Japan's investment in Thailand is at a crossroads as Japanese investors face a dilemma. Is it worth continuing the investment as the baht rises or would it be better to move to lower-cost countries?

"Japanese manufacturers are concerned about the substantial strengthening of the baht from Bt40 per dollar to Bt36, and it has appreciated faster than other currencies in Southeast Asia in the past few months," Tetsuji Banno, president of the Japanese Chamber of Commerce in Bangkok, said last week.

The Bank of Thailand has not yet found effective ways to curb the rising baht, blaming a weaker US dollar, and further strengthening could encourage Japanese investors to relocate to other countries.

In the mid-1980s, a combination of a surging yen and the devaluation of the baht sparked a wave of Japanese investment into Thailand, which enjoyed lower labour costs than Hong Kong, South Korea, Singapore and Taiwan, the previous investment destinations for Japanese. The Kingdom became an attractive target for Japanese investors.

 Foreign direct investment (FDI) largely contributed to Thailand's high economic growth in the late 1980s and early 1990s, with double-digit growth rates between 1988 and 1990.

However, in recent years, Thailand started to lose its attractiveness for foreign investment, especially when compared to rising economies such as China, India and Vietnam.

Japan is still the largest foreign investor in Thailand. According to the Board of Investment (BoI), Japanese investment through BoI approvals between 1970 and 2005 reached Bt1.11 trillion, or about 40 per cent of total FDI.

Japanese applications for investment incentives with the BoI accounted for 38 per cent, or US$2.4 billion (Bt85 billion), of total FDI worth $6.3 billion between January and October this year. Japanese investment of $12.9 billion topped major FDI sources from 2001-2005, followed by the European Union, the United States and Taiwan, with $3.6 billion, $2.9 billion and $1.9 billion respectively.

But the Thai and global economic situations have changed since the mid-80s. Now the baht is appreciating, labour is in short supply, the birth rate is low, and there are more competitors for the Kingdom - all negative factors for FDI.

Both the Thai and Japanese business communities are now worried about the rapid appreciation of the baht, particularly in the past few weeks, fearing an adverse impact on exports. This is in contrast to the situation in the 1980s when the government devalued the unit.

Deputy Prime Minister and Industry Minister Kosit Panpiemras, in his first overseas trip to attract Japanese investment, last week also conceded to Japanese business leaders in Tokyo and Osaka that Thailand could no longer offer low-wage workers. "Thailand also relies on unskilled labour imported from neighbouring countries," he said.

He proposed a solution by asking for collaboration with Japan to increase the number of skilled labourers to supply industries.

Many Japanese firms have already paid attention to this problem by training more Thai workers in Japan. With support from Japanese development organisations, the two sides will next year open a new university in Bangkok, the Japan-Thailand Institute of Technology, to produce engineers and IT specialists. This strategy is aimed at promoting productivity to compensate for declining numbers of low-wage workers.

Competition from both multinational and Thai firms based here has also made investment in Thailand a tough choice for the Japanese. The attitude of policymakers and the Thai public has been changing recently, as they ask for more value-added FDI rather than a focus simply on the number and size of projects.

With these conditions, many Japanese firms may not be able to overcome the challenges. The practical choice then is to relocate production to other countries.

Kosit, however, is unconcerned about this prospect. "If they move to Asean countries, we would stand to gain as Asean economies are closely tied," he said.

He also wants to see whether Japanese and Thais can form joint ventures and invest in Vietnam, Laos and Cambodia, taking advantage of lower wage costs.

Nor is Kosit worried about new investment projects. "The number of projects is no longer important - the quality of investment is," he said.

Satit Chanjavanakul, secretary-general of the BoI, is more optimistic about new Japanese investment. "Investment in autos and parts, machinery, and electrical and electronic products, still holds a promising future," he said.

The two men last week tried to promote eco-car projects, which aim to encourage investment in the production of more fuel-efficient cars in Thailand. "Among Japanese carmakers, two or three firms said their investment plans are in line with the government's eco-car project," said Kosit.

Japanese apparently still prefer Thailand as an investment base.

Banno told about 800 investors in Tokyo and Osaka that they could take advantage of the location as Thailand is at the heart of Asean. He also believes the prospective Thai-Japanese free-trade agreement would further strengthen trade and investment between the two countries.

"I'm pro-Thailand" said Tadashi Hasegawa, president of Fujitsu (Thailand), a leading hard-disk-drive producer. He argued that the network of supporting industries in Thailand kept the country attractive for his company.

He also made a cautious observation that as more firms are moving to China and Vietnam, creating networks of suppliers, he did not know whether in the future his company would move production out of Thailand.

Though many negative factors have recently emerged, relatively well-developed infrastructures, opportunities to make profit from both local and export markets, and relative political stability, have probably retained many Japanese firms here.

But no one knows how long they will keep Thailand as one of their key global strategic locations.

Wichit Chaitrong

The Nation