http://www.businessweek.com/magazine/in-thailand-ugly-politics-is-testing-investors-resolve-06302011.html

Global Economics

In Thailand, Ugly Politics Is Testing Investors’ Resolve


Considering how confusing and scary the Thai political scene is, it’s easy to see why so many foreign investors have been turning their backs on the place.

Here’s the situation. On Sunday, July 3, Thailand’s voters will choose a ruling party. Nothing unusual about that—except that the election comes just 14 months after thousands of anti-government protesters occupied central Bangkok, prompting clashes with the military that ended with 91 people dead. The violence was broadcast worldwide, and resentments among Thai voters—against the army or against the protesters—are still simmering. The military, which has engineered 10 coups since 1932, has publicly told Thais to vote for the right candidates, yet the party that’s ahead so far in the polls is not the army’s choice.

The prospect of more clashes between the military and protesters prompted overseas investors to withdraw some $1 billion from Thai stocks in June. Government instability was cited as the biggest concern about doing business in Thailand among 13,000 executives surveyed in the World Economic Forum’s “Global Competitiveness Report 2010-2011.” Thailand has also attracted less foreign direct investment than Indonesia and Vietnam over the past three years after outpacing them from 2005 to ’07, Asian Development Bank statistics show.

Yet for most multinationals already established in Thailand, this political drama is pretty much background noise. More than 7,000 Japanese companies, including Nippon Steel, Mazda, Isuzu, and Fujitsu, make automobiles, televisions, air conditioners, and more in Thailand, says Yoichi Yajima, who works with Japan’s External Trade Organization in Bangkok. “Politics and the economy are completely separated, and history proves that,” he says. “Even with many changes in administration, the preferential treatment for foreign companies has remained intact.”

Thailand’s political instability, rooted in differences over how much say rural voters should have in picking the country’s leaders, has contrasted with an enduring openness to foreign companies. “It’s always been one of Thailand’s strengths that we can work well with foreigners,” says Chalongphob Sussangkarn, a former finance minister and president of the Thailand Development Research Institute. “That is partly because we were never colonized by any foreign power.” All of Thailand’s political parties have backed the use of tax breaks and special economic zones to attract foreign capital.

Toyota (TM), General Motors (GM), and Ford (F) have used Rayong, a special economic zone in the south, as a major production hub, profiting from tax incentives and trade arrangements that grant access to Southeast Asia’s 592 million consumers. Nissan (NSANY) chose its Thai factory to make the latest version of its successful subcompact, the fuel-efficient March. Peter Fleet, president of Southeast Asian operations at Ford, says the company has invested $1.3 billion in Thailand over the past three years.

Dow Chemical (DOW), which has been in Thailand for 45 years, is opening a plant later in 2011, part of $3 billion in new investment there. Molly Zhang, country manager for Dow Chemical, says one strength of the Thai workforce is its tech proficiency. Although Thai workers are not as skilled as Singapore’s workforce, literacy is high, productivity is good, and the government has been working to boost the skills of engineering grads.

In many ways the Thai economy is more exposed to global conditions than to local politics. Last year, when the political violence was the worst in two decades, tourists came in record numbers and economic growth hit a 15-year high of 7.8 percent. This year, growth will moderate to 4.5 percent.

Even Thailand’s biggest boosters, however, say the government can do a better job of managing the economy. “Our companies have endured coups over the last few decades and survived,” says Hugh Young, who helps manage $70 billion in Asian equities at Aberdeen Asset Management Asia, in an e-mail. “The sadness is that they and the country could have done so much better in a stable, mature democracy with strong institutions.”

Kongkrit Hiranyakit, president of the Tourism Council of Thailand, agrees: “Though the number of tourist arrivals is improving, it would have been better without the unrest. We projected that we would get 18 million travelers last year, and we only got 15.9 million.” Hotel operators, he adds, haven’t been able to raise prices in three years.

Nandor von der Luehe, chairman of the Joint Foreign Chambers of Commerce in Bangkok, says Thailand is not keeping up with regional rivals. “It’s not that Thailand becomes worse, as such,” he says. “But the other ones are lifting the bar.” Restrictions on investments in telecommunications have made Thailand one of Southeast Asia’s only countries without high-speed mobile-phone services, while the Philippines is already working on a 4G wireless network. Heavy regulation of the financial sector limits the amount of capital available to smaller foreign companies.

The wealth gap may also eventually affect foreign investment. Farmers in the north and northeast earn an average income that’s about a third of Bangkok’s, according to data from the National Statistical Office. That has prompted both major parties to promise handouts to the poor and a minimum wage increase of 25 percent to 99 percent in some areas, a move that manufacturers fear may erode their competitiveness.

As Thais seek to reconcile their economic and political divide, long-term residents like David Lyman are keeping things in perspective. All the governments since absolute monarchy ended in 1932 have been pro-business, says Lyman, the chairman of law firm Tilleke & Gibbins and a governor of the American Chamber of Commerce in Thailand. “In spite of its inept governments and its continued chaotic political situation, Thailand always survives,” Lyman says. “They may be foolish, but they’re not stupid.”

The bottom line: Longtime investors are shrugging off political turmoil in Thailand because the country has traditionally treated foreign companies well.

Ten Kate is a reporter for Bloomberg News.
Jordan is Bangkok bureau chief for Bloomberg News.

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