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BANGKOK – Thailand’s Eastern Economic Corridor (EEC) scheme is back in vogue with the recent signing of a 290 billion baht (US$9.4 billion) contract to transform the US-military built U-Tapao airbase used for launching bombers in the Vietnam war into a commercial airport.
The EEC related megaproject, known as the Eastern Airport City, will build a new runway, terminal, industrial estate, business and duty-free zone, and an area designed for airplane maintenance, repair and overhaul (MRO) centers.
The infrastructure-spending spree will breathe new life into the EEC, the flagship project of Prime Minister Prayut Chan-ocha’s previous coup-installed regime (2014-19), which aims conceptually to revive the kingdom’s Eastern Seaboard industrial corridor launched in the 1980s.
The plan: uplift the country’s flagging manufacturing sector into the “4.0” era through the promotion of new value-added “S-curve” industries, including new generation autos, smart electronics, and digital services and robotic, via a new high-tech development corridor.
A Thai consortium comprising the private airline Bangkok Airways (45%), Bangkok Skytrain operator BTS Group Holding (35%) and construction giant Sino-Thai Engineering and Construction (20%) will build the Eastern Airport City.
The deal has brought the EEC, previously penciled to cost as much as $44 billion, back into the limelight as the kingdom looks for new sources of economic revival amid what is estimated to be a historic economic contraction this year caused by Covid-19.
The ambitious scheme faded from public view during the hurly-burly political maneuvering after the March 2019 election which brought Prayut and his lieutenants back to power in a wide umbrella coalition government. It had also been off the radar as the pandemic played havoc with the economy, which is just reopening after being locked down since March.
Earlier, there was speculation that if Prayut’s Palang Pracharath Party (PPRP) lost the election, the EEC would have floundered as a national development scheme and be scrapped by their political opponents. PPRP won the election’s popular vote, though only narrowly, and Prayut’s coalition is wobbling with internal divisions that could eventually sink it.
An ongoing power play within the PPRP, for instance, could lead to the sidelining of Deputy Prime Minister Somkid Jatusripitak, Prayut’s economic maestro for the past four years and the mastermind behind the EEC’s value-added concept. Somkid’s demise could undermine political support for the scheme, insiders suggest.
“You need someone of stature to speak on behalf of the EEC, so if Somkid is not around this is going to be a little difficult, because it’s his baby,” said Sihasak Phuangketkeow, a special advisor to the EEC and former permanent secretary to the Ministry of Foreign Affairs.
Prayut, who chairs the EEC’s policy board, would likely need to take a more proactive role as the scheme’s champion if Somkid is, as widely speculated, removed at an expected Cabinet reshuffle.
“I think if you look back at the five years in power of the previous government, this (EEC) is probably one of their success stories,” said Sihasak. “I think projects like the high-speed train would have been impossible in a politicized environment, so because we had these five years of imposed stability we were able to bring the EEC in to fruition,” he said.
Prayut’s first administration fast-tracked key infrastructure projects deemed as crucial to the EEC before the 2019 polls, armed with the knowledge that newly elected coalition governments often undo their predecessors’ handiwork.
In May 2018, Prayut’s coup government pushed through the EEC Act, which provided a legal and institutional framework for the program and allowed it a “sandbox” status to experiment with new regulations such as fast-tracked Public-Private Partnership (PPP) procedures that hastened five important megaprojects worth about 700 billion baht ($22.6 billion).
The five projects include a high-speed rail link between U-Tapao-Suvarnabhumi-Don Mueang airports ($7.3 billion), the U-Tapao Aviation City ($9.4 billion), a MRO between Airbus and Thai Airways International ($340 million), and third phase expansion of Laem Chabang ($3.7 billion) and Mab Ta Phut ($1.8 billion) ports.
Prayut’s previous military regime was particularly keen to get the high-speed rail link underway before the March 2019 election by expediting environmental impact studies, terms of reference, and calls for bids by November 2018.
The rail link’s bid was won by a consortium led by the Charoen Pokphand (CP) Group, Thailand’s agri-business multinational giant which has diversified into the retail, telecommunications, automotive and property sectors, making it a multi-pronged colossus that will soon also be a major player in Thailand’s transport and logistics.
With no expertise in mass transit construction or operation, CP cobbled together a consortium that has provided the needed technology comprising the Bangkok Expressway and Metro Plc (BEM) that operates the capital’s first subway system, China Railway Construction Corp Ltd (CRCC), Ch Karnchang Plc (CK) and Italian-Thai Development (ITD,) two of Thailand’s largest construction firms, and Italy’s Ferrovie dello Stato Italiane to provide the signaling works).
