US embassy cable - 05BANGKOK6016

UNCLAS SECTION 01 OF 03 BANGKOK 006016 
 
SIPDIS 
 
PASS TO USTR FOR ABIOLA HEYLIGER 
STATE FOR EB/TPP/ABT - EDWARD HEARTNEY 
COMMERCE FOR ITA/OTEXA - MARIA D'ANDREA 
 
E.O. 12958: N/A 
TAGS: KTEX, ECON, ETRD, ELAB 
SUBJECT: THAI TEXTILES AND APPAREL: COPING WITH A 
POST-QUOTA WORLD 
 
REF: STATE 146213 
 
1. Summary: Thailand's textiles and apparel exports continue 
to grow following the expiration of the global quota system, 
albeit at a more moderate pace than during the banner year of 
2004.  The overall sector has seen exports rise by a solid 
5.8 percent in the first half of 2005, defying the most 
pessimistic predictions that forecast a shrinkage in 
Thailand's export markets due to increased competition from 
China.  In fact, the Thai government is reporting that 
exports to the U.S., Thailand's largest export market, 
increased by 10.3 percent through June of this year. 
Thailand's textiles and apparel producers attribute this 
performance to their increased emphasis on higher-value, 
higher quality products, as well as improvements in supply 
chain systems coordinated with large Western buyer firms. 
Producers also believe Thailand's infrastructure and 
higher-skilled labor have induced foreign factory owners to 
resist moving to China en masse, although some factory 
closures have been reported.  End Summary. 
 
 
TEXTILE AND APPAREL EXPORTS GROW, BUT SLOWER THAN IN 2004 
--------------------------------------------- ------------ 
 
2. Thai exports of textiles and apparel in 2005 have 
experienced surprisingly solid growth despite the lifting of 
global quotas on January 1 and the subsequent increase of 
Chinese exports to the U.S.  The Thailand Textile Institute 
(TTI) reports that total textiles and apparel exports grew 
5.8 percent in value during the first half of 2005 
(January-June).  While exceeding some expectations, the rate 
of growth is a sharp drop-off from the 17.1 growth rate 
experienced in 2004.  Exports to the U.S., Thailand's largest 
export market, have grown 10.3 percent in 2005 through June, 
with the bulk of the increase being in cotton fabrics and 
clothing, which rose almost 19.6 percent in value. 
 
3. In interviews with the Embassy, a wide range of Thai 
textile manufacturers attributed Thailand's continuing 
competitiveness to a stronger focus on higher-value and 
higher-quality garments, and sharp improvements in logistics 
and supply chain systems that were coordinated with U.S. 
buyers in recent years.  Concurrent with the Thai 
government's effort to develop Bangkok into a "global fashion 
hub," Thai garment producers are developing niche markets for 
products of their own design and incorporating Thailand's 
traditional high quality fabrics, such as silk, for 
quality-conscious Western consumers.  According to the Thai 
Garment Manufacturers Association (TGMA), Thai exporters are 
also increasing their direct marketing to U.S. buyers, 
providing more of their own shipping and insurance services 
and bypassing middlemen, compared to 2003 and prior years. 
 
4. Exporters associated with the TGMA and TTI said they have 
seen little dramatic change in the number of foreign-owned 
factories, Asian or otherwise, since the end of the quota 
system this year.  They admitted that some low-cost factories 
have moved to China to take advantage of economies of scale 
and labor costs that are estimated to be 40 to 60 percent 
lower than those in Thailand (for comparison, Thai labor 
costs are estimated to be roughly 17 to 22 percent of those 
in Hong Kong, South Korea and Taiwan).  In the Northeast, the 
Sakon Nakon Chamber of Commerce did report this week that 
they've lost almost half of their low-cost garment production 
due to Chinese competition.  Other exporters report, however, 
that a number of factory operators have been disappointed 
with the lower-quality output from Chinese factories, and 
have moved back to Thailand.  Thai producers say Thailand 
retains a competitive advantage in worker skills, 
infrastructure, and less bureaucratic interference, which has 
allowed them to reap larger orders from larger buyers who are 
less concerned about achieving the maximum savings on labor 
costs.  Thai producers also do not see the rise of China and 
India as a one-way street.  According to a Thailand Textile 
Institute (TTI) executive, "China and India may cause our 
lowest-cost and most old-fashioned factories to go under, but 
our fabric exports to China have risen 23 percent this year." 
 "We are still in a precarious industry," he added, "and we 
hope that the U.S. and other governments take a strong look 
at China's subsidies to its textile industry.  But, so far, 
we are surviving in the post-quota world quite well." 
 
