Thailand Fuel Troubles: From Subsidies to Substitution

Concern over the impact of rising fuel prices on the Thai economy has prompted a two-pronged intervention, which seeks to stabilise diesel prices through subsidies on the one hand, as well as accelerate the adoption of bio fuel alternatives to reduce dependence on fossil fuel on the other.
While these may appear to be rational responses to address inflation, both approaches are not without problems, and if international crude oil prices continue to rise, there is a danger that Thailand’s CPI (Consumer Price Index) may rise above GDP growth before the end of the year.

The Trouble with Subsidies: Thailand’s Oil Fund
To stabilise prices in the short-term, the state is currently subsidising the cost of diesel from Thailand’s Oil fund to keep pump prices at just below 30 Baht a litre. However, worldwide events since the subsidy was implemented in January, have driven up the costs of this subsidy from the projected 5.4 billion baht per month announced in December to an actual 7.4 billion baht per month. This is rapidly eating away into the reserves of the oil fund, prompting concerns that the entire fund may be depleted by early April. According to a report from the Ministry of Energy, the Fund now only has 2.1 billion baht left.

The Trouble With Substitution: Alternative Fuels
While Thailand has a good track record in terms of promoting alternative transport fuels, it is doubtful whether gains can be made quickly enough to counter inflationary pressures.
The use of dual fuel hybrid passenger cars, running on petrol/LPG, or petrol/electricity, is more widely established than most other countries, and the share of bio fuel (and palm oil in particular) has also markedly risen over the past 5 years, but the overall market share of alternative fuels is still relatively small. Moreover, for the transport of goods in particular, dependence on diesel remains key, and while it may be politically and economically desirable to reduces this by encouraging bio fuel as a substitute, this is simply not practical in the short-term.
Indeed, while the Ministry of Energy has been encouraging bio fuel producers to increase production, a national shortage of cooking oil has now forced it to prevent the purchase of raw palm oil for fuel purposes.

Where has all the Palm Oil gone?
As the world’s third largest producer of palm oil, Thailand is one of the last places where one would expect palm oil rationing, but this is exactly what happened last week, with customers queuing to buy their quota of one bottle of cooking all per person. Predictably, this has resulted in a political furore, with allegations of hoarding and speculation against some companies and incumbent MPs, but truth of the matter probably lies closer to the fact that most of Thailand’s palm oil is already being directed to energy uses, and that this cooking oil shortage was ultimately examined by some other well-intentioned but ill-conceived government intervention. For Thailand caps the retail price of cooking oil at $47 Baht a bottle, a price which is too low to allow producers to make a profit, a price which can only be maintained by subsidising imports of cooking oil, and thus a price which encourages exactly the sort of hoarding the government is trying to prevent.

* Thailand’s Oil Fund was established in 1979 as a response to the Oil Shocks to provide a monetary reserve for stabilising fuel pump prices, and it is financed from a special Oil Fund Tax levied on business. Since fuel prices were liberalised in 1991, the fund has principally been used to promote other political objectives (such as use of LPG).

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A Light at the end of the Tunnel? Global Trends and Opportunites for British Business

A wise man* once said that “nothing endures but change” and this is a most apt expression for the times that we are living in. The world is a changing place and fears that economic growth in the USA and Europe will stagnate, as Asia and other parts of the developing world rise, are increasingly being realised. While we are still short of a total reversal of the situation of the mid-20th century, when the developing world was synonymous with debt and no hope of growth, it is becoming increasingly clear that the 2008 economic crisis is unlikely to be followed by a strong recovery for the West any time soon. Moreover, the long-term indicators are not optimistic, as changing demographic trends and the unsustainability of debt-driven consumption may necessitate a radical shift in the ways we do business and live our lives.

Opportunities for British Business
But all is not doom and gloom, as these global changes also create opportunities. It has become increasingly clear that the devaluation of sterling in 2008 is a long-term phenomenon, which is a strong impetus for making the UK economy more competitive. In combination with rising purchasing power in the emerging markets of Asia, where the middle class will soon approach one Billion, this presents a tremendous opportunity to open up new markets for UK goods and services:

1. Services
The service sector is the first to be able to seize opportunities offered and in Asia there is a lot of demand for precisely the type of services which the Uk has a competitive edge in. For example, a set of recent studies by the LDA identified a myriad of current opportunities for the finance, IT and creative industries in China, including the insurance sector, e-Healthcare, industrial design and TV programmes among many others.

Other services for which there is a lot of potential business in Asia, include contracting and consultancy in engineering and infrastructure development, particularly water supply and waste-water management, as well as alternative energy and other clean-tech industries. But UK businesses will have to fight hard to gain and retain market share in these fields, as there is fierce competition not just from other western competitors, but also from Asian countries themselves, which are heavily investing in R&D and in engineering-related education.

