The Thailand Ceramic Tile Industry

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					             The Thailand Ceramic Tile Industry in 1992
This case was written by Will Mitchell at the University of Michigan’s Business School.
Assistance was provided by members of the MBA program at the Sasin Graduate
Institute of Business Administration at Chulalongkorn University in Bangkok, Thailand.
Some figures are casewriter’s estimates.

The ceramics industry is one of the oldest industries in Thailand, traditionally making
pots, plates, bowls and other kitchen utensils. Thai ceramic firms began to make
decorative building tiles to substitute for imported tiles in 1969. Tile exports began
during the mid-1970s, although in 1992 the primary market continued to be domestic
buyers.


Products

In 1992, there were more than thirty tile manufacturers in Thailand, most basing their
operations on simple production technology and low labor cost. These companies
produced several types of tiles, including simple, glazed non-ceramic (4 inch x 4 inch);
unglazed ceramic; glazed ceramic; and mosaic tiles. This case is primarily concerned
with glazed ceramic and mosaic tiles.

Glazed ceramic tiles with shiny or matte finishes are used to cover floors, walls and
counters. The tiles are made by adding water to slip, which is a mixture of ground
stone, sand and clay. After drying, the wetted powder is compressed into tile form,
glazed and colored. The tiles are then strengthened by baking in a kiln at 1000 to 1250
degrees centigrade. Decorative wall tiles are fired at lower temperatures than floor and
counter tiles. The lower firing temperature creates brilliant colors and glossy surfaces
but makes the glazes less durable.

Unglazed ceramic mosaic tiles are made from porcelain rather than clay, and are
durable and slip resistant.

Substitute products include both more and less expensive products. More costly
coverings include marble and granite that tend to be longer lasting than tile. Less costly
coverings include vinyl, PVC and linoleum. Tiles are easier to maintain, more durable,
and cleaner than inexpensive substitutes.


Markets

Domestic Users and Channels

In Thailand, ceramic tiles are sold to homeowners and to contractors for condominium
and large-scale property development projects, such as office/shopping complexes.
Architects and interior designers often influence customer choices.



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Two types of retailers service the homeowner market. Some retailers are dedicated to
a single firm, selling only its ceramics products, but carrying the full range of products.
Other outlets carry products from many manufacturers, but may have a specific focus,
such as bathroom fixtures and design.

Project developers often negotiate directly with the manufacturer. Manufacturers
frequently will direct the customer to a dealer to negotiate a price after agreeing on a
design. Tile manufacturers may submit supply bids for particularly large projects, and
then pass the order to a dealer if the bid is accepted.


Domestic Demand

Demand can be segmented into high, medium and low end. High end users seek
quality and new designs with little price sensitivity. Low end users are price sensitive at
the expense of quality and design. Medium range users' needs fall between these
extremes.

Sales were tight during the early 1980s as Thailand experienced a severe recession
from 1983 to 1985. Tile manufacturing capacity exceeded local demand during this
period, which the industry dealt with by allocating production based on past market
shares. Demand more than tripled between 1987 and 1991 as annual GNP growth
rates in excess of 10% fueled a property development boom. Condominiums, town
houses, shopping malls and hotels were constructed at a prodigious rate. Sales growth
is reported in Figure 1.


                                           Figure 1
                            Thai Ceramic Tile Sales: 1987-1991
                                        Sales†          Growth(%)
                            1987         585
                            1988         762            30
                            1989         941            24
                            1990        1313            40
                            1991        1855            41
                            †
                              In million baht. $1 U.S. was equivalent to
                            approximately 25 baht. Thai inflation ranged
                            from 5% to 6%.




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New tile manufacturing capacity was added during the boom of the late 1980s, some of
which had not yet come on line in 1992. The development boom slowed during 1991
and in 1992 available production capacity roughly balanced current demand. The
industry feared renewed excess supply if the construction slump continued. Key
economic indicators are shown in Exhibit 1.


Foreign Users and Channels

The leading foreign markets for Thai glazed ceramic and mosaic tiles have been, in
order of importance: the U.S., Australia, Germany, Singapore and the Netherlands.
(See Exhibit 2.) Typically, tiles are marketed internationally through independent
agents and foreign wholesalers. Thai exporters are another important distribution
channel.

