Investing in ASEAN

Investing in ASEAN

Investing in ASEAN

 

In this first of ten blog posts on the subject of Investing in ASEAN, we’ll look at the region as a whole; in subsequent posts, we’ll take a closer look at

Cambodia, Indonesia, Laos PDR, Malaysia, Philippines, Singapore, Vietnam, Myanmar and – last but by no means least – Thailand.

 

AD ASIA Consulting has maintained a presence in Thailand for 15 years now, originally as manufacturers and service providers and gradually expanding into AD ASIA Consulting – an affiliate of the Hong Kong-based AD ASIA Group – which has been providing clients here with A-Z turnkey solutions since 2011.

 

ASEAN

 

ASEAN – the Association of Southeast Asian Nations – was established on 8 August 1967 in Bangkok, when the ASEAN Declaration was signed by the ‘Founding Fathers of ASEAN’: Indonesia, Malaysia, Philippines, Singapore and Thailand. Brunei joined in 1984, Viet Nam in 1995, Lao PDR and Myanmar in 1997, and Cambodia in 1999.

 

The ASEAN Economic Community

 

In 2003, leaders from these ten member states agreed to establish an ASEAN Community by 2020 supported by three pillars:

 

  • The ASEAN Political-Security Community
  • The ASEAN Socio-Cultural Community
  • The ASEAN Economic Community

 

Subsequently, the establishment of the AEC was moved up to 2015.

 

The ASEAN Economic Community – or AEC – is an initiative to transform the region into an area where goods, services, investment and skilled labor move freely, as well as capital to a slightly lesser degree. As 2015 approaches, the question investors are asking is whether the AEC live up to the hype – and if so, when. A 2013 report from Eastspring Investments entitled ASEAN: A Force To Be Reckoned With, says that, “if there is one region that has survived the doom and gloom of the global uncertainties, it would have to be ASEAN. In essence, ASEAN remains the favourable region for investments with promises of high returns and bountiful opportunities”.

The report cites a recent document by the Economist Corporate Network (ECN) entitled Riding the ASEAN elephant: How business is responding to an unusual animal.

 

The ECN report summarises the results of a poll of senior executives from 147 multinationals operating in ASEAN about their companies’ strategies in the region in which 95% of respondents said they believe ASEAN will achieve its vision of creating an economic community with the free movement of goods, services and labour, and the majority of whom are factoring ASEAN integration into their strategic planning.

 

 

What About China, India & Brazil?

 

Stories coming out from other parts of the world are starting to make ASEAN even more attractive. According to a report from Spire Research and Consulting entitled ASEAN Economic Community 2015, the rising costs of doing business in in China have affected many companies, as “labor costs in the urban manufacturing sector have risen about 17% each year from 2003 to 2010, with costs measuring at USD 4,579 per employee per year in 2010, compared to USD 1,534 in 2003. Taiwanese companies, such as electronics company ITEQ and bicycle-maker Giant Manufacturing, which were once lured by China’s low costs, have since relocated production to their own home country”.

 

Geopolitical and intellectual property issues have made investors reconsider China. “The second biggest concern after rising costs,” says Spire, “is the competition from local players as the state favours local companies with benefits like easier access to government credit, preferential treatment in licencing, approvals and tax benefits, and lower land costs”.

 

Meanwhile, India is still not considered a prime location by investors, despite its population of 1.2 billion and relatively low business costs, largely because of inadequate infrastructure and political concerns, but also because of the lack of well-developed transport systems and power supplies. Compounding these problems, most infrastructure projects have faced delays due to excessive regulation and difficulties in the acquisition of land, while corruption and policy uncertainty have further eroded investor confidence.

 

Down in Brazil, infrastructure problems persist, but a bigger concern is the country’s high dependence on commodity exports. “Although the country’s abundant access to natural resources has been a source of competitive advantage,” says Spire, “the required shift towards value-added manufacturing will demand significant political will and a policy revamp”.

 

While many investors have been focusing on China, India and Brazil for the past decade, due to their immense populations and low production costs, a shift of focus back to South East Asia is