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FY 1999: Thailand |
CHAPTER IV. MARKETING U.S. PRODUCTS AND SERVICES DISTRIBUTION AND SALES CHANNELS There are two major channels of distribution available to U.S. exporters. The first includes large, well- established trading companies with strong financial resources and sales volumes, as well as an extensive presence in many industrial sectors. This category includes many Thai trading companies such as Berli Jucker and Loxley, the U.S. firm, Louis T. Leonowens and European Trading Companies such as B. Grimm, Diethelm, East Asiatic Company, F.E. Zuellig and Inchape. In many cases, these large traders form marketing or production joint ventures with foreign firms when import volumes reach a sufficient level to justify local investment. In highly specialized markets (e.g. Defense), however, these large import/distribution companies often shy away from direct involvement. Instead, they prefer to rely on sub-dealers or agents who have the requisite specialized contacts or expertise. The second available channel is smaller importers. These importers generally specialize in one line of business in which they have proven networks and market know-how. In any case, it is advisable to perform careful due diligence during these financially difficult times to assure that a potential agent or distributor is fiscally healthy and able to fulfill his part of your arrangements. On your side, it may be necessary to develop more flexible, creative financing arrangements to compensate for credit shortages and financial illiquidity. USE OF AGENTS AND DISTRIBUTORS -- FINDING A PARTNER The economic crisis in 1997 resulted in an almost eighty percent drop in the number of the Agent/Distributor Service customers of U.S. Commercial Service Bangkok. However, even though near term sales are flat in many sectors because of the financial crisis, Thailand's is expected to resume its formerly dynamic course in the future. The Royal Thai Government and local companies are still interested in establishing arrangements with foreign companies. Now is a wise time to build long-term relationships with local companies as those contacts will be considered as promising partners as the economy resumes growth. Agreements between foreign suppliers and local agents and distributors are governed by the general contract law under the Thailand Civil and Commercial Code. The relationship between the two parties is basically a buyer- seller relationship under a sale of goods contract. Under the Thai Revenue Code, this arrangement avoids any liability for the supplier. Importers must obtain licenses for products such as foodstuffs, certain pharmaceuticals and chemicals. It is the responsibility of the local agent or distributor to apply for any necessary licenses. New market entrants should appoint an established agent/distributor with good local contacts, market expertise and technical know-how. U.S. exporters must invest sufficient time and attention in selecting a qualified agent and providing training for marketing and technical support staff. Frequent contact with local representatives is critical, especially at the outset, in order to build a good working relationship based on shared values and objectives and to make sure there are no misunderstandings or communications problems. This is particular the case during the difficult economic times. Verifying assurances of a partner's continued viability and commitment to work together is crucial. The U.S. Commercial Service and the Foreign Agricultural Service at the American Embassy in Bangkok can provide valuable assistance in locating potential representatives and acquiring preliminary market data. Staff at both offices can help companies identify agents and distributors will places in their industry sectors, and they also know many reputable local consultants who are qualified to design market entry strategies and to identify local business partners. FRANCHISING The current economic crisis in Thailand is hurting the franchise business for both international and local operators. For several reasons, a local franchise operation has better growth potential than an international franchise. The local franchise requires a smaller initial capital investment. It also normally asks for a lower franchise fee and profit sharing scheme. The international franchises will experience difficult times for the next few years (1998-2000). The devaluation of the baht currency causes an automatic increase of the franchise fee. The devaluation also hurts the cost of imported supplies, which, in turn, causes an increase in the production cost. The already tight competitive market, due to the economic downturn, limits the opportunity for the franchise operator to pass on the burden to the customers through a price increase. Those already in the market, particularly those in fast food and consumer goods, are experiencing diminished revenues because the Thai people are being more cautious and selective in their spending. It is difficult to start new international franchises in Thailand now. The devaluation has almost doubled the fees, and financial institutions are reluctant to finance any investments at this time. Thai investors tend to hang onto their cash and postpone any potential investment decisions until later. However, as the expected recovery starts, franchising will be seen as an attractive, relatively safe way to get back into business for many Thai investors who have been rendered inactive. The franchise market structure has not changed much since the crisis began. Food franchises (fast food restaurants) command approximately 45 percent of the market, followed closely by convenience stores with approximately 35 percent. The rest goes to service franchises such as laundry, car wash, language and computer schools. Franchises from the United States still lead the market with approximately eighty percent share. The local franchises have approximately fifteen percent and the rest goes to other countries (United Kingdoms, Australia, etc.). Local investors are very receptive to franchises from the United States. DIRECT MARKETING Direct marketing is very popular in Thailand and is expected to be booming in the next few years. Since the economic crisis began in mid 1997, many people who have lost their jobs have joined the direct marketing force. Often, they have strong business experience and high motivation. Direct marketing is used widely in the sales of cosmetics, health products, cleaning and household consumer goods, electrical appliances and service businesses such life and health insurance. Major U.S. brands are Amway, Nu Skin, Herbal life, and Avon. Mail order sales/and direct marketing are increasing because