
market. End summary and Comment.

Lamphun to China to the World

3. While agriculture and tourism remain the cornerstones of the
regional economy, the tiny province of Lamphun, located adjacent
to Chiang Mai, is a shining example of the potential competitive
advantage for the region as a hub of high-tech electronics
manufacturing. ConGen staff visited the 21-year-old Northern
Regional Industrial Estate (NRIE), where a concentration of
foreign firms operate to produce a variety of goods, most
notably small, lightweight electronic components for consumer
electronic products, such as cell phones and laptops. The 98
firms present in the NRIE also manufacture a range of other
goods from animal feed to cosmetics to lingerie.

4. The rising stars among goods produced at the NRIE are the
highly sophisticated - and often expensive - high-tech
components for electronics goods, which include optical lenses,
transponders, glass disks for hard drives, and other parts used
in electronic goods. Most producers of these products are
Japanese, though one American firm, Innovex, produces these
goods as well. (Note: Currently two wholly American-owned and
four partially American-owned firms operate at the NRIE.)

5. The Japanese firm MuRata, the first Japanese electronics firm
to start operations on the Lamphun NRIE, selected the estate in
1989 after considering other locations in ASEAN, including Kuala
Lumpur, Bangkok, and various cities in Indonesia. According to
the firm's managing director, Lamphun's NRIE was selected
because of local labor's careful attention to detail and the
northern Thai climate, which they described as comparable to
Japan's. Because of the low cost of shipping small,
light-weight electronics parts, the inland location of Lamphun
province does not add significant costs to operating there,
while the relatively lower cost of labor vis-a-vis Bangkok was
an added advantage. MuRata imports many of its raw materials
from Japan (what the managing director referred to as "trust
relationships" that keep the firm loyal to its kin in Japan) and
exports the parts - about 80% of the Lamphun factory's output -
back to Japan. MuRata exports about 70% of its goods by land
from Lamphun to Bangkok for shipment by sea and 30% by air
directly to Japan.

6. While MuRata tends to follow this Japan-focused supply chain
model, most other firms, such as the U.S. firm Innovex, tend to
fit into another major cycle: parts are produced in Lamphun,
then assembled in China, from where final goods are shipped to
world markets. Innovex, which as of three years ago
concentrated all manufacturing operations in Lamphun, imports
its raw materials from elsewhere in Asia, primarily Taiwan.
After producing the electronic parts, mainly "flexible
interconnects" (a component for computer hard drives), Innovex

CHIANG MAI 00000160 002.2 OF 003

exports the components to China where final assembly takes place
before shipment to U.S. or other markets. Innovex confirmed
that many electronic parts producers on the NRIE follow this
production pattern.

A Competitive Eye for Detail

7. The lasting competitiveness of the NRIE in Lamphun, despite
the tendency of some firms to shift manufacturing to relatively
cheaper China and Vietnam, is attributed to northern Thailand's
abundant and semi-skilled labor force. According to electronics
firms operating on the estate, Thai factory workers, who tend to
be overwhelmingly female (ref A), are relatively more skilled at
highly detailed work. The result is higher quality goods that
may be slightly more expensive in world markets but are
certainly more competitive.

8. Innovex, for example, is able to use certain laser
technologies to produce its hard drive components because of
local labor's ability to learn and implement this sophisticated
production process. According to Innovex, competitor firms that
do not use laser technology produce cheaper but lower quality
parts that are less competitive. Most notably, Innovex recently
relocated a highly capital-intensive portion of its production
process to Lamphun from the U.S. It was the last of Innovex's
manufacturing operations in the U.S. and is a testament to the
firm's confidence in Lamphun as a high-tech production center.
Innovex also reported that some of its clients who had switched
to lower cost suppliers in China in previous years have since
returned to Innovex because, despite the higher prices, the
clients were far more confident in the quality of Innovex's

9. Similarly, MuRata began manufacturing in Beijing in 1994 and
outside Shanghai in 1995. MuRata complained to us that managers
face a variety of problems in China including bad quality
control of products and bad behavior and performance among
workers, which Lamphun-based managers said are not problems
here. MuRata's managing director noted that China's strict
labor laws controlling voluntary labor mobility across provinces
and limiting individual workers' time spent in certain coastal
manufacturing areas cause the average length of employment to be
only two years, wheras MuRata's Lamphun factory boasts a
ten-year average. Thus, although average wages tend to be lower
in China, MuRata has found it can save costs on re-training in
Thailand, where labor tends to be more loyal and less mobile.