2. Manufacturing and Related-Sectors
While we are not likely to see a resurgence of British mass-manufacturing at any time soon, it no longer as far-fetched a notion as it would have seemed a few years ago, and may be within the realm of possibility by 2020. Prices for mineral and material inputs being equal at a global level, the main determinant for competitiveness is the cost and efficiency of labour. The cost of this is currently driven up by direct and indirect taxation, as well as overregulation in health and safety compliance requirements, which is also a major factor preventing entrepreneurship.

But for those producing innovative and high-quality products, the market is already there. Current opportunities for exporting manufactured goods to Asia range from the high-tech industries, such as precision tools and medical equipment, to branded luxury goods and handicrafts.

3. “Importing Customers” – the Education and Tourism Sectors
The British education sector has long benefitted from the foreign students and this is a trend that is likely to continue to grow as long as quality remains high. Private secondary schools in particular are well positioned to make up for decreasing enrollment rates from UK students by soliciting new students overseas. The situation for the tertiary sector is more complex, as private universities generally do not enjoy the same prestige as their counterparts in the US, and the state sector is subject to more political interference.

In theory at least, Tourism also stands to benefit a lot, as the UK is high on the wish list of places that Asia’s middle classes would like to visit. Other European countries are already benefiting from this to a large degree, but in the UK, growth in this sector has been hampered by restrictive visa policies, and it will require a great deal of political will to address this.

Obstacles to Growth
Sceptics may point out that Sterling has been in a steady decline since the 1970s, when it had an exchange rate of 1-6 for the Deutschmark and that UK manufacturing has declined in tandem. This is correct, but in the 80s the reasons for this were primarily domestic. The price advantage means nothing unless you are also able to compete in terms of quality or innovation. Moreover, macro-economic opportunities can only be realised if managers and entrepreneurs act to seize these. Aside from dedication, this requires a willingness to take risks for long-term investment in both research and marketing. And if you are not prepared to take these risks than you cannot expect to prosper.

* Heraclitos, a greek philosopher in the 5th Century BC

Posted in Asia, Business opportunities, China, economics, Export, globalisation, UK | Tagged , , , , | 1 Comment

That order from China may be too good to be true

So you’ve just got an enquiry for a large order from a company in China and you’ve been invited to go there to sign contracts. Perhaps you’ve already done some research, and were happy to see that the company is a genuine business trading from the address they gave you. You’ve negotiated terms and received a contract the terms of which seem reasonable to you and your lawyer. They may have even agreed to pay in advance. So you’ve looked into flights and visas, and are excited about your first trip to the world’s rising economic powerhouse.

But wait! As the old adage goes, “If it’s too good to be true, it probably is”. Just sit back and think how you would feel if the enquiry came from Nigeria rather than China – that’s because Nigeria is the origin of the scam that you’ve just been targetted with. Unscrupulous “business people” in China have refined the so-called 419 fraud and taken it to new heights, making it almost indiscernable from a legitimate business request.  Gambling on a success ratio of over 10%, they invest in the registration of a company with an export license, rented office and a young English-speaking team that is mostly unaware of their bosses fraudulent intentions.  Most clever of all, often the scam is such that there’s no clear proof of a crime being committed, which means the same firm can do it again and again.

So how do you distinguish a genuine order from a scam? There are a number of tell-tale signs, which should arouse your suspicion:

1. The original enquiry was unsolicited.

2. The company is assured of the quality of your product and does not require a sample.

3. They insist on the need for you to go to China in person.

4. They’ve mentioned the need for a notary fee of either a fixed sum or based on a percentage of the value of the order, which is to be split 50/50 between both parties.

5. The language of the default page on their company website is English.

The sad thing is that any of the above can also be found in legitimate orders, so one should be careful not to dismiss any enquiries from China offhand. The country is growing at a rapid pace, a large proportion of its consumers have the purchasing power to buy quality products from the West and there is a huge potential for developing genuine business. It is only when these and other indicators are found in combination, that fraudulant intentions can be identified.

We’ve seen quite a few companies in Southeast England who have been targetted with this scam recently and we’re of aware of a number cases elsewhere where the fraudsters were successful. Should you have received an unsolicited order from China, then please contact our research division: Go East Intelligence

Posted in Asia, China, Export, Sales, Scams | Leave a comment

Welcome to our blog!

Welcome to the blog of Go East Consulting – the independent Asia specialists!

In this blog we’ll be presenting a range of articles and other information to provide you with cultural and economic insights on doing business in the emerging markets of Asia.

We hope you’ll find these reseources useful and would appreciate your feedback.

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