VZCZCXRO8647
PP RUEHCN RUEHDT RUEHGH RUEHHM RUEHVC
DE RUEHCHI #0128/01 2390951
ZNR UUUUU ZZH
P R 260951Z AUG 08
FM AMCONSUL CHIANG MAI
TO RUEHC/SECSTATE WASHDC PRIORITY 0825
INFO RUCPDOC/USDOC WASHDC 0010
RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHOO/CHINA POSTS COLLECTIVE
RUEHCHI/AMCONSUL CHIANG MAI 0896

UNCLAS SECTION 01 OF 02 CHIANG MAI 000128 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EAGR ECIN ECPS EFIN EIND EINV ELAB ELTN CH
TH 
SUBJECT: NORTHERN THAILAND CREATES A SPACE FOR U.S. INVESTMENT 
 
CHIANG MAI 00000128  001.2 OF 002 
 
 
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Summary 
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¶1. Northern Thailand boasts many attributes that are attractive 
to foreign investors, including low labor and land costs, making 
the region an inviting alternative to the growing costs of 
operating in Bangkok.  Moreover, favorable tax incentives in the 
north, combined with sophisticated transportation networks that 
link the land-locked north to the Lamchabang seaport near 
Bangkok, are defining the region as ripe for U.S. investment. 
This favorable investment climate is also beneficial to other 
foreign investors, including the Chinese, who will be the 
primary beneficiaries of infrastructure projects slated for 
completion in the next few years.  Nonetheless, northern 
Thailand is creating an investment climate that could draw U.S. 
investors, whom government officials believe might help balance 
China's growing economic influence in the region.  These pull 
factors form a solid foundation, but the region's leaders will 
also need to mount an effective marketing strategy in order to 
sell U.S. investors on northern Thailand.  End Summary. 
 
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Incentives for FDI in Northern Provinces 
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¶2. Northern Thailand's low labor and land costs make it 
domestically competitive for economic activity.  Now, creative 
tax incentives are making the region ripe for foreign direct 
investment (FDI) as well.  Thailand's Board of Investment (BOI) 
categorizes the 17 northern provinces as zone 3, which boasts 
the country's most generous tax incentives for foreign 
investors.  In zone 3, for example, firms enjoy an exemption 
from import duties on machinery and from corporate income tax 
for the first eight years of operation followed by a 50% 
exemption over the next five years.  They also enjoy double tax 
deductions on expenses such as transportation costs, 
electricity, and water usage for ten years.  In the three 
least-developed provinces of zone 3 (Phayao, Phrae, and Nan), 
additional incentives are provided, such as a tax deduction 
valued at 25% of the construction costs for the first ten years. 
 
¶3. These incentives have been a magnet for about $520 million of 
U.S. capital in northern Thailand over the past 20 years.  This 
investment represents a range of sources, from large 
corporations like Pepsi-Cola to small enterprises such as fly 
fishing firms, and includes both the manufacturing sector and 
the agricultural sector. 
 
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Land. 
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¶4. The success of two large corporations in northern Thailand is 
a testament to the potential for American investment in the 
region's arable and affordable land.  Pepsi-Cola's Frito-Lay 
factory in Lamphun province, which has been in operation since 
1995, is an example of how American business and Thai government 
cooperation can lead to profit generation for the firm and 
economic development for northern Thailand.  Frito-Lay has 
worked closely with Thailand's Royal Project Foundation and the 
Ministry of Agriculture and Cooperatives to develop a profitable 
potato farming sector, which provides revenue for local farmers 
and low-cost inputs for the snack foods it produces for sale on 
the domestic Thai market.  Currently, Pepsi-Cola invests about 
$75 million in northern Thailand and purchases over 30,000 tons 
of potatoes annually from over 5,500 local farmers.  The company 
is concerned, however, that local production of potatoes cannot 
meet production demand for potato chips and is advocating for 
lower tariff rates on potatoes imported from the U.S. 
 
¶5. While Pepsi-Cola's cooperation with the Thai government has 
contributed to its success in the region, Monsanto, an 
agro-technology firm that operates in Phitsanulok province, 
cites good climate and farmer loyalty as the primary benefits of 
investing in the land of Thailand's lower north.  According to 
Monsanto, Phitsanulok is an ideal destination for its investment 
because:  it is the center of Thailand's corn belt; local 
farmers abide by the company's regulations and remain loyal to 
the company; and the climate is at low risk for natural 
disasters.  Monsanto's success in investing $37 million in 
northern Thailand and contracting 15,000 Thai farming families 
has led it to expand its investment into two other agricultural 
firms operating in the north, Cargill and the Seminis Company. 
 
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.and Labor 
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¶6. While some U.S. firms have benefited from the land of 
 
CHIANG MAI 00000128  002.2 OF 002 
 
 
northern Thailand, manufacturing and service sector firms have 
found benefit in the region's abundant and inexpensive labor. 
Labor-intensive firms have clustered their investments in the 
populous provinces of Chiang Mai and Lamphun, where the Northern 
Region Industrial Estate is located.  (Note: The NRIE is a 
parastatal enterprise charged with building the infrastructure 
for industrial parks).  Because of relatively higher 
transportation costs due to the region's inland location, 
northern manufacturing firms tend to produce lightweight 
products such as small electronic parts, jewelry, cosmetics and 
accessories, and fishing flies.  Urbanization in these two 
provinces is also leading to greater investment in service 
franchises, including U.S. food and merchandise retailers such 
as Starbucks, McDonald's, KFC, Subway, Pizza Hut, Swensen's, and 
Burger King.  With ample labor and growing middle-class markets, 
as well as booming tourist and expatriate populations, it is 
likely that such services investments will continue to expand in 
northern Thailand urban centers. 
 
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What About China? 
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¶7. Regardless of any future action by U.S. investors, Chinese 
investment is expected to flow into northern Thailand rapidly 
over the next two to three years, according to the outgoing 
Director of the Board of Investment's Northern Regional Office. 
She said that with the Greater Mekong Subregion (GMS) 
transportation network planned for completion in 2011 (primarily 
the construction of a bridge over the Mekong River connecting 
Thailand and Laos at the town of Chiang Khong), Chinese 
investors will ramp up their rate of investment in the northern 
provinces.  She expressed anxiety about China's growing economic 
influence over Thailand, and said that it is important for 
Thailand to keep its foreign investment diversified. 
 
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Comment 
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¶8. With many factors working in its favor for foreign investment 
-- tax incentives, cheap land and labor, and improving 
transportation networks -- northern Thailand now faces the 
challenge of selling itself globally and, in particular, to U.S. 
investors.  The existence of large American firms operating in 
the region, such as Pepsi-Cola and Monsanto, is a testament to 
the potential for U.S. investment.  However, if northern 
Thailand seeks to attract more U.S. investors in an effort to 
balance the anticipated growth of Chinese investment in the 
region, government and business leaders will have to mount an 
effective strategy in order to market the north to the U.S. 
This is of particular import in overcoming two negatives: 
political uncertainty (and thus investor skittishness) since the 
September 2006 coup d'etat; and lengthy travel times (generally, 
it takes a full day longer to reach northern Thailand from the 
U.S. than it does to reach most other major Asian markets). 
MORROW