The public partner in the PPP is the State Railway of Thailand (SRT). The contract was signed on October 24, 2019, giving birth to the very accurately named “Eastern High-Speed Rail Linking Three Airports Co., Ltd.”
While some still question the need for the 220-kilometer, 250-kilometer per hour railway connecting the country’s three central airports, the project’s go-ahead was seen by potential investors as a firm government commitment to the EEC.
“It is about confidence,” said Luxmon Attapich, deputy secretary-general of the EEC Office in charge of investment and international affairs. “And now that we are going ahead with U-Tapao, it means the EEC is definitely happening. We are alive and kicking.”
The third phase expansion of the Mab Ta Phut deep-sea port project is also underway, with the contract signed on October 1, 2019. That joint venture project will be led by Thailand’s Gulf Energy Development Company and PTT Tank Terminal Co, part of the state-run PTT national energy group. The Industrial Estates Authority of Thailand (IEAT) is the public partner.
While the bid was won for the third phase expansion of Laem Chabang deep seaport in Chonburi, the contract signing has been delayed by a court case initiated by one of the losing contenders for the project, sources said. The initial winner was a consortium comprising Gulf Energy, PTT and China Harbor Engineering Co.
Although US and European multinationals had expressed interest in the megaprojects, especially the high-speed train link, they did not emerge as winners apart for Ferrovie dello Stato Italiane’s signaling work contract.
Business consultants cite difficulties foreign companies faced in competing against the Thai conglomerates dominating the bidding process, which are more likely to choose Japanese and Chinese partners over American or Europeans. A stipulation that the PPPs must be at least 51% Thai-owned also favored the local conglomerates.
One EEC megaproject, however, that has failed to fly is the joint venture MRO between Airbus and Thai Airways (THAI). Shortly after the outbreak of Covid-19, Airbus informed the EEC office that it had decided to withdraw from the 10 billion baht ($321.5 million) project due to a lack of funds.
But sources familiar with the project tell a different tale. “Covid-19 gave Airbus an excuse to withdraw, but they were already having problems with the negotiations with THAI,” said the source, who requested anonymity.
Negotiations had bogged down because of THAI’s labor union, which was opposed to moving the airline’s main MRO at Bangkok’s Don Mueang Airport to U-Tapao, while THAI executives were opposed to the idea of the joint venture’s chief executive officer (CEO) coming from Airbus, a precondition to assure good governance.
THAI entered bankruptcy procedures on May 19, partly because of the governance issues Airbus raised, putting a final nail in the joint venture’s coffin. This doesn’t mean that there will be no MROs at the U-Tapao Airport City, however. THAI has a small MRO already at U-Tapao that will be moved to build the new runway but needs to be rebuilt under the runway construction contract.
“The THAI MRO will go ahead but not in the form that we wanted before,” Luxmon said, adding that the decision would lie with THAI’s board. “We have also designed a parcel of land at U-Tapao for other MROs, and before Covid we were approached by several entities who were interested in MROs there.”
The EEC concept is hard-focused on attracting local and foreign direct investment (FDI) into 12 so-called “S-curve” industries, most of which have their foundations in existing, foreign-invested Thai industries.
In sum, they include new generation cars, smart electronics, medical and wellness tourism, agriculture, food, robotics for industry, logistics and aviation, biofuels and biochemicals, digital services, medical services, defense and education.
New generation cars, aviation and even robotics arguably build upon Thailand’s already strong industrial cluster in automobile manufacturing that has been built up over the past three decades with heavy government promotion.
While the Board of Investment (BOI) has promoted investment into various models of electric vehicles for several years – most of them Japanese manufacturers already based on the Eastern Seaboard – much of the country’s existing supply chain of automobile parts is geared towards combustion engine models, arguably a sunset industry as climate change concerns mount.
One objective behind the U-Tapao Airport City is to create a MRO regional hub that will lead to growing traffic in aircraft parts and, ideally, encourage local aircraft production of parts and components by offering investment opportunities for soon-to-be-out-of-work auto parts producers.
While France’s Airbus is no longer on board, and America’s Boeing has so far shown scant interest in the U-Tapao project, suppliers of the world’s two main airplane manufacturers may be a different story.
