case study hrd strategy for relocated factory in lao pdr

Australian Journal of Asian Country Studies

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Case Study: HRD Strategy for Relocated Factory in Lao

PDR

Asst.Prof. Pradit Withisuphakorn (DBA)

Director,

NIDA MSc in Financial Investment and Risk Management (FIRM),

NIDA Business School,

National Institute of Development Administration (NIDA),

118 Serithai Rd, Bangkapi, Bangkok, Thailand 10240.

Personal Phone: +6681 6220310, +1 206 294 2575

e-mail: [email protected], [email protected]

ABSTRACT

This is a real case study from consulting works for Strategic Decision making and HRD (Human

Resource Development) Problem Solving before and after the relocation of a group of Thai garment

factory to CLMV (Cambodia, Laos, Myanmar, Vietnam). Since Lao PDR is one of the fast growing

economy in ASEAN, all businesses are facing the labor shortage. However, there are a lot of direct and

indirect unemployed workforces in rural and remote area of Lao PDR. Many foreign investors had

failed to settle their factories in Lao PDR because they are not understand and cannot adapt to the local

condition. In order to solve the labor shortage and fill the long term labor needed for future growth,

newly relocated garment factory needs to learn about the culture and the psychology of Lao‘s people

which are difference and could be classified into more than 160 ethnic groups. This case can be

considered as a ‗Strategic Decision‘ or ‗Project Feasibility Study‘ which we have to quantify and

compare all critical decision variables and find out the optimal solution or win-win for all for factory

relocation and Human Resource Development (HRD). We can prove that the total stakeholder return

will be more valuable and more sustainable than one dimension SMV (Standard Minute Value)

benchmark which is widely accepted Western school of thought for industrial mass production. The

lesson and experiences learnt and presented in this case study will be very useful and valuable for all

foreign enterprises who want to make long term and sustainable business expansion into Lao PDR.

Furthermore, the successful HRD Strategy for labor recruitment and workforce development will

benefits not only to the income improvement, but also the real quality of life for Lao people who are

currently suffering from poverty and poor quality of life.

Keywords: HRD Strategy, Lao ethnic groups, Culture and Psychology, Quality of Life.

1. Introduction

Thai Garment sector used to generate export earning for Thailand close to 150,000 million baht (about

5 billion USD assuming 1 USD = 30 Thai Baht) annually and used to be the 2nd biggest source of

foreign currency for Thailand. During 1994-1995, TGMA (Thai Garment Manufacturer Association)

has funding a research project for NIDA Business School to do the extensive and action research to

help Thai Garment to be more competitive. Since then, Thai Garment Manufacturers have

systematically accumulated and improve the techniques for competitiveness enhancement (improve

productivity and quality, quick response and flexibility of the production system, etc.).

In the past 10 years, the emerging economy like Bangladesh, Sri Lanka, Cambodia, etc. become the

new competitors to Thai Garment Manufacturers on OEM market. The situation is getting worst when

Thai Baht is appreciate and Thai government announce the new minimum wage policy to become 300

baht in all area of Thailand in 2012. There are a lot of SMEs in Thai Garment Industry which cannot

change or adjust to the new situation. Thus, they have to close the factories and drained their workers to

find the new jobs which will finally harm the economy and the distribution of income for Thailand.

2. The strategic dilemma

Indy Fashion Group (IFG)1 is the pioneer of Thai Garment Manufacturer for Apparel and Lingerie

1 Name of company and persons in this case has been modified

mailto:[email protected]

ACEI

Typewritten Text


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products (e.g., Brassieres, Brief, Girdle, Slip, Nightwear, swimwear, etc.) for more than 20 years. The

total revenue of IFG used to reach 5,000 million baht (almost 200 million USD) annually. At that time,

total worker is peak at 5,000 persons. IFG has 4 factories located within the Kingdom of Thailand (2

factories in Bangkok, 1 Factory at Chaiyapoom, and 1 factory at Lumphoon). Mr.PK, the owner and

president of IFG, was graduate from NIDA Business School 20 years ago and received a bachelor

degree in Industrial Engineering from Chulalongkorn University 30 years ago. Mr.PK is not only a real

engineer, but also a quick response businessman and at the same time he is the strong leader with sharp

vision. During the past 20 years, IFG is the rising star in Thai Garment Manufacturers because of

Mr.PK‘s vision and good marketing relationship with oversea customers,

In the past 20 year, IFG has passed many crisis (including SARS in 2003, US and Euro crisis during

2007-2010, and the Thai grand flooding in 2011). The factors which help IFG to survive from the crisis

and storm of competition is that IFG has accumulate know-how for design and pattern making and hire

many talent engineers to join the group. For all these reasons, IFG can differentiate from the

competitors from inside and outside of Thailand by Trendy Design (IFG utilizes ODM strategy instead

of OEM as all other factories are doing) and reliable quality. However, the crisis in 2012 (from strong

Thai Baht and the jump in minimum wage) is not normal and not so easy to surmount. One evening in

March 2012, Mr.PK decided to call a special meeting among the top management team of IFG. Mr.PK

asked the critical question to the meeting ―What will happen if we decide to close IFG group and shut

down all factories and exit from garment business?‖ This question stunned all management team.

