When rumors started swirling late last year that the Thai baht could be in for a devaluation, most of Bangkok's business community was gripped by anxiety. But Norio Okumura, managing director of IBM Storage Products (Thailand), was busy laying plans. Figuring a lower baht would soon make Thailand a far cheaper production base for foreign investors, Okumura persuaded IBM to approve a proposal to build a $300 million hard- drive plant in Thailand. The hunch paid off. On July 2, seven months after IBM announced the project, the Bank of Thailand stopped propping up the baht. Since then, the currency has fallen by 25% to 32.75 to the dollar, slashing production costs for IBM, which already is shipping from the site.
Amid the carnage of failing finance companies, plummeting stock prices, and mothballed public works, a silver lining is emerging out of the currency meltdown. For companies like IBM that use Thailand as an export base, the plunging baht is a boon. Meanwhile, investors who focus on the domestic market, such as Japanese carmakers, are exporting more as local sales dive. As a result, ING Barings Ltd. predicts exports will surge by 10% this year and by 22% in 1998 after no growth in 1996. That, plus the reforms imposed by the International Monetary Fund's $16 billion bailout, could sharply cut Thailand's huge current-account deficit of around 8% of GDP, putting the economy on the road to recovery.
Investment is picking up, too. In disk drives alone, Fujitsu Ltd. in May announced a $250 million plan to boost output by 60%, to 1.3 million units per month, while Seagate Technology Inc. is spending $17 million to expand production of hard-drive components. Delta Electronics (Thailand), a locally listed unit of a Taiwanese maker of monitors, batteries, and other computer products, is building a new plant.
Thailand has a long way to go before it can be regarded as Asia's next high-tech mecca. As a multinational base for design and final assembly, it trails such neighbors as Malaysia, Singapore, and Taiwan. And because only half of school children make it past sixth grade, there is a shortage of skilled workers needed to run state-of-the-art plants. Still, Thailand has plenty of land and manual labor for assembly industries.
The drop in costs makes Thailand more attractive. Most disk-drive makers, for example, use Thailand as a base for making portions of the drive that can be assembled by hand. The jobs can be done by workers with a ninth-grade education earning the minimum daily wage of around $4. Seagate, which will employ 50,000 workers when its new plant opens by yearend, makes subassemblies in Thailand. Final assembly is in Singapore and Malaysia, where Seagate also makes key components.
JUMPING SHIP. The devaluation also is good for exporters who buy raw materials and parts locally. Delta Electronics, a $1.2 billion maker of computer peripherals for Apple Computer, Dell Computer, Gateway 2000, and other PC vendors, is expanding its 6,000-worker Thai operations. Delta uses the baht to buy from Thai suppliers around 60% of its parts--from printed circuit boards to plastic cabinets. But 98% of sales are in U.S. dollars. "So far, I can't think of any disadvantage in the devaluation for us," says Delta Thailand President James Ng Kong Meng.
There's a bright side in the retrenchment of Thai corporations as well because it will ease the skilled-worker shortage. For example, multinationals are eyeing the 6,000 employees of chipmaker Alphatec Electronic Co. and other companies owned by Charn Uswachoke, whose industrial group collapsed. "I guess the maximum they'll wait before jumping ship is another three months," says Seagate Thailand Vice-President Pom Piemsomboon.
Of course, the export boost from the devaluation won't last forever. The currencies of Indonesia, Malaysia, and the Philippines also are tumbling. And the weaker baht makes imports, which account for 40% of GDP, more expensive. So inflation could hit double digits by next year, bumping up wages. Warns Bernard Tan, a Merrill Lynch & Co. electronics analyst in Singapore: "A weaker currency can sometimes result in a higher domestic cost structure."
Unless Thailand can address fundamental problems such as education, the gains from the baht crash could prove fleeting. With the coalition government of Premier Chavalit Yongchaiyudh in danger of collapse, dealing with such issues will be difficult. But for now, the electronics rebound is a welcome sight for a country that is desperate for any good news. If it capitalizes on its position as one of Asia's bargain manufacturing locations, Thailand could start laying the groundwork for recovery.