“Japan is thinking about exporting their aircraft supply chain to Southeast Asia,” Sihasak said. “They had a conference I attended about a year ago – called Aircraft Supply Chain in Asia. So they are thinking of shifting some of their production because they are part of the Boeing supply chain. 60% of Boeing parts are made in Japan.”
Thailand has already had some success in attracting aircraft parts manufacturers from China. Qingdao Sentury Tire Company has been producing aircraft tires at its “intelligent manufacturing plant” in Rayong province since it opened in 2014, using Thailand’s abundant natural rubber supplies.
Another sector that has benefitted from Thailand’s status as the largest automobile manufacturing hub in Southeast Asia is automation and robotics systems integration, a relatively new service sector that is now dominated by Thai small and medium-sized enterprises (SMEs).
Thai Automation and Robotics Association (TARA) is the newest business association to be established in Thailand, registered in June 2019, and already boasts 120 members.
TARA comprises companies like Lertvilai & Sons Co. Ltd, which started as a bicycle repair shop in 1932, entered the welding business and joint ventured with Nippon Steel Welding & Engineering to service the expanding automobile parts sector in the 1980s.
Lertvilai, already a major importer of Japan-made robots for the automobile sector, launched in 2015 its Robotics & Automation Integration business to assist foreign and Thai companies in automating their factories to replace human labor. The automation of Thailand-based, Japanese-owned automobile manufacturing has been gathering pace for the past two decades.
“Automobile companies need quality, reliability and quick cycle time so they use robots,” said Prapin Abhinorasaeth, TARA President and CEO of Lertvilai & Sons. As part of its EEC package, the BOI is offering tax cuts to companies that hire the local systems integration services TARA members provide. “Whatever industry they invite to the EEC, they will need systems integration,” Prapin said.
A well-established systems integration service is arguably unique to Thailand – and within Southeast Asia – and is attributable to the foreign-invested and highly successful automobile industry.
Thailand will have a tougher time attracting investment into smart electronics, the “S curve” sector most likely to benefit from the shift of supply chains out of China to Southeast Asia.
Many smart electronics manufacturers have or are poised to flee China due to the Sino-US trade war and to hedge against the massive production disruption caused by the Covid-19 outbreak and subsequent lockdowns in China earlier this year.
“This capacity that will flow out of China will definitely come to Southeast Asia,” opined Kirida Bhaopichitr, director of the Economic Intelligence Service at the Thailand Development Research Institute (TDRI), a Bangkok-based think tank. “I think Vietnam will be the greatest beneficiary. Thailand will probably be a distant second.”
Thailand is losing out to Vietnam, especially in the smart electronics supply chains involved in smartphone manufacturing, an industry that was initiated by South Korea’s Samsung’s shift of its Galaxy model production to Vietnam almost a decade ago.
The supply chain exodus from China to Southeast Asia even includes Chinese suppliers formerly based in China, analysts note.
“After the US-China trade war, Chinese FDI started shifting to Vietnam, because Vietnam met their business needs,” said Aksornsri Phanishsarn, a director of the Thai-Chinese Strategic Research Center, under the National Research Council of Thailand. “Chinese companies in electronics will mostly go to Vietnam, because Vietnam nowadays is very strong in the electronics cluster.”
Compared to Thailand, Vietnam has several other advantages such as political stability, free trade agreement memberships and an industrious and increasingly skilled labor force, according to Aksornsri. “Vietnam is ahead of Thailand on the Global Innovation Index,” she noted.
While Thailand may lag Vietnam in electronics, it still has FDI pulling power.
“We see bright spots for [US] investments on account of supply chains moving from China, which Vietnam had been capturing a lot of, but Thailand is not completely sidelined,” said Jay Harriman, senior director of BowerGroupAsia, a government affairs and business advisory firm. “For a company looking to do manufacturing for export, Thailand is still pretty well positioned with strong logistics and industrial estates.”
Indeed, the EEC is slowly putting in place the infrastructure that could make Thailand a safe landing spot for footloose industries looking for an alternative to China, especially in the post-Covid era. Thailand has won plaudits for its handling of the pandemic, which among other things has highlighted its strong medical care system and, when needed, technocratic capabilities.
“Covid highlights certain strengths of Thailand, and Covid highlights that the EEC is going in the right direction,” the EEC’ Luxmon enthused. “The industries that have emerged as the important industries (after Covid-19) are basically our targeted S-Curve industries – medical hub, food for the future, biotechnology, digital, new generation automobiles. These are our key areas.”