Manufacturing and service sectors would grow slightly in 2008

The industrial sector stayed sound in the first six months of 2008, even though the elected-government failed to make any improvements to the unfavourable business climate. ”Most Thai private industrial companies are very competitive and they could survive a tough situation without any support from the government,” said Santi Vilassakdanont, chairman of the Federation of Thai Industries. ”They are even performing well amid numerous negative factors.”

He noted that production for export was particularly competitive.

The main contributor to performance worries was volatile oil prices, which played a major role in slowing economic growth and driving up costs for raw materials, operations and transport for all industries. This led the export sector to maintain its double digit growth for 2008.

Record-high agricultural prices also spelled positive growth for exports as well as boosting the purchasing power of consumers in the farm sector, which helped to offset the shrinking wallets of those who earned a living in other sectors.

”So far, I would say that the overall industrial sector is still growing steadily,” Mr Santi said.

Political conflicts wouldn’t make a negative impact on the industrial sector unless the clash between political groups becomes uncontrollable, which would dampen consumer and business confidence, he said. That could trigger an economic recession in the country.

”Look at Vietnam and China. Who cares what system the countries are? The investors keep going there because their governments focus on boosting their economies,” Mr Santi pointed out.

The dour business climate hasn’t changed despite the introduction of a campaign dubbed ‘Thailand Investment Year 2008′ by Suwit Khunkitti, the industry minister and deputy prime minister, when he first took office.

The main sector that concerns Mr Santi is small business operators because of their limited access to credit.

”Some of them have started to go out of business because of the economic slowdown. If the political situation gets worse, it will be the last straw for them,” he said.

Small and medium businesses rely on the bigger manufacturers as suppliers for the large companies who choose to outsource some orders to these small producers instead of expanding their production to meet their rising fixed costs.

In addition, the purchasing power of local markets was also shrinking severely because of inflation, which affects the producers who supply the local markets.

Some small companies in apparel, construction and furniture were the first ones to be dampened by economic decline according to an FTI survey. Higher costs had depressed their margins so severely it was not worthwhile to produce even though orders from overseas remained strong. Some companies decided to take fewer orders just to keep their staff and maintain relations with important clients.

In the first quarter most of the industrial indices still showed strong expansion, led by electronics, computers and components, air-conditioning and automobile and auto parts industries, said Atchaka Brimble, the director-general of the Office of Industrial Economics.

However, there were some export industries that were affected by the US economic recession, such as suitcase production, which dropped by nearly 60% as some plants were closed.

The furniture market for steel and wooden items declined 2.6% because both US and local demand were weak.

The outlook for the second half is poor as negative factors such as oil prices and high material costs will linger.

The steel and construction materials industries will need to be monitored, as their raw material prices keep jumping in line with the global market, said Mr Santi. But the baht’s strength against the US dollar and other major currencies will help offset higher costs.

Higher raw material prices could also affect related industries such as contractors and products that are produced from steel.

”Over the next few months, the government should seek measures to take care of small and medium businesses. Otherwise, disaster could happen when weak businesses cause the whole system to collapse,” he noted.

Another challenge in the second half will be the toll the global economic slowdown will take on the investment climate.

Prospective foreign investors may hesitate while manufacturers who already have bases in Thailand will maintain their production, Mr Santi predicts.

The outlook for small and medium-sized operators is gloomy in the second half because of low competitiveness and lack of financial support.

The Office of Small and Medium Enterprises Promotion (Osmep) projects the number of SMEs in both the manufacturing and service sectors would grow slightly by 1.3% in 2008, while their return from operations would fall sharply from 7.10% a year earlier to between 3.6% and 5%. bangkok post