In joint ventures with foreign firms, the foreign partner usually locates the overseas
markets. Sales are promoted by organizing trade exhibitions in foreign countries.


Foreign Demand

Exports of mosaic tiles are increasing. Between 1986 and 1988 the average increase
was 67% per annum. However, on July 1, 1989 the U.S. government issued a cut in
Generalized Trade Preferences (GSP) on glazed mosaic tiles. This change resulted in
a 25% drop in Thai market share of mosaic tiles in the U.S. The GSP cut did not apply
to other types of tiles, and so did not affect market share in those segments.

Major manufacturers of glazed ceramic and mosaic tiles in Japan, Korea and Taiwan
are confronting problems of raw material supply and high production costs. They also
face high foreign exchange rates. These factors affect foreign demand for Thai tiles.

Although export sales are desired, transportation costs and tariffs have limited their
growth. Some Thai manufacturers have seen foreign direct investment as the major
opportunity for foreign sales.

Key problems include higher fuel prices than in some competing ASEAN countries,
substantial transportation costs to the Port of Thailand and slow service at the Port.
Quality often lags behind leading-edge world standards because of technological lags.
Wage rates in Thailand are low by developed country standards but have begun to rise.
The national minimum wage was raised to slightly over 100 baht per day in 1992.


Manufacturing Process

Most of the raw materials needed for tile manufacture are available in Thailand,
including kaolin, clay, quartz, limestone and feldspar. Some critical materials must be
imported, however, including the clay, quartz and glass sand. The industry is centered


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near the available materials, in the Samutsakorn it is near Bangkok's commercial center
and shipping facilities on the Gulf of Siam, while Saraburi is located on a major inland
highway north of Bangkok.

Tile design and manufacturing quality are critical requirements for success in the
industry. Designs have often been licensed from Italian tile manufacturers. After
licensing, a new design takes six months to a year to bring into production.
Manufacturing quality depends on the quality of manufacturing equipment and the
availability of skilled labor.

The major tile manufacturers in Thailand have upgraded their manufacturing equipment
during the past twenty years, although they have sometimes lagged behind the leading
global technological edge. Sophisticated grinding and kiln firing machinery has often
been acquired from Italian companies that are considered the world leaders in tile
manufacturing techniques. Smaller Thai producers have retained older production
techniques and facilities.

Other than the grinding and kiln firing processes, most aspects of the production
process are labor intensive, even for advanced firms. Skilled workers with a lot of
experience are needed to meet quality standards in critical aspects of tile manufacture.
Skilled labor was in short supply in 1992, as training had not kept up with increased
demand and technological advances made during the past decade.

Economies of scale in the industry have never been precisely measured. Managers
believe that larger facilities translate into a substantial cost advantage, both in Thailand
and in other countries.


Government Involvement

The Thai government has played a major role in the industry since the mid-1970s. The
Petroleum Authority of Thailand provides natural gas at a subsidized rate. Imports of
ceramic tiles were banned in 1978. However, tariffs and import restrictions were
scheduled to decline over the next fifteen years based on agreements reached within
the ASEAN Free Trade Area (AFTA) during the early 1990s.

The government encourages tile exports through investment incentives for plants that
export at least 80% of their production. The Ministry of Science and Technology and
the Ministry of Industry provide technical and market information. The Ministry of
Commerce sets quality standards and assists with manufacturing technology and
design advances. Government ministries have also supported development of
industrial parks, including zones for transportation access, export processing, general
industry facilities, commercial facilities and housing.


Competition



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Domestic Competitors

Four firms dominated the Thailand tile markets in 1992 and had held stable market
positions for the past decade. Thai German Ceramics Industry Ltd. (TGCI) and Thai
Ceramics Co., Ltd. (TCC) sold tiles in the homeowner and developer segments. Union
Mosaic Industry Co., Ltd. (UMI) primarily sold in the homeowner segment where it
offered high quality tiles to high income homeowners. Royal Ceramics (RCI) produced
only wall tiles and sold mainly to the domestic market. Figure 2 details the market
share in Thailand held by the major companies. (See Exhibit 3 for details on past
performance.)