of the growing number of credit card operators. Leading the market in this sector are American Express (Amex) and Citi Bank (Visa Card and Master charge card). Most major department stores in Thailand also are pursuing direct marketing via mail order campaigns through their own networks of discount card holders. The direct selling of household consumer goods and electrical appliances using an installment plan is gaining popularity among consumers, especially in rural areas. TV home shopping was introduced this year and is well accepted and becoming popular. Direct marketing is not bound by any specific laws other than regular commercial laws. JOINT VENTURES/LICENSING Joint ventures and licensing agreements are important market entry strategies for American exporters to Thailand. In many cases, the only way to overcome costly freight charges, import restrictions and competition from cheap local goods is via local production. In spite of the devaluation, Thai firms need to become more technologically advanced to offset competition from lower cost producers, some of whom also have devalued their currency. Joint venture partnerships with technology transfer and training components are effective mechanisms to achieve this. Many Thai firms are actively seeking U.S. joint venture partners who, along with much needed capital in these economic times, can also bring technical, marketing and management skills to a business relationship. In turn, Thai firms generally offer assets, valuable local vendor and government contacts, and established business relationships throughout the region. A number of aggressive U.S. companies have already entered into strategic joint-venture relationships with Thai partners in Indochina and China. The American Chamber of Commerce in Thailand facilitates joint ventures in the manufacturing and service sectors. The Commercial Service at the U.S. Embassy also provides assistance in locating potential joint venture partners for American companies. STEPS TO ESTABLISHING AN OFFICE The primary organizational forms for commercial enterprises are the sole proprietorship, partnership, limited liability company, joint venture and foreign branch. All are similar in nature to those found in the United States. Limited liability companies, however, are more often privately-held rather than public corporations. The majority of foreign corporations operating in Thailand do so through private limited liability companies. The U.S.-Thai Treaty of Amity and Economic Relations of 1966 allows U.S. majority-owned businesses, incorporated either in the United States or in Thailand, to operate on a nearly equal footing with Thai corporate entities. Consequently, U.S. corporations may establish wholly-owned subsidiaries or branch offices in Thailand without the constraints that other foreign firms face from the Alien Business Law. However, there are still government restrictions in the communications, transport and banking sectors, the exploitation of land and natural resources and the trade of domestic agricultural products. To register under the Treaty of Amity, a U.S. company needs to file an application with the Department of Commercial Registration at the Thai Ministry of Commerce. The Commercial Service at the U.S. Embassy in Bangkok has further information. SELLING FACTORS/TECHNIQUES To differentiate themselves from local and third country competitors, U.S. firms should emphasize their strengths in quality, innovation, technology enhancements and customer service. Thai customers have come to expect more and better styles and designs, regular product upgrades and updated technology from U.S. companies and will often choose U.S. products and services on the basis of "value for money," not solely by cost factors. Training is an effective means to make potential customers aware of the quality of products and services. Due to the current economic crisis, most Thai buyers require more long-term or more flexible and creative financing terms. ADVERTISING AND TRADE PROMOTION Advertising and trade promotion are important marketing tools in Thailand. In particular, foodstuffs and consumer products should be promoted heavily via a full range of mass media. In Thailand, many companies rely heavily on the two major English-language newspapers, "The Bangkok Post" and "The Nation", for advertising, but Thai-language publications should also be considered. The most popular daily newspapers in Thai are "Krung Thep Thurakit" (Bangkok Business News) and "Manager". Special promotional campaigns should be conducted at local shopping centers, hotels and convention halls. Movie theaters and cable channels are also viable means of reaching the public. It is advisable to translate all product literature and technical specifications into Thai when advertising in trade journals and organizing technical seminars. Successful firms also arrange for Thai agents and major customers to receive specialized training at the U.S. plant. Equipment is often donated to conduct training in Thailand. PRICING THE PRODUCT Thai end-users agree that price is a significant factor in selecting which products to purchase, especially during the economic crisis. First time buyers in Thailand often tend to buy based on price alone. Less than fifty percent of consumers buy based on brand-name recognition. Detailed marketing analysis is needed for developing a pricing strategy in Thailand. U.S. firms need to study such factors as the channels of distribution, the necessary sales and promotion techniques and the current pricing practices of key competitors. Buyers are often offered free gifts or extra options with their purchases. Standard credit payments, as in most international trade, apply in Thailand as well. Midnight sales, or occasional sales are proved success in the Thai market. SALES SERVICE/CUSTOMER SUPPORT To differentiate themselves from local and third country competitors, U.S. firms should emphasize their strengths in quality, innovation, technology enhancements and customer service. Thai customers have come to expect more and better styles and designs, regular product upgrades and updated technology from U.S. companies and will often choose U.S. products and services on the basis of "value for money", not solely by cost factors. Training is an effective means to make potential customers aware of the quality of products and services. Due to the current economic crisis, most Thai buyers require more long-term or more flexible and creative financing terms. SELLING TO THE GOVERNMENT Even though many government projects have been put on hold because of the economic crisis, U.S. exporters are highly competitive in such key fields as power generation and transmission, petroleum refining and