Chinese firms ramp up presence in Thailand(2)

Pros and cons

Apipong Khunakornbodintr, director of the investment promotion section at the Royal Thai Embassy in Beijing, said a major benefit for companies like COFCO building facilities in Thailand is to avoid tariff barriers.

Holley Group Electric (Thailand) is an example - a power meter maker subsidiary of Holley Group China which has made great use of its factory in Thailand.

It used to face a 30 percent special tariff when trying to export to Peru, for instance, from the Chinese mainland.

The establishment of a factory in Thailand helped it get around that tax barrier, as no such barriers exist between Thailand and Peru, and some other countries.

"That's the initial reason for many Chinese investors coming to Thailand, but once they are here, they discover there are many more advantages," Apipong said.

According to information from BOI, foreign investors are also exempt from corporate income tax for a maximum of eight years, followed by a 50 percent reduction for another five years.

As a result of those kinds of incentives, the number of approved investment projects from the Chinese mainland increased from 16 in 2006 to 36 in 2011, with the total investment volume up from 2.5 billion baht ($79 million) to 16.9 billion baht.

But not all business environments are perfect.

"Compared with domestic workers, local employees are more mannered, but at the same time, less flexible," said Liang.

Although salaries in Thailand are lower than in China, the efficiency may not be as high either, because local workers often need to managed more closely, can lack initiative, and working overtime is just "unimaginable".

"But on the other hand, the quality is good, and a high standard can be guaranteed," he said.

Meanwhile, another major issue being reported by Chinese companies is an overcapacity of firms in some sectors, leading to vicious price competition among rival investors.

COFCO has to share the market with two other Chinese-funded citrate producers in Thailand, including privately funded Sunshine Biotech International.

According to Apipong, there is no surplus in production in this case, yet, but elsewhere he said some Chinese investors are exploiting the local market, by simply using their operations in the country as export bases.

"Price competition is unlikely, as we will normally ask investors to detail their pricing structures within their investment contracts," he said.

However, with more Chinese companies entering the local market, favorable conditions such as tax reductions compared to China for exporters could be cancelled for certain industries over the next five years, to avoid any possible overcapacity.

"Chinese companies should work closely with organizations such as the Chinese-Thai Enterprises Association to build relations and discuss their competitiveness and common practices to avoid issues such as over-capacity," he adds.

According to the BOI, the majority of Chinese companies investing in Thailand are still centered on the manufacturing, whereas higher-value added industries such as alternative energy are target sectors that Thailand is hoping will attract more overseas investment.

Increasing cooperation

During a meeting with his Thai counterpart Yingluck Shinawatra in Beijing in April, Premier Wen Jiabao proposed expanding bilateral trade between the two countries to $100 billion annually before 2015, enhancing cooperation particularly in telecommunications, technology, energy and agriculture.

Yingluck said her country would play a positive role in boosting ASEAN-China cooperation.

According to Wang Jian, an officer with the ASEAN-China Center, established last year to promote trade and investment exchanges within the area, the trade volume between China and ASEAN countries is expected to reach $500 billion in 2015 form the current level of $360 billion.

During a visit to China in August, Thai Industry Minister Chaiwuti Bannawat was quoted by Guangxi Daily as saying that investment from China, worth another 20 billion baht this year, is likely.

The Thai government is actively pushing construction of traffic networks, including a high-speed railway linking southwestern China's Yunnan province to the northeast of Thailand.

"The northeast of Thailand will be a transport hub for the ASEAN region after the network is established," said Wiboon Khusakul, Thailand's ambassador to China.

"Chinese businessmen are more familiar with the coastal region in east Thailand, but know very little about the north where there are abundant opportunities."

Although the project is still at the discussion stage, Wiboon said it would only be "cost-efficient" if the railway finally reaches Singapore, suggesting speeds could reach 250-300 km per hour.