Syndicate content

Add new comment

In Thailand, finding the way back into growth: Step 1, switch the supply chains back on

Frederico Gil Sander's picture

As part of its regular monitoring of the corporate sector in Southeast Asia, the World Bank economic team I am part of in Thailand has been working on a short case study of supply chains of Japanese multinational companies (MNCs) in the electrical and electronics (E&E) industry. We wanted to hear directly from firms about how the crisis affected them, how they were able to adjust so quickly to the drop in demand, what the rebound looked like, and what were the prospects going forward to upgrade along the value chain. I have learned a great deal from these interviews, and have become convinced that supply chains are central to understanding the current crisis in Thailand and East Asia more generally.

Some facts: the crisis had a disproportionate impact on manufacturing. In Thailand, manufacturing represents about 40 percent of GDP, but contractions in manufacturing value added have accounted for about 75 percent of the contraction of headline GDP. Within manufacturing, the auto and E&E industries account for the bulk of the contraction. Most of the output in those industries is exported, and more than three-fourths of the decline in Thai exports during the crisis was due to falls in shipments from the auto and E&E industries. My conclusion is that the magnitude of the crisis in Thailand has been driven primarily by these two industries.

This is consistent with the history of the crisis, which originated from a contraction in demand for autos, E&E products and others by consumers in the advanced economies who were directly affected by the crisis. This caused retailers to cancel orders and the shock was transmitted through the supply chain, from the final assembler to the raw material supplier. Due to innovations in information technology and greater reliance on local suppliers, companies in the supply chain operate with very short lead times and were able to shut down production very quickly – though not quickly enough to prevent unsold goods and unused inputs from piling up in warehouses.

As production shut down, orders in early 2009 had to be met from those accumulated inventories. But something was happening: fiscal stimulus and low interest rates started working – including in some unexpected places, like China, which was able to implement a stimulus package large enough to offset most of the decline in external demand. Orders were higher than firms had expected, and the inventories were running out fast.

It was time to flip the switch back on, and here we are witnessing the rebound as production levels recover to meet the higher-than-expected demand (which continues to improve as the stimulus trickles down the economy), but also to replenish those inventories that were used in the beginning of the year.

There are two implications of this view of the crisis:

  • First, the concentration of the effects of the crisis in these specific sub-sectors, which employ few people relative to their output, suggests that GDP figures may exaggerate the real impact of the crisis. Make no mistake: the crisis did reach well beyond the supply chains in autos and E&E. But looking at household consumption (estimated to decline by 1.1 percent this year, the first decline in 10 years) is probably a better gauge of the extent to which people were affected. Compare to the 1997/1998 crisis, when household consumption declined at an annualized rate of 9 percent over two years.
  • The second implication is that Thailand’s recovery in the medium-term remains highly dependent on the return of robust demand for Thai exports, and therefore on developments in the mature economies. Although Thailand will always benefit from being an open economy, some rebalancing towards domestic demand is likely possible by removing constraints to domestic investment and consumption, for example by improving social safety nets to reduce precautionary savings and allow individuals to seek higher productivity but more volatile employment opportunities. Such rebalancing, if coordinated across the region, would open the prospect of greater demand from regional final consumption. However, this process is likely to take at least as much time as the recovery of the mature economies.

So the rebound is welcome, but not a time to relax – the bouncy economic ball is now rising, but gravity will eventually prevail if it is left to its own devices.