petrochemicals, telecommunications, transportation, the environment, health care and defense. Companies with strategic views have not cut off their business development efforts despite the cut backs. The key to successful bidding on Thai government contracts and supply tenders is to have a reputable local representative with good access to the procuring agency and knowledge of specific requirements. Without this intermediary, it is very difficult to win a government project. Representatives are accepted as legitimate players in the bidding process. Agents often provide an early "heads up" to U.S. firms when they hear of attractive tenders. Before these tenders are even issued, they can sometimes ensure that the principal's product can meet all of the tender specifications. A specific set of rules, commonly referred to as the "Prime Minister's Procurement Regulations", governs public sector procurement. These regulations require that non- discriminatory treatment and open competition be accorded to all potential bidders. However, in reality the system is not entirely transparent, nor does the Royal Thai Government always provide a level playing field for foreign bidders. The procuring government agency reserves the right to accept or reject any or all bids at any time, and is not bound to approve the lowest bid. The procuring government agency may also modify the technical requirements mid-way in the bidding process. This flexibility can prove frustrating to bidders and charges that changes are made for special considerations have been common in the past. Generally, the procuring government agency provides preferential treatment to domestic suppliers who receive an automatic fifteen percent price advantage over foreign bidders in initial bid round evaluations. The specific laws that apply to international tenders are Regulations 87 and 89 which generally adhere to established international procedures. The "two envelope" system is commonly used, with technical evaluations of bids conducted separately from cost evaluations. The new Constitution, passed in October 1997, contains a chapter on corruption in government. The status and powers of the Office of the Counter Corruption Commission (OCCC) have been enhanced, giving it independence from all branches of government. The members of the new Commission sit on the OCCC for a term of nine years with no renewal, and report to their own Chairman. Persons holding high political offices, and members of their immediate families, are now required to list their assets and liabilities before taking office and upon leaving office. It appears that there is a will developing to enforce transparency. However, because of the economic crisis, the Royal Thai Government has to cancel or defer a number of infrastructure projects. Almost all projects that are moving ahead are ones that were committed before the crisis, and that had long-term financing. Counter trade Recently, the Royal Thai Government established a counter trade requirement for government procurement exceeding 500 million baht (approximately $12.5 million). It is likely that the amount of government procurement requiring a Counter trade arrangement will be lowered to 300 million baht (approximately $7.5 million) in the near future. The amount of Counter trade items is negotiable on a case-by-case basis, but average twenty to fifty percent of the purchase price. Off-shore soft loan financing programs, such as the World Bank, Asian Development Bank, OECF loans and technology transfer programs are exempt from the Counter trade requirements. Thai commodities used in Counter trade deals include rubber, rice, tapioca flour and certain kinds of manufacturing goods. In some cases, offers of technology or co-production (offset) are considered in lieu of commodities. There are restrictions on overseas markets where Counter trade commodities can be sold in order to limit competition with Thai exporters. PROTECTING YOUR PROPERTY FROM INTELLECTUAL PROPERTY RIGHTS INFRINGEMENT Inadequate enforcement of protective measures in Thailand for U.S. copyright, patent and trademark holders remains a serious bilateral trade issue. U.S. firms should protect themselves by registering all of their intellectual property. Lawyers specializing in this area can initiate legal actions to combat piracy. However, this can be a lengthy process. The Thai Government has taken legislative and administrative steps to update and increase enforcement of existing copyright laws. An Intellectual Property Court began operation in September 1997. But there are serious enforcement problems, and the U.S. Government continues to monitor Thailand's progress in implementing protective measures. Thailand remains on the U.S. Trade Representative "watch list" because of its weak IPR enforcement. NEED FOR A LOCAL ATTORNEY The services of a local attorney are required for executing distributorship agreements and setting up offices in Thailand. Normally, the paperwork can be completed quickly and easily. Law firms also advise on the various types of business organizations that can be set up, assist in registering firms under the Treaty of Amity, and in obtaining the requisite permits. Lawyers are needed for registering patents and trademarks and for taking other legal measures to protect a product from intellectual property right infringement. The U.S. Commercial Service at the American Embassy in Bangkok has a list of Thai lawyers and American legal consultants who specialize in commercial law. PERFORMING DUE DILIGENCE/CHECKING BONA FIDES OF BANKS/AGENTS/CUSTOMERS The current economic crisis had its start in excesses in the financial sector that were not discovered or checked because of legal, regulatory, institutional and information deficiencies, and a weak supervisory system. The problem started, to a large extent, because of excessive risk taking in the private sector. A large number of existing banks, finance companies and public companies are seeking foreign partners. There is a great deal of discussion between sellers and foreign (including U.S.) buyers/investors. U.S. buyers/investors considering any deals in Thailand now should be cautious, and exercise extreme due diligence as a number of local companies still lack of transparency in their account books. U.S. buyers/investors are advised to hire professional accountancy companies to do due diligence to check bona fides of the bank or company they want to buy. A number of leading American accounting and consulting companies with expertise in doing due diligence are in practice in Thailand.[end of document]
Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U. S. Copyright Law, Title17, United States Code.
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