Mr.PS, the General Manager and senior engineer of the IFG, has made a quick comments ―If IFG

decided to close all factories, IFG will loss long term reputation as the leading garment manufacturing

in Thailand and all foreign partners will be shocked on this news. Furthermore, we have to lay off more

than 3,000 workers. According to the Thai labor law, IFG has to compensate workers 2 months – 12

months (depend on the length that workers has worked in IFG) in full amount of salary or wage earned

before lay-off. Approximately, IFG has to scarify more than 300 million baht (or 10 million USD) from

this decision. This amount of money will be vanished without any economic return. Furthermore, there

are a lot of oversea customers who still want to place order to IFG if IFG can relocate to nearby

countries namely CLMV (Cambodia, Lao, Myanmar and Vietnam) which are shown in Map 01

(Thailand and CLMV).‖

Map 01: Thailand and CLMV countries (Cambodia, Lao, Myanmar, and Vietnam)

Mr.PS stressed that ―IFG had accumulated 20 years experiences in Design, Production and Marketing

in Apparel and Lingerie Business. Thus, IFG has huge tangible assets and huge hidden value. If we

shutdown IFG today, all these value will be plummeted to zero. Furthermore, IFG has more than one

options and if IFG made the right decision, IFG can be reborn again outside Thailand soil.‖

Mr.PK agree with the idea and start to explore more information on the relocation options within


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nearby countries (namely CLMV) before making the final decision on the future of IFG. However, the

time for action is very limit. We have no time for trial and error. Otherwise, all customers will be

intercepted by foreign factories.

3. Relocation decision

3 months after the first meeting, Mr.PK has called another meeting in order to decide the future of IFG.

Mr.MN, the factory manager of IFG, has reported to the meeting that he was assigned by Mr.PK to

survey within CLMV area and find out the most appropriate new location for IFG. Mr.MN told the

meeting that: ―Since labor cost is more than 60% of the total production cost, we should select the new

location for IFG in one country from CLMV which can be able to recruit sufficient workers (at least

200 workers in one year in order to break even for operation and relocation overhead) and should have

competitive or lowest wage.‖

Then Mr.MN has reported that Lao PDR is the least interesting area for relocation since Lao PDR is a

booming in tourism and service sector and the labor cost in Lao is not the lowest and the population of

Lao PDR is the smallest compare to another countries in CLMV. Mr.MN is interesting in Myanmar

because Myanmar has plenty of workforce with lowest wage and Myanmar is currently promoting their

country for foreign investment.

According to the report by TGMA survey in 2012, Minimum wage for labor in Myanmar is the lowest

at 37-62 USD/month, Cambodia is the second lowest at 61 USD/month, Lao PDR is the third lowest at

79 USD/month, and Vietnam is the highest wage at 67-96 USD/month.‖

Finally, Mr.MN added to the meeting that even though Myanmar has the lowest wage among CLMV,

there are a lot of difficulties such as the language. Most of the local workers in Myanmar cannot speak

English. And the language they use will be similar to Indian language (both written and speaking)

which is far difference from Thai language.

Mr.PS gave some more opinion to the meeting that even though the information from TGMA report is

published in 2012, the labor and minimum wage situation is changing very fast especially Myanmar

and we need to recheck from the local and another source to get more accurate information about the

labor situation and minimum wage and other critical factors for relocation decision to CLMV. Mr.PK

agreed with the conclusion from the meeting and decided to call Dr.PD from NIDA Business School to

give more advice for this critical decision on factory relocation from Thailand to CLMV. Dr.PD has

given insight information to the meeting of IFG Executives that it is normal that most of Thai factories

always considered Lao PDR as the last choice and Myanmar is the priority choice (similar to Mr.MN‘s

opinion) when they are thinking about factory relocation to CLMV. However, Dr.PD has explained to

the meeting about the other aspects to be considered such as the legal aspect, the infrastructure

readiness aspect, the investment incentive aspect, government capabilities for GSP certificate,

competitiveness of industrial cluster, etc. (which shown in details in table 1). For all these reasons, we,

therefore, cannot rule out Lao PDR from the target for relocation.