                                       Figure 2
                  Market Share in Thailand: Major Competitors–1990
                                 All Tiles(%)   Glazed Ceramic
                                                Only(%)
                  TGCI           40             36
                  TCC            20             28
                  UMI            20             20
                  RCI            10              8
                  Others         10              8


Thai German. TGCI was the first major ceramic producer in Thailand, founded in 1969
as a 25% German and 75% Thai joint venture. By 1991, the German financial interest
had declined to 3.5%

TGCI, the largest tile exporter in Thailand, exports about 15% of its output. Major
markets included the U.S., Canada, Australia, New Zealand, Hong Kong and
Singapore. The company recently launched exports to Japan, South Korea, Taiwan
and Europe.

The company had the largest capacity in Thailand in 1992, with a workforce of 1200
people, and it is believed to have the lowest production costs. TGCI's annual
production capacity has expanded from 5.8 million square feet in 1969 (485,000 square
feet monthly) to 181 million square feet in 1991 (15.1 million square feet monthly).

TGCI is expanding capacity to 388 million square feet per year (32.3 million square feet
per month) in 1993. Most of the new capacity will be located in eighteen new plans in a
1100-acre industrial park, located near the Port of Thailand, that TGCI is spending 4
billion baht ($160 million) to develop. TGCI is establishing several of the new plants in
the industrial park as joint ventures with U.S. and European firms.




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TGCI offered the broadest range of tile sizes in 1992, emphasizing the larger sizes.
Almost 75% of the company's output consisted of standard, single-fired glazed floor tile;
higher-quality, double-fired interior wall tile accounted for 15%. The company also
produced third-firing tile for interior wall designs. About 10% of production is specialty
floor tile that has the appearance and hard surface of granite. The company is
considered a design and product innovator, and regularly introduces new tiles with
different dimensions for special applications.

TGCI realizes higher than average prices and margins.


Thai Ceramics. TCC is a subsidiary of Siam Cement, the largest diversified company
in Thailand. Siam Cement has trading subsidiaries worldwide and a global reputation.
The parent provides substantial financial resources and bargaining power, as well as
being a source of raw materials for tile manufacture. In addition, Siam Cement sells
cement to many large scale property development projects in Thailand, and is
sometimes able to negotiate cement and tile sales jointly. About 20% – 30% of TCC's
output is sold through its own dealers.

TCC has recently established its manufacturing facility in the U.S., in order to overcome
U.S. tariffs and avoid transportation costs. TCC's 1.5 billion baht ($60 million) plant in
Tennessee was scheduled to produce about 40 million square feet of wall and floor tile
annually when production began in 1992. This represents about 4% of total U.S. tile
consumption, which reached about 1 billion square feet in 1989, the construction boom
year. The TileCera facility planned to aim its output at the middle and upper segments
of the U.S. tile market that are currently dominated by Italian and Spanish imports.
Much of the tile making equipment in the highly-automated facility was imported from
Italy. The new facility was designed to conform to recently strengthened U.S.
environmental regulations, and met stricter environmental standards than many
established U.S. facilities. The U.S. ceramic tile industry was in "dire straits" in 1991,
according to Robert J. Kleinhans, executive director of the Tile Council of America, Inc.
Employment, profitability, production and exports were all down from late 1980s levels.


Union Mosaic Industry. UMI manufactures various types of mosaic, ceramic, and
granite tiles under the brand names of UMI, Duragres and Lila. Approximately 90% of
its mosaic tiles and 40% of its ceramic tiles are exported to major markets, such as the
European Community, the U.S., New Zealand, Australia and Japan.

The company, formed in 1975 with technical assistance from Japan, is located on more
than forty acres in Sarabari Province, north of Bangkok. The company faced financial
difficulties during 1976-1977, leading to a financial restructuring and a name change.

UMI's second and third factories opened in 1983 and 1984, with Italian technology, to
produce Duragres tile for the domestic market. The fourth plant started operations in
1987 using advanced Monoporosa production technology from Italy. The company
made two new investments in 1991 to strengthen its marketing network. It invested 5.5


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million baht in Siam Art Ceramic Co. Ltd., a marketing firm for ceramic tiles, and 2
million baht in Tekno Cer HRL, a joint venture with Italian partners which will market the
company's products in Europe.

