VZCZCXRO7757
PP RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHCHI #0160/01 2910653
ZNR UUUUU ZZH
P 170653Z OCT 08
FM AMCONSUL CHIANG MAI
TO RUEHC/SECSTATE WASHDC PRIORITY 0866
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE
RUEHC/DEPT OF LABOR WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHCHI/AMCONSUL CHIANG MAI 0941

UNCLAS SECTION 01 OF 03 CHIANG MAI 000160 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EINV ETRD ELAB EIND CH TH
SUBJECT: HIGH-TECH LAMPHUN SHOWS COMPETITIVE POTENTIAL AND INVESTMENT 
LIMITS OF NORTHERN THAILAND 
 
REF: A. A. 07 CHIANG MAI 123 (INDUSTRIAL ZONE TRANSFORMS LITTLE LAMPHUN) 
     ¶B. B. 08 CHIANG MAI 128 (NORTHERN THAILAND CREATES A SPACE FOR U.S. INVESTMENT) 
 
CHIANG MAI 00000160  001.2 OF 003 
 
 
------------------- 
Summary and Comment 
------------------- 
 
¶1. As host to many foreign high-tech manufacturing firms, the 
Northern Regional Industrial Estate (NRIE) of Lamphun province 
is both a model for the potential of northern Thailand as a 
producer of sophisticated electronics products as well as a 
reality check of the challenges foreign investors face in the 
region.  The competitiveness of electronic components produced 
in Lamphun in the global supply chain of consumer electronics is 
evidence of the potential for the northern region as a high-tech 
manufacturing hub.  However, the crowdedness of the NRIE, the 
red tape that limits the construction of new estates, and the 
on-going political crisis in Bangkok are barriers to the 
expansion of high-tech manufacturing in northern Thailand. 
 
¶2. Comment: The success of the Northern Regional Industrial 
Estate, measured by the loyalty of firms functioning on the 
estate and the estate currently operating at maximum capacity, 
suggests that Lamphun can be a model for the construction of new 
estates in northern Thailand.  Moreover, the niche industry that 
foreign electronic parts-producing firms have developed in 
Lamphun over the past twenty years is an indicator that labor in 
the region can be competitive in the global production chain of 
small, high-tech electronics.  However, the expansion of the 
Lamphun estate and the construction of new estates in the north, 
as government-initiated projects, will likely remain on hold 
until the on-going political crisis in Bangkok has subsided and 
some degree of normalcy returns.  Remaining red tape that 
hinders NRIE expansion will also need to be addressed in order 
for northern Thailand to reach its full potential in this niche 
market.  End summary and Comment. 
 
----------------------------- 
Lamphun to China to the World 
----------------------------- 
 
¶3. While agriculture and tourism remain the cornerstones of the 
regional economy, the tiny province of Lamphun, located adjacent 
to Chiang Mai, is a shining example of the potential competitive 
advantage for the region as a hub of high-tech electronics 
manufacturing.  ConGen staff visited the 21-year-old Northern 
Regional Industrial Estate (NRIE), where a concentration of 
foreign firms operate to produce a variety of goods, most 
notably small, lightweight electronic components for consumer 
electronic products, such as cell phones and laptops.  The 98 
firms present in the NRIE also manufacture a range of other 
goods from animal feed to cosmetics to lingerie. 
 
¶4. The rising stars among goods produced at the NRIE are the 
highly sophisticated - and often expensive - high-tech 
components for electronics goods, which include optical lenses, 
transponders, glass disks for hard drives, and other parts used 
in electronic goods.  Most producers of these products are 
Japanese, though one American firm, Innovex, produces these 
goods as well. (Note: Currently two wholly American-owned and 
four partially American-owned firms operate at the NRIE.) 
 