Table 1: Population, Economy, Transportation System Information of CLMV Information C: Cambodia L: Laos M: Myanmar V: Vietnam

Capital Phnom Penh Vientiane Naypyidaw Hanoi

Official Languages

Khmer Lao Burmese Vietnamese

Religion

Buddhism 96.4%, Islam 2.1%, Christianity 1.3% and Other 0.3%

Buddhism 67%, Christianity 1.5%, and other or unspecified (mostly practitioners of Ghost worship) 31.5%

Buddhism 89%, Islam 4%, Christianity 4%, Hinduism 1% and Other 2%

Folk Religions / Beliefs 45.3%, Buddhism 16.4%, Christianity 8.2%, Non-Religion 29.6% and Others 0.5%

Population

(As of 2012)

14,864,646

Male: 48.78%

Female: 51.22%

6,645,827

Male: 49.75%

Female: 50.25%

52,797,319

Male: 48.53% Female: 51.47%

88,772,900

Male: 49.41% Female: 50.59%


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Information C: Cambodia L: Laos M: Myanmar V: Vietnam

Form of Government

Constitutional monarchy

Socialist State Unitary presidential constitutional republic

Single-party Communist-socialist republic

Source: World Bank Data

The Thai Chamber of Commerce

Dr.PD suggested that IFG has to develop a ―Business Case‖ at least 1 location in each country within

CLMV. Each ―Business Case‖ need to get the actual information from the feasible location (1

relocation option for Lao PDR, 1 for Myanmar, 1 for Cambodia, and 1 for Vietnam). Dr.PD

emphasized that the size and site for each ―Business Case‖ must be almost the same such as the

distance from main road, availability for telecommunication, internet, electricity, water, legal system,

export-import processing and supporting, time required for factory set up, etc. so that we can make the

‗Apple to Apple‘ comparison for each ―Business Case‖. Then, IFG need to do the comparison by using

both the simple weighted scoring and more sophisticate NPV (Net Present Value), IRR (Internal Rate

of Return) and PB (Pay Back Period), etc. We have to quantify all critical factors to make it possible to

apply capital budgeting techniques. Some factors such as the political and legal system and the utility

availability may affect the decision model through the risk premium and the cost of capital; while

another factors may affect the decision model through the higher production cost and expenses.

Dr.PD explained that we, then, should come up with the best result (―Business Case‖ for the location

country which got the highest weighted score and highest NPV and lowest PB criteria). However, we

cannot make the final decision from this end result since we have to do the sensitivity analysis for each

―Business Case‖ to see the risk which incur from each case (new emerging economy and less

developed legal system should be venerable to higher unexpected risk).

4. One problem solved, new problem occurred

IFG management team understood the whole idea of Dr.PD suggestions and revised all information and

developed the comparable ―Business Case‖ for first factory relocation decision to CLMV. When all key

points are considered extensively especially the time constraint, Lao PDR is then become the best

choice which will fit to the situation since IFG need to make quick decision for relocation and start

production as fast as possible to make the export to be continued. Lao PDR is suitable not only from

the availability of the utility and stable political and legal system, but also the official language ‗Laos‘

is almost 90% similar to Thai language in term of writing and speaking. The low barrier on language

help IFG to transfer the know-how to the lower and middle level staffs and workers quicker compare to

the other 3 countries in CLMV.

Finally, after the new factory is settle, the new problem occurred. There are some existing garment

factories in Vientiane (Lao PDR) starting to block our new factory on new workers recruitment. It is

normal practice to pay 500 baht (approximately 20 USD) to the introducer for new worker recruitment.

First, we perceived that this is the only one choice for us to get new workers and also follow the trend

(to pay for new workers introducer). We have to make decision based on ‗Sustainable‘ of the strategy.

It took us more than 1 year to develop a good reputation and good relationship with local communities

and also the head of labor department in remote province. We then found that the best solution is to

make our own ‗Branding‘ for labor market and try to use the ‗words of mouth‘ to spread our reputation

and at the same time making the closer link to National University of Lao PDR in order to develop the

middle managers who can communicate better with the local workers in Vientiane and remote

provinces of Lao PDR. Furthermore, culture aspect is playing key role in workforce management

which SMV (Standard Minute Value) in Western School of Thought could not be applied in this area.

There are a lot of idea developed during this period and it can be learnt and applied to another countries

in CLMV for strategic decision and HRD Strategy. Even though the problem may not be identical for

all cases, we should use the concept and policy for future decision making and HRD development plan

for another factories.

References

Bank of Thailand. Thailand Export Value of Apparels and Textile Materials (1995 - 2013)

Chaisrisawatsuk, S. (2008). Thailand and Its Cooperative Development Strategies for CLMV, in


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Sotharith, C. (ed.), Development Strategy for CLMV in the Age of Economic Integration, ERIA

Research Project Report 2007-4, Chiba: IDE-JETRO, pp.351-394

National Minimum Wage Committee, Ministry of Labor. Thailand Minimum wage categorized by

Province 1998 - 2013

Thai Garment Manufacturers Association. (2012). Information for investing in CLMV (in Thai)

Withisuphakorn, Pradit. (2012). Textbook, Project Feasibility Study (in Thai) NIDA Business School.

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