The company opened another factory in 1991, bringing the combined daily capacity of
its factories to 48,000 square meters. Assisted by German technical expertise, UMI has
also diversified into producing PVC door panels.


Royal Ceramic Industry. RCI commenced operations in September 1969 in Saributo,
under the brand names of RCI and Royal, with a daily capacity 1800 square meters.
The company obtained technical know-how and equipment from Japan. In 1975, a
second factory opened expanding daily capacity to 3200 square meters. In 1987, daily
output reached 5300 square meters and another factory, with a daily capacity of 3500
square meters, opened. The factories had a combined daily output capacity of 8820
square meters in 1990. In 1991, 430 million baht was invested in equipment and
facilities to increase daily production capacity to 16,000 square meters.

In 1992, the company introduced a new line of decorative, third-firing tiles. Income
increased by 17.2% between 1991 and 1992. Return on equity was 24.3% in the 1991-
1992 fiscal year.


International Competition

Foreign firms had little access to the Thai market in 1992 due to Thai import
restrictions. With declining restrictions due to the AFTA agreements, firms based in
other South East Asian countries posed mid-term threats. Italian companies have
excess capacity, as well as superior production skills, and may see the more open Thai
market as a growth opportunity.

Some foreign entry into Thailand has already been occurring through joint ventures. In
July 1991, for instance, the Ferro Corporation (based in Cleveland, Ohio) and the TPI
Polene subsidiary of Thai Petrochemical Industry Co., agreed to establish a joint
venture for the production of ceramic glazes and frits (glass granules for glazing
ceramic tiles) in Nong Kare, north of Bangkok. The plant, due to open in late 1992, is
expected to have an initial annual capacity of 15,000 metric tons and to employ 100
people. TPI is among the largest petrochemical companies in Thailand, and is involved
in plastic feedstocks, titanium dioxide pigments, chemical intermediates and cement.
Ferro is an international producer of industrial specialty materials such as coatings,
colors, ceramics, plastics and chemicals, with sales exceeding $1 billion in 21 countries.

Many countries see ceramic tile as an export opportunity. Polish firms are attempting to
strengthen their ceramic tile businesses, for example, using Italian technology to
support technical improvements.




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Indian ceramic tile manufacturers also are gaining strength. The Indian industry
produced over 2,500 million rupees ($147 million U.S.) of ceramic goods in 1990,
including ceramic floor tiles, sanitary ware, tableware and ornamental products. Many
Indian companies are forming joint ventures with Italian, Spanish and German firms to
update manufacturing technology and acquire designs.


Conclusion

Thai ceramic tile manufacturers face different issues in the 1990s in addition to those
they have previously encountered. As the industry moves from a protected, traditional
industry toward a global industry, several key issues emerge for manufacturers. One is
how they should position themselves to compete outside Thailand. Another is how they
should deal with the increasing presence of foreign firms in the domestic market in the
wake of the AFTA agreements. In the 1990s, how will slower domestic growth, reduced
governmental protection and future competition from lower wage and higher technology
competitors shape the industry? Finally, how should the role of the government change
to fit the new conditions?




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References

Business Wire (July 18, 1991). Ferro Corporation and TPI Polene Company. Limited
form joint venture in Thailand.

Hobbs, B. (December 30, 1991). Tile Plant in Clarksville to Open with 'Green' Design.
Nashville Business Journal 7(52): 1.

International Trade Reporter. (July 31, 1991). U.S. Tile Council of American.

Institutional Investor. (April 1991). Pioneer in Manufacturing and Leisure. Thai-
German Ceramic Industry Company, Ltd. (p. S 4).

Xinhua General Overseas News Service. (October 21, 1990). India's ceramic tile
industry develops rapidly.

Xinhua News Agency (January 5, 1990). Thai ceramic tile industry expects to grow
30% this year.