¶5. The Japanese firm MuRata, the first Japanese electronics firm 
to start operations on the Lamphun NRIE, selected the estate in 
1989 after considering other locations in ASEAN, including Kuala 
Lumpur, Bangkok, and various cities in Indonesia.  According to 
the firm's managing director, Lamphun's NRIE was selected 
because of local labor's careful attention to detail and the 
northern Thai climate, which they described as comparable to 
Japan's.  Because of the low cost of shipping small, 
light-weight electronics parts, the inland location of Lamphun 
province does not add significant costs to operating there, 
while the relatively lower cost of labor vis-a-vis Bangkok was 
an added advantage.  MuRata imports many of its raw materials 
from Japan (what the managing director referred to as "trust 
relationships" that keep the firm loyal to its kin in Japan) and 
exports the parts - about 80% of the Lamphun factory's output - 
back to Japan.  MuRata exports about 70% of its goods by land 
from Lamphun to Bangkok for shipment by sea and 30% by air 
directly to Japan. 
 
¶6. While MuRata tends to follow this Japan-focused supply chain 
model, most other firms, such as the U.S. firm Innovex, tend to 
fit into another major cycle: parts are produced in Lamphun, 
then assembled in China, from where final goods are shipped to 
world markets.  Innovex, which as of three years ago 
concentrated all manufacturing operations in Lamphun, imports 
its raw materials from elsewhere in Asia, primarily Taiwan. 
After producing the electronic parts, mainly "flexible 
interconnects" (a component for computer hard drives), Innovex 
 
CHIANG MAI 00000160  002.2 OF 003 
 
 
exports the components to China where final assembly takes place 
before shipment to U.S. or other markets.  Innovex confirmed 
that many electronic parts producers on the NRIE follow this 
production pattern. 
 
---------------------------- 
A Competitive Eye for Detail 
---------------------------- 
 
¶7. The lasting competitiveness of the NRIE in Lamphun, despite 
the tendency of some firms to shift manufacturing to relatively 
cheaper China and Vietnam, is attributed to northern Thailand's 
abundant and semi-skilled labor force.  According to electronics 
firms operating on the estate, Thai factory workers, who tend to 
be overwhelmingly female (ref A), are relatively more skilled at 
highly detailed work.  The result is higher quality goods that 
may be slightly more expensive in world markets but are 
certainly more competitive. 
 
¶8. Innovex, for example, is able to use certain laser 
technologies to produce its hard drive components because of 
local labor's ability to learn and implement this sophisticated 
production process.  According to Innovex, competitor firms that 
do not use laser technology produce cheaper but lower quality 
parts that are less competitive.  Most notably, Innovex recently 
relocated a highly capital-intensive portion of its production 
process to Lamphun from the U.S.  It was the last of Innovex's 
manufacturing operations in the U.S. and is a testament to the 
firm's confidence in Lamphun as a high-tech production center. 
Innovex also reported that some of its clients who had switched 
to lower cost suppliers in China in previous years have since 
returned to Innovex because, despite the higher prices, the 
clients were far more confident in the quality of Innovex's 
product. 
 
¶9. Similarly, MuRata began manufacturing in Beijing in 1994 and 
outside Shanghai in 1995.  MuRata complained to us that managers 
face a variety of problems in China including bad quality 
control of products and bad behavior and performance among 
workers, which Lamphun-based managers said are not problems 
here.  MuRata's managing director noted that China's strict 
labor laws controlling voluntary labor mobility across provinces 
and limiting individual workers' time spent in certain coastal 
manufacturing areas cause the average length of employment to be 
only two years, wheras MuRata's Lamphun factory boasts a 
ten-year average.  Thus, although average wages tend to be lower 
in China, MuRata has found it can save costs on re-training in 
Thailand, where labor tends to be more loyal and less mobile. 
 
------------------------------------------ 
Estate Growing Pains and Other Challenges 
------------------------------------------ 
 
¶10. The crowdedness of the NRIE is another indicator of northern 
Thailand's appeal as a high-tech manufacturing center.  The NRIE 
in particular is attractive to foreign firms because it includes 
a Board of Investment certification that allows for a range of 
tax incentives and duty-free export from Thailand (ref B).  For 
potential new investors, however, the bad news is that the NRIE 
is full.  The NRIE Director said the estate is trying to expand, 
but is facing land procurement challenges.  (Innovex noted it is 
monitoring the potential expansion of the NRIE since Innovex 
wishes to increase its own operations.) 
 