 
PRODUCTION AND EXPORT DATA 
-------------------------- 
 
5. The following figures were requested in reftel para 4: 
 
 
Total Manufacturing Production 2004: 
-- USD 57.4 billion 
 
Total Textiles and Apparel Production 2004: 
-- USD 11.1  billion 
 
Textiles-Apparel Share in Imports 2004: 
-- 3.00 percent 
 
Textiles-Apparel Share in Exports 2004: 
-- 6.6 percent 
 
Textiles-Apparel Share in Imports 2005 (Jan-Jul): 
-- 2.66 percent 
 
Textiles-Apparel Share in Exports 2005 (Jan-Jul): 
-- 6.1 percent 
 
Total Employment in Manufacturing: 
-- 5,597,000 
 
Total Employment in Textiles and Apparel: 
-- 1,084,130 
 
Note: no reliable figures for Total Industrial Production are 
available. 
 
 
LITTLE IMPACT FROM SAFEGUARDS 
----------------------------- 
 
6. Textile and apparel manufacturers told the Embassy that 
they expect only marginal gains from efforts by the European 
Union (EU) and the U.S. to place safeguard restrictions on 
the influx of textiles from China.  The Thai Garment 
Development Foundation (TGDF) said that U.S. buyers who 
normally import from China are likely to place more orders 
from other countries with similarly low labor costs, such as 
Sri Lanka, Bangladesh, India and Pakistan.  The TGDF said 
Thai producers were less competitive than these countries in 
low-labor cost products such as bras, sweaters, gowns and 
pants.  The TGMA also said that Thai textile and apparel 
factories were already operating near full capacity and would 
not be able to take on a significant amount of new orders, 
partly due to a persistent labor shortage.  The apparel 
industry lacks qualified industrial engineers, managers and 
other staff as the best of Thailand's skilled workers are 
increasingly looking to other industries or to working 
abroad, in the Middle East or Taiwan for example, to earn 
higher wages.  The TGMA also said it expected U.S. producers 
to assume most of the new orders arising from curbs on 
Chinese imports into the U.S. 
 
7. The Thai government has not considered implementing 
safeguards to reduce Chinese textile and apparel imports into 
Thailand.  Thai imports of textiles and apparel (including 
leather goods and footwear) are only 2.7 percent of total 
imports, and Chinese clothing imports do not compete directly 
with locally-produced products. 
 
 
LABOR SITUATION 
--------------- 
 
8. The textile and apparel industry comprises over 4,500 
factories and employs over one million workers, a number 
which has remained steady for the past 7 years.  Employment 
has remained between 1,000,000 and 1,100,000 since 1998, with 
little variation in between, according to the Ministry of 
Industry (Thailand's total labor force is around 35 million). 
 Both employers and labor leaders say that the recent 
increase in global competition in textiles and apparel has 
not appreciably affected local labor conditions, although 
opinions on existing conditions differ sharply.  A high-level 
representative of the TGMA unsurprisingly told Laboff this 
week that Thai factory workers were "treated like kings," 
while a regional labor expert at the International Labor 
Organization's Bangkok office says enforcement of labor 
standards in Thailand is among the weakest in Southeast Asia. 
 Any realistic assessment must note that conditions for 
laborers vary widely depending on the enterprise involved. 
Factories sourced by certain large U.S. apparel firms have 
received favorable reviews by independent factory monitoring 
groups, while low-cost textile plants in border regions which 
source a large number of migrant workers, such as Mae Sot 
along the Burmese border, are often poorly monitored and have 
very poor labor conditions.  Overall, the labor situation in 
Thailand's textile and apparel industry has not changed 
significantly since the expiration of global quotas in 
January, 2005. 
 
 
HOPING FOR AN FTA - BUT WITH FLEXIBLE RULES OF ORIGIN 
--------------------------------------------- -------- 
 
9. Thai textile and garment producers predictably differed on 
the scale of benefits that would accrue to their industries 
if a prospective U.S.-Thai Free Trade Agreement, currently 
under negotiation, is implemented.  Textile producers 
associated with the TTI said they stood to gain from 
increased textile exports to the U.S. even if a "yarn 
forward" rule were included in the FTA, due to Thailand's 
large usage of imported U.S. yarn and thread.  However, a 
producer from the garment-producing TGDF (who is also a 
member of the Thai FTA negotiating team for textiles), said 
that Thailand's gains would be significantly curbed by 
"overly restrictive rules of origin."  The producer said that 
Thailand wanted the flexibility to use fabric from other 
countries, especially other countries who are already U.S. 
FTA partners, in garment production.  "None of us will lose 
from an FTA," he added, "but the benefits will vary widely 
depending on the outcome." 
ARVIZU