This is the first of a two-part series on why Vietnam has emerged so rapidly as an important investment destination and how Thailand and its investors should adjust to the new environment.
Over the past few weeks, Thai media have shown disgruntled employees of various companies either protesting to close down streets or stripping in front of Government House to demand that authorities intervene and help sort out their compensation problems.
The news reports about companies including Thai Silp, a garment manufacturer, and the footwear unit of one of Thailand's largest companies, Saha Pathanapibul Plc - all closing their operations as Thailand continues to lose its competitive advantage in the labour-intensive industry - are not likely to be the last that we are going to hear about. Instead, they are among the first in a long series.
The reason behind the closures is not new. Actually, it is something that has already been written on the wall a while back: Thailand is losing its competitive advantage to new and emerging economies with lower labour costs.
The emergence of countries such as Vietnam and China has taken its toll on the labour-intensive industries in Thailand. The impact has become even more severe as the country's currency continues to strengthen against the US dollar at a greater rate than other regional currencies, adding salt to the wound.
As part of the effort to see how and why Thailand is losing its competitive edge and what should Thai companies do, I have tried to compare the two countries and come up with the reasons for Thai businessmen to look at other areas of production if they intend to continue in their area of expertise that requires high labour content.
Among the emerging countries to which labour-intensive industries are shifting is Vietnam, a country that has shown tremendous growth over the past few years. It has also opened its doors to foreign investments like no other country in this hemisphere of the world has done.
Labour costs Vietnam has started to become the haven for low-cost production, as foreign companies flood the market to take advantage of the low but highly skilled labour force in the country.
It has a far lower labour cost than most countries in this region, averaging at around $45 to $55 a month (depending on provinces). The 17% benefits (15% for social security and 2% for health) bring the total cost to the equivalent of between 1,800 and 2,200 baht per month, a far cry from what businesses have to pay in Thailand.
The labour cost in Vietnam is 2.5 to three times cheaper than that in Thailand. Even in larger cities such as Danang, it is just $45 for a month of 48-hour work weeks.
In addition to being cheap, Vietnam's labour market is plentiful. Around 54% of the 84 million people living in the country are of working age. Vietnamese workers are also very diligent and love to work overtime to make more money.
By comparison, Thailand has to bring in low-cost workers from neighbouring countries such as Burma and Laos for its labour-intensive sectors.
Exchange rates The exchange rates of Thailand and Vietnam are two completely different stories. As the Thai baht continues to strengthen, the Vietnamese dong continues to depreciate.
In 2006, the baht strengthened by 16% against the dollar while the dong depreciated by 1%. This brought a total difference of 17%.
In the first six months of this year, the Thai baht strengthened by another 7.8% while the dong depreciated by 0.5%.
All told, over the past 18 months, we have already lost 24.3% in exchange-rate difference.
Therefore, it is not surprising to see a lot of orders for labour-intensive products shifting to Vietnam and away from Thailand.Export promotion Vietnam, for its part, has been vigorously promoting its export industry.
As part of its promotional package, the country has waived import taxes for raw materials destined for re-exporting after processing. Hanoi therefore gives nine months or 275 days for imported goods to be processed without requiring any kind of guarantee. We will explore this subject further next week.
Wittaya Supatanakul is Bangkok Bank Plc's adviser on Vietnam. He was the general manager for Bangkok Bank's Ho Chi Minh City's branch before becoming the adviser on the bank's Vietnam strategy.