Estate Growing Pains and Other Challenges

10. The crowdedness of the NRIE is another indicator of northern
Thailand's appeal as a high-tech manufacturing center. The NRIE
in particular is attractive to foreign firms because it includes
a Board of Investment certification that allows for a range of
tax incentives and duty-free export from Thailand (ref B). For
potential new investors, however, the bad news is that the NRIE
is full. The NRIE Director said the estate is trying to expand,
but is facing land procurement challenges. (Innovex noted it is
monitoring the potential expansion of the NRIE since Innovex
wishes to increase its own operations.)

11. The NRIE in Lamphun covers the 16 northern-most provinces of
Thailand. The NRIE Director said the Industrial Estate
Authority of Thailand (IEAT), the state enterprise that runs the
NRIE, is eager to develop new industrial estates in the north.
As a semi-government owned and operated organization, however,
the IEAT faces significant obstacles when trying to develop a
new estate unilaterally. In particular, the challenges of
government land procurement are significant relative to a
private acquisition of land. Thus, joint-ventures for new
estates between IEAT and foreign firms would make land
acquisition and construction significantly more efficient. A
feasibility study is currently in process for a new estate in
Chiang Khong, a Thai-Lao border city along the North-South
economic corridor of the Asian Development Bank's Greater Mekong
Subregion project.

Despite Hard Times, An Optimistic Future

12. Economic optimism seems to be the norm across the NRIE,
despite the current global financial situation, the red tape
that hinders expansion, and the political situation in Bangkok.
As noted, the NRIE is eager to expand its Lamphun estate, and
the IEAT is seeking ways to build new estates in the north.

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Saha Group, a Thai firm, has developed a nearby private
industrial estate which is quickly filling with domestic and
foreign manufacturers who specialize in handmade products,
mainly jewelry and textiles. MuRata is forecasting slightly
lower profit margins at present, but is seeking to expand
operations in the automotive parts market and is optimistic
about returns on that new venture. Innovex is boasting
sustained growth and forecasts above-expected margins in the
coming quarter. Recently acquired new clients have boosted
Innovex's growth forecasts, and the firm is even considering
reopening its previously closed factory in northeastern Thailand
to handle the increasing demand for its products.

Labor: Organizing, but Content

13. The recent formation of two industry-wide labor unions, one
by electronics factory workers and another by jewelry and gem
workers, has raised awareness of potential labor issues at the
NRIE's nearly 100 factories. The NRIE Director and firms
operating on the estate dismissed any significant labor issues.
They noted that the vast majority of workers' complaints are
related to benefits rather than legal versus illegal labor
conditions. Their claims were generally consistent with the
comments by the Lamphun-based Friends for Friends labor rights
NGO. At present, the electronics union only has members from
the Thai subsidiary of the Japanese firm Hoya; while the jewelry
union has members from only two firms. (Note: On August 4, Hoya
Glass Disk Thailand, a subsidiary of Hoya Corporation Japan,
dismissed 43 workers without advance notice, and the Ministry of
Labor revoked the license of the company's labor union, stating
that the labor leaders lack proper qualifications. End Note).

14. Representatives of the Friends for Friends NGO stated that
most workers at the NRIE are trapped in a never-ending overtime
cycle in which laborers are enticed to work overtime in order to
reach company set production goals. According to the NGO, goals
cannot be reached without working overtime. Moreover, as
production goals are met, the employers continue to increase the
goals forcing workers to contribute more and more overtime
hours. The NGO complained that the cycle causes health risks in
that workers eventually forgo meal and restroom breaks in order
to continue working; however, examples of such health-related
incidents seem to be few. The NGO admitted that, with the
exception of some mysterious factory worker deaths in 1992 (ref
A), no major legal issues have arisen at the factories.

15. This cable was coordinated with Embassy Bangkok.

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