LAO TZU ONCE said, “If you do not change direction, you may end up where you are heading”. This timeless quote could potentially portend eroding profits of Thai exporters if they could not adapt their business in response to adverse environments: higher costs from the government’s recently announced wage hike and the stronger-than-last year Thai baht.
Though it is likely that Thai exporters will enjoy a 4.8 per cent growth this year due to the momentum in global synchronised economic growth and robust global trade, those businesses that are not prepared for such changes will become sitting ducks and see their “net” profit margin gradually vanish.
On average, a 3.4 per cent increase in the minimum wage could lift the Cost Of Goods Sold (COGS) and will eventually slash the net profit margin by about 0.4 per cent, given all other factors remain constant. As for the impact from the indomitably strong baht, if the Thai curency gains about 5 per cent from last year, it would eat up the net profit margin of exporters by around 0.6 per cent on average.
However, different business and financial structures could lead to different levels of severity of net impacts from higher minimum wage and strong currency.
The businesses that will face most ramifications from the wage hike and strong Thai baht, with a 1-3 per cent drops in net profit margin , are agriculture, apparel, and furniture buisnesses due to their intensive labour usages and high revenue reliance on exports. Additionally, these business groups also face a uncertain outlook as most analysts have forcast low export growth ranging form one to four per cent.
Another group that will be badly affected by the strong baht due to their reliance on oveseas sales are the rubber, rice and foods businesses. The group that will face a bigger impact from the minimum wage hike due to their high employments include consumer products, paper and printing, as well as packaging businesses.
Even though all Thai exporters will be affected, the group that will face the least impact are automakers, electronics and computer parts manufacturers, electric appliances manufacturers and chemical producers.
Most of the exporters in the last group are naturally hedged as they receive US dollars from exporting their products and pay their imported materials in dollars . So, their USD exposure is cancelled out.
In addition, their businesses generally use technology in production which means they have low labour costs compared to the other groups. They will face no more than a 0.1 per cent decrease in their net profit margin.
Thai exporters could not escape negative impacts from both Thai baht appreciation and the minimum wage hike. However, with an effective strategy, such as revamping their marketing campaigns, expanding their markets, and improving manufacturing efficiency to significantly reduce their costs, these exporters could alleviate overall impacts on their hard-earned profits.
Therefore, it is highly critical for business owners or business operators to truly understand shifting environments and adapt themselves, just like the immortal quote from Lao Tzu. Without the right and swift adaptation, it will surely seal a fate of sitting duck for Thai exporters, waiting to be hunted.
Views expressed in this article are those of the author and not necessarily of TMB Bank or its executives. Biz Insight is co-authored by WIRUNPON ROCHANAVIBHATAVANICH and POON PANICHPIBOOL. They can be reached at firstname.lastname@example.org