BANGKOK -- A special economic zone in southern Laos that is being driven by foreign investment is becoming the new symbol of Southeast Asia's industrial development.
The Savan-Seno Special Economic Zone in Savannakhet has drawn nearly 60 companies, including Toyota Boshoku, a supplier to the Japanese carmaker, and Aderans, one of the largest wig makers in Japan.
The zone's location and the Lao government's generous tax incentives are attracting manufacturers to build production facilities there. The Savan-Seno SEZ also offers opportunities to build plants in neighboring Thailand.
The SEZ is rapidly drawing interest from Japan, with eight Japanese companies already setting up manufacturing operations there. In early February, Toyota Boshoku officially opened its $5.6 million plant in the zone, although it has been making car seat covers there since last year. At the opening, Hiroyuki Kishino, Japan's ambassador to Laos, said the plant represented "a landmark" in the history of Japanese business investment in the country.
Nikon started the trend in 2013, when it became the first Japanese company to build a plant in the Savan-Seno SEZ. The trail blazed by the camera maker is now being followed by a growing number of Japanese companies. Aderans, which outsourced its wig production to the Laos capital, Vientiane, will soon start running its own plant in the SEZ.
All up, 59 foreign companies, including French optical product group Essilor and companies from other members of the Association of Southeast Asian Nations, have so far invested $226 million in the zone.
It's all about location
The Savan-Seno SEZ's location is a key factor behind the surge of interest. Savannakhet is part of the so-called East-West Economic Corridor, the transport artery stretching across the Mekong region, linking Vietnam, Thailand and Myanmar.
The Laos city of Savannakhet near the Thai border is being offered as a location for supplementary production facilities to plants in Thailand.
As major manufacturers expand their supply chains across borders for optimal division of labor, Japan Logistic Systems has built a distribution warehouse within the Savan-Seno SEZ to be used as a regional center for its cross-border logistic services. Phanomkone Dararassamy, director of the Savan-Seno Special Economic Zone Authority (SEZA), stresses the zone's strategic location near Vietnam, Thailand and Myanmar.
The government's tax incentives for investing in the Savan-Seno SEZ include a 10-year exemption from corporate income tax, which is usually 24%. Income tax for employees of companies that have invested in the zone is also fixed at 5%, compared with up to 24% for ordinary workers.
Companies in the SEZ also get cheaper electricity -- about half the rate charged on businesses in Thailand.
However, there are some factors that could undermine the competitive advantage of Laos. In April, the country's minimum wage was raised 44% to 900,000 kip ($110) a month -- close to Vietnam's ($140) and Cambodia's ($128).
The government is also concerned about its neighbor's plans to develop the border area. Research has begun into an industrial park in the Thai province of Mukdahan, across the Mekong River from Savannakhet. A SEZA official fears the park could take foreign investment away from the Savan-Seno SEZ. It could also attract Lao workers wanting better pay.
Foreign companies looking to set up production in the region will have to carefully weigh up the pros and cons of Lao and Thailand.