SMEs in turmoil as manufacturing faces a downturn

The manufacturing sector continues to face a downturn, with working hours reduced since the first quarter of this year in both labour-intensive and technology-driven factories. The automotive parts sector is the hardest hit, with sales down 30%, overtime cuts, and work weeks shortened to three days, reducing subcontracting and fixed costs.

The Industrial Production Index confirms this downward trend, shrinking by 2.08% in the first five months of 2024 compared to the same period last year, and clearly reflecting the continued struggles of Thailand’s industrial sector amidst high household debt, elevated interest rates and rising energy costs.

The National Economic and Social Development Council (NESDC) reports that employment and working hours in the industrial sector have been decreasing since the first quarter. The average working hours per person per week dropped to 45.31, down from 45.76 hours, a 1% decrease from the same period last year.

In the domestic material-based manufacturing category, average working hours per person per week were 45.23, down 1.1% from the same period in 2023, with most of the workers in the food industry (1.06 million people). The Industrial Production Index in this sector decreased by 0.2%, with a capacity utilisation rate of 58.92%, down 0.5%.

In labour-intensive manufacturing, average working hours per person per week were 44.44, down 0.3%, with most workers in the garment industry (282,000 people). The index decreased by 4.7%, with a capacity utilisation rate of 42.79%, down 9.4%.

In technology-based manufacturing, average working hours per person per week were 45.83, down 10%, with most workers in the automotive and trailer manufacturing sector (445,000 people). In this category, the index fell by 6%, with a capacity utilisation rate of 64.35%, down 8.5%.

The decline in working hours aligns with the Department of Industrial Works' report that 667 factories closed in the first half of 2024, affecting 17,674 workers, which is higher than during the Covid-19 pandemic.

And while there is some optimism that Thailand's economy will recover in Q4 2024 driven by government budget policies, economic stimulus measures, and the tourism sector during the high season, the situation could well get worse before it gets better.

Kriengkrai Thiennukul, chairman of the Federation of Thai Industries (FTI), admits that factory working hours are likely to decrease, citing Honda's consolidation of production lines from Ayutthaya to Prachinburi as an example. This consolidation reduces the working hours in the overall picture.

“Factory closures affect the SME supply chain, potentially leading to numerous small factory closures. Last year saw medium and large factory closures, but this year, the most worrying are the SMEs,” Kriengkrai said.

Supoj Sukpisan, secretary-general of the Cluster of FTI Future Mobility-ONE and chairman of the Federation’s Automotive Parts and Components Industry Group, is also worried about SMEs, noting that since the beginning of the year, automotive parts orders and sales have dropped by 30%. This has led to the cancellation of overtime and the extension of holidays to three days a week. Some companies have reduced working hours and initiated a 75% salary payment scheme, similar to measures taken during the Covid-19 crisis and major flooding events.

The automotive parts industry divides employment into three groups, he added.

Direct employment: Employment within the company;
Subcontracting employment: If work is not needed, workers are returned to subcontracting companies, effectively reducing or terminating employment.

Outsourcing employment: Employment for security, housekeeping, and transportation remains relatively unchanged.

“The 30% drop in sales means balancing by reducing the workforce by 30%. However, reducing fixed costs, like employee expenses, is challenging,” Supoj said.

Businesses involved in manufacturing are also suffering. Their work is based on orders, with high production volumes requiring more working hours and labour and low orders leading to reduced working hours. Overall, the adjustment is around 10-15%, with businesses balancing overtime work, but currently, there is no overtime.

SMEs with limited resources find it difficult to survive due to low bargaining power. When ordering goods, they get only 30 days of credit, but when delivering materials to OEM factories, they get 60-90 days of credit, requiring 60 days of working capital. Since early 2024, low production volumes and strict financial institution lending have led to high NPLs.

“SMEs account for 70-80% of automotive parts manufacturers. Therefore, SMEs must manage their finances well, especially working capital. However, many SMEs lack high financial management skills, which is a significant concern," Supoj concluded.