¶11. The NRIE in Lamphun covers the 16 northern-most provinces of 
Thailand.  The NRIE Director said the Industrial Estate 
Authority of Thailand (IEAT), the state enterprise that runs the 
NRIE, is eager to develop new industrial estates in the north. 
As a semi-government owned and operated organization, however, 
the IEAT faces significant obstacles when trying to develop a 
new estate unilaterally.  In particular, the challenges of 
government land procurement are significant relative to a 
private acquisition of land.  Thus, joint-ventures for new 
estates between IEAT and foreign firms would make land 
acquisition and construction significantly more efficient.  A 
feasibility study is currently in process for a new estate in 
Chiang Khong, a Thai-Lao border city along the North-South 
economic corridor of the Asian Development Bank's Greater Mekong 
Subregion project. 
 
---------------------------------------- 
Despite Hard Times, An Optimistic Future 
----------------------------------------- 
 
¶12. Economic optimism seems to be the norm across the NRIE, 
despite the current global financial situation, the red tape 
that hinders expansion, and the political situation in Bangkok. 
As noted, the NRIE is eager to expand its Lamphun estate, and 
the IEAT is seeking ways to build new estates in the north. 
 
CHIANG MAI 00000160  003.2 OF 003 
 
 
Saha Group, a Thai firm, has developed a nearby private 
industrial estate which is quickly filling with domestic and 
foreign manufacturers who specialize in handmade products, 
mainly jewelry and textiles.  MuRata is forecasting slightly 
lower profit margins at present, but is seeking to expand 
operations in the automotive parts market and is optimistic 
about returns on that new venture.  Innovex is boasting 
sustained growth and forecasts above-expected margins in the 
coming quarter.  Recently acquired new clients have boosted 
Innovex's growth forecasts, and the firm is even considering 
reopening its previously closed factory in northeastern Thailand 
to handle the increasing demand for its products. 
 
------------------------------ 
Labor: Organizing, but Content 
------------------------------ 
 
¶13. The recent formation of two industry-wide labor unions, one 
by electronics factory workers and another by jewelry and gem 
workers, has raised awareness of potential labor issues at the 
NRIE's nearly 100 factories.  The NRIE Director and firms 
operating on the estate dismissed any significant labor issues. 
They noted that the vast majority of workers' complaints are 
related to benefits rather than legal versus illegal labor 
conditions.  Their claims were generally consistent with the 
comments by the Lamphun-based Friends for Friends labor rights 
NGO.  At present, the electronics union only has members from 
the Thai subsidiary of the Japanese firm Hoya; while the jewelry 
union has members from only two firms.  (Note: On August 4, Hoya 
Glass Disk Thailand, a subsidiary of Hoya Corporation Japan, 
dismissed 43 workers without advance notice, and the Ministry of 
Labor revoked the license of the company's labor union, stating 
that the labor leaders lack proper qualifications.  End Note). 
 
¶14. Representatives of the Friends for Friends NGO stated that 
most workers at the NRIE are trapped in a never-ending overtime 
cycle in which laborers are enticed to work overtime in order to 
reach company set production goals.  According to the NGO, goals 
cannot be reached without working overtime.  Moreover, as 
production goals are met, the employers continue to increase the 
goals forcing workers to contribute more and more overtime 
hours.  The NGO complained that the cycle causes health risks in 
that workers eventually forgo meal and restroom breaks in order 
to continue working; however, examples of such health-related 
incidents seem to be few.  The NGO admitted that, with the 
exception of some mysterious factory worker deaths in 1992 (ref 
A), no major legal issues have arisen at the factories. 
 
¶15. This cable was coordinated with Embassy Bangkok. 
ANDERSON