NORTHERN THAILAND CREATES A SPACE FOR U.S. INVESTMENT

UNCLAS SECTION 01 OF 02 CHIANG MAI 000128

SIPDIS

E.O. 12958: N/A
TAGS: ECON EAGR ECIN ECPS EFIN EIND EINV ELAB ELTN CH
TH
SUBJECT: NORTHERN THAILAND CREATES A SPACE FOR U.S. INVESTMENT

CHIANG MAI 00000128 001.2 OF 002


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Summary
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1. Northern Thailand boasts many attributes that are attractive
to foreign investors, including low labor and land costs, making
the region an inviting alternative to the growing costs of
operating in Bangkok. Moreover, favorable tax incentives in the
north, combined with sophisticated transportation networks that
link the land-locked north to the Lamchabang seaport near
Bangkok, are defining the region as ripe for U.S. investment.
This favorable investment climate is also beneficial to other
foreign investors, including the Chinese, who will be the
primary beneficiaries of infrastructure projects slated for
completion in the next few years. Nonetheless, northern
Thailand is creating an investment climate that could draw U.S.
investors, whom government officials believe might help balance
China's growing economic influence in the region. These pull
factors form a solid foundation, but the region's leaders will
also need to mount an effective marketing strategy in order to
sell U.S. investors on northern Thailand. End Summary.

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Incentives for FDI in Northern Provinces
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2. Northern Thailand's low labor and land costs make it
domestically competitive for economic activity. Now, creative
tax incentives are making the region ripe for foreign direct
investment (FDI) as well. Thailand's Board of Investment (BOI)
categorizes the 17 northern provinces as zone 3, which boasts
the country's most generous tax incentives for foreign
investors. In zone 3, for example, firms enjoy an exemption
from import duties on machinery and from corporate income tax
for the first eight years of operation followed by a 50%
exemption over the next five years. They also enjoy double tax
deductions on expenses such as transportation costs,
electricity, and water usage for ten years. In the three
least-developed provinces of zone 3 (Phayao, Phrae, and Nan),
additional incentives are provided, such as a tax deduction
valued at 25% of the construction costs for the first ten years.


3. These incentives have been a magnet for about $520 million of
U.S. capital in northern Thailand over the past 20 years. This
investment represents a range of sources, from large
corporations like Pepsi-Cola to small enterprises such as fly
fishing firms, and includes both the manufacturing sector and
the agricultural sector.

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Land.
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4. The success of two large corporations in northern Thailand is
a testament to the potential for American investment in the
region's arable and affordable land. Pepsi-Cola's Frito-Lay
factory in Lamphun province, which has been in operation since
1995, is an example of how American business and Thai government
cooperation can lead to profit generation for the firm and
economic development for northern Thailand. Frito-Lay has
worked closely with Thailand's Royal Project Foundation and the
Ministry of Agriculture and Cooperatives to develop a profitable
potato farming sector, which provides revenue for local farmers
and low-cost inputs for the snack foods it produces for sale on
the domestic Thai market. Currently, Pepsi-Cola invests about
$75 million in northern Thailand and purchases over 30,000 tons
of potatoes annually from over 5,500 local farmers. The company
is concerned, however, that local production of potatoes cannot
meet production demand for potato chips and is advocating for
lower tariff rates on potatoes imported from the U.S.


5. While Pepsi-Cola's cooperation with the Thai government has
contributed to its success in the region, Monsanto, an
agro-technology firm that operates in Phitsanulok province,
cites good climate and farmer loyalty as the primary benefits of
investing in the land of Thailand's lower north. According to
Monsanto, Phitsanulok is an ideal destination for its investment
because: it is the center of Thailand's corn belt; local
farmers abide by the company's regulations and remain loyal to
the company; and the climate is at low risk for natural
disasters. Monsanto's success in investing $37 million in
northern Thailand and contracting 15,000 Thai farming families
has led it to expand its investment into two other agricultural
firms operating in the north, Cargill and the Seminis Company.

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.and Labor
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6. While some U.S. firms have benefited from the land of

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northern Thailand, manufacturing and service sector firms have
found benefit in the region's abundant and inexpensive labor.
Labor-intensive firms have clustered their investments in the
populous provinces of Chiang Mai and Lamphun, where the Northern
Region Industrial Estate is located. (Note: The NRIE is a
parastatal enterprise charged with building the infrastructure
for industrial parks). Because of relatively higher
transportation costs due to the region's inland location,
northern manufacturing firms tend to produce lightweight
products such as small electronic parts, jewelry, cosmetics and
accessories, and fishing flies. Urbanization in these two
provinces is also leading to greater investment in service
franchises, including U.S. food and merchandise retailers such
as Starbucks, McDonald's, KFC, Subway, Pizza Hut, Swensen's, and
Burger King. With ample labor and growing middle-class markets,
as well as booming tourist and expatriate populations, it is
likely that such services investments will continue to expand in
northern Thailand urban centers.

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What About China?
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7. Regardless of any future action by U.S. investors, Chinese
investment is expected to flow into northern Thailand rapidly
over the next two to three years, according to the outgoing
Director of the Board of Investment's Northern Regional Office.
She said that with the Greater Mekong Subregion (GMS)
transportation network planned for completion in 2011 (primarily
the construction of a bridge over the Mekong River connecting
Thailand and Laos at the town of Chiang Khong),Chinese
investors will ramp up their rate of investment in the northern
provinces. She expressed anxiety about China's growing economic
influence over Thailand, and said that it is important for
Thailand to keep its foreign investment diversified.

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Comment
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8. With many factors working in its favor for foreign investment
-- tax incentives, cheap land and labor, and improving
transportation networks -- northern Thailand now faces the
challenge of selling itself globally and, in particular, to U.S.
investors. The existence of large American firms operating in
the region, such as Pepsi-Cola and Monsanto, is a testament to
the potential for U.S. investment. However, if northern
Thailand seeks to attract more U.S. investors in an effort to
balance the anticipated growth of Chinese investment in the
region, government and business leaders will have to mount an
effective strategy in order to market the north to the U.S.
This is of particular import in overcoming two negatives:
political uncertainty (and thus investor skittishness) since the
September 2006 coup d'etat; and lengthy travel times (generally,
it takes a full day longer to reach northern Thailand from the
U.S. than it does to reach most other major Asian markets).
MORROW