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                                               Exhibit 1
                                    Thailand’s Economic Indicators

                                             1989             1990           1991            1992
GDP per capita (Baht)                        32,049           36,563         41,000          45,840
GNP per capita ($U.S. )
Thailand *                                    1,180             1,400          1,600          1,800
Indonesia (1988) *                               450
Philippines *                                    732
Malaysia *                                    2,201
Korea                                         4,908
Taiwan                                        7,498
Singapore *                                  10,740
Hong Kong                                    10,941
United States                                20,852
Japan                                        23,016

GDP growth (%)                                    12.0             10.0            7.5            8.0
Agriculture                                        6.6             -1.8            3.0            3.4
Industry                                          14.9             13.7           10.5           10.1
Construction                                      21.3             22.7           15.5            9.2
Services, other                                   11.8              9.5            7.0            8.0

Expenditure growth (%)
Private consumption                               10.9              9.1            6.5            7.0
Public consumption                                -0.1              2.9            3.0            3.3
Private investment                                15.7             23.0           15.0            9.0
Public investment                                  5.7             33.3           30.0           20.0

Consumer price increase (%)                         5.4              6.0            5.8             5.7

Export (billion Baht)                            510              583            705            830
Increase (%)                                      27.7             14.4           20.8           18

Import (billion Baht)                            650              838            997          1150
Increase (%)                                      29.9             28.8           19.0          15.3

Trade balance (billion Baht)                    -140             -255            -292          -320
GNP (%)                                           -7.9            -12.4          -12.5          -12.0

Current account (billion Baht)                   -64             -180            -200          -210
GNP (%)                                           -3.6             -8.8            -8.5           -7.9

Tourism income (billion Baht)                     96              116            120            140

Debt-service ratio                                10.5               9.2          n.a.
                                                                                                    n.a.

Note: 1992 values are projected. * Member of ASEAN. Source: Thailand National Economic & Social Development
Board.


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                        Exhibit 2
 Export Value From Thailand of Floor Wall and Mosaic Tiles


Country             1988            1989            1990

United States       192.3            338.6           322.8
                    (21.4)           (28.9)          (34.0)

Australia           185.8            238.4           184.5
                    (20.7)           (20.3)          (19.4)

W. Germany          123.3            117.0           113.9
                    (13.7)           (10.0)          (12.0)

Singapore             57.3           144.1           40.3
                     (17.5)          (12.3)          (4.2)

Netherlands           93.5             93.8          83.4
                     (10.4)            (8.0)         (8.8)

Hong Kong             27.4             60.4          66.2
                      (3.1)            (5.1)         (7.0)

Finland               28.2             39.8          28.1
                      (3.1)            (3.4)         (3.0)

Canada                13.8             21.2          28.6
                      (1.5)            (1.8)         (3.0)

Others                75.5           118.4           81.2
                      (8.4)          (10.1)          (8.6)

Total               797.1           1171.7           949.0
                     (99.8)           (99.9)        (100.0)


Note: Values are in million Baht. Figures in parenthesis
indicate percentage to total export value of floor wall and
mosaic tiles.




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                                                                 Exhibit 3
                                             Past Performance of Major Producers (1988-1990)

                                    TGCI                          TCC                           UMI                  RCI
                           1988     1989    1990         1988     1989    1990         1988     1989   1990   1988   1989   1990
Sales                       852     1327     847          860     1039     n.a.         762     941    634    234    379    228
Profits                     130     252      204           82      30      n.a.          80     112    95     (4)    51     38
Gross Margin (%)            39       44      50            38      31      n.a.          32      33    64     27     36     61
Net Margin (%)              15       19      24            2        2      n.a.          10      12    15     (2)    13     17
          a
Capac. Growth (%)           40       32       8           n.a.     28      24            11      56    24     57     64      0
D/E Ratio                   1.4      0.6     0.8          9.4     11.3     n.a.         2.6      1.0   1.0    4.5    1.5    0.9
Market Capital              1.5      7.6     7.7            -       -        -            -      5.1   6.2     -     6.2    2.9
Stock Return (%)            119     239      172            -       -        -            -     226    42      -     111    35


Price
High                       1026     354      404            -       -        -            -     336    430     -     171    171
Low                        382      49       152            -       -        -            -     204    254     -     99     125


Note: Monetary values are in million Baht. 1990 figures are calculated for six months as of June 30.
a
  Calculated from year end capacities.
n.a. Not Available.




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