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Business trends

Thailand's M&A surge highlights push to adapt and navigate

Leaner, meaner corporates use outward investment in bid to move up value chain

Thai Beverage has acquired a majority stake in Vietnam's largest brewer Sabeco. (Photo by Shinya Sawai)

Long known as a destination for inbound foreign investment, Thailand has also become a significant outward investor, thanks to aggressive overseas mergers and acquisitions by its growing community of heavyweight companies. Recent forays into and beyond Southeast Asian markets, led by top Thai corporates like Thai Beverage (ThaiBev), Indorama Ventures and Thai Union Group, may be a harbinger of things to come as domestic companies seek ways to strengthen their competitiveness.

Taking a more assertive route through direct investment is only the beginning, but being able to leverage skills and resources obtained overseas to improve their overall operations is essential for these Thai companies to become truly multinational.

In the past, export-focused Thai companies relied more on the technological inputs and distribution networks of other multinationals, but overseas investment has now become an alternative strategy for them to move up the regional and global value chains. Being exposed to heightened competition boosts the technological and managerial capabilities of domestic companies.

As they become leaner and meaner, Thai companies abroad may be the key to the country's economic upgrading and potentially lead to greater economic integration among the 10 member countries of the Association of Southeast Asian Nations.

With a domestic investment growth rate averaging around 1.6% per year from 2010 to 2015, according to the World Bank, the rapid rise of Thai outbound investment raises concerns that investors are shunning Thailand for better growth prospects in the region. According to the United Nations Conference on Trade and Development, Thai outward foreign direct investment stock grew from $6.7 billion in 2006 to $85.6 billion in 2016, a thirteenfold increase in just a decade.

While almost 30% of Thai investment abroad is concentrated in the ASEAN region, its companies are also investing in more advanced and geographically distant economies. Based on U.S. Bureau of Economic Analysis numbers, Thailand ranked as the fastest-growing source of foreign direct investment in the U.S., with a compound annual growth rate of 55.5% in 2011 to 2016, surpassing even third-ranked China, at 44.7%. This rapid rise is conspicuous, although the total stock of Thai investment in the U.S. remains small, at $2 billion in 2016, compared to China's $58 billion.

Much of this growth has occurred through overseas M&A by large Thai corporates. In 2016, Thailand ranked second behind Singapore as Southeast Asia's most active purchasers, with a total value of $4.5 billion overseas M&A deals, accounting for one third of the total ASEAN value. The figure for 2017 is expected to be higher, given a recent string of large deals by leading Thai conglomerates. ThaiBev, the country's main beverage conglomerate, completed two major acquisitions worth $5.8 billion in Vietnam and Myanmar last October and December.

In June, Charoen Pokphand Foods, the agribusiness arm of the CP Group, announced its 95% acquisition of Paulsen Foods, a leading prepared foods company based in Germany, for $14.8 million. In petrochemicals, Indorama Ventures' acquisition of Portugal's Artlant, Europe's second-largest purified terephthalic acid producer, is believed to have cost the Thai group $34.23 million.

The steady rise of Thai overseas investment may be partly a response to a more conducive environment, especially given the Bank of Thailand's liberalization of capital controls from 2007 onward. With the Thai baht's ongoing appreciation -- it has strengthened 3.7% since the start of this year -- the central bank has encouraged Thai companies to invest abroad, partly to alleviate upward pressure on the local currency. Similarly, Thailand's Board of Investment, once focused entirely on inward investment, has since 2013 included outward investment as one of its principal policies to stimulate further economic growth.

It would be misleading, however, to attribute the rise of Thai corporate expansion overseas solely to a strong baht and favorable macro-economic factors. The country's recent surge in outward investment should be viewed as part of strategic efforts to strengthen companies' overall competitive position. While these Thai corporates may take different internationalization paths in terms of the nature or destination of their investments, the main objective is to secure a stronger position against their rivals amid intensifying globalization and competition.

Market expansion certainly ranks among the most significant motives for Thai overseas investment. Take ThaiBev's latest mega-deal. Vietnam, with its population of 92 million, rising income, and taste for beer, is an attractive market with the highest per capita beer consumption in Southeast Asia. ThaiBev's acquisition of Sabeco, which controls 17% of ASEAN's brewing market, not only added to its regional production capacity, but also widened ThaiBev's share of Southeast Asia's beer market to a staggering 26% from 9%.

Another factor in recent Thai overseas deals has been the push to secure stronger control in the value chain through acquisitions of higher value-adding activities. Thai Union's acquisitions of leading brands in the U.S., Canada and Europe have enabled it to grow from a domestic manufacturer of canned tuna to become a leading seafood company, with a $4.3 billion annual turnover and a portfolio of global brands. Similarly, Indorama Ventures' deals in Portugal, Germany and Mexico in 2017 strengthened its position as an integrated chemicals company. It had total revenues of $7.2 billion in 2016 and a presence in 25 countries in North America, Europe, Asia and Africa.

Thai companies in the resources industries have also used overseas acquisitions in the quest for alternative sources of raw materials. Banpu Public Co., an energy company with a background in coal mining, has been acquiring shale gas businesses in the U.S. since 2016. PTTEP, the exploration arm of the state-owned PTT Group, has ventured into resource-rich countries and regions such as Canada, Australia and Africa.

While these purchases added to their portfolio of assets, becoming multinational requires more than consolidating financial accounts. The real challenge for these Thai companies to transform from domestic leaders to regional and global players lies in their ability to integrate, leverage and consolidate the acquired skills and technology to their current set of resources.

More broadly, Thailand's economy may depend on how its domestic companies adopt technological and managerial capabilities from their experience competing abroad. Capitalizing on their overseas M&A requires a trickle-down process whereby domestic competitors and suppliers also gain from increased exposure to global competition, and a bigger pool of domestic companies venturing overseas. Closer to home, as Thai corporates increase their value-chain activities throughout ASEAN, these intra-regional investments can become the building blocks to the kind of economic integration that has long been elusive.

Pavida Pananond is associate professor of International Business at Thammasat Business School, Thammasat University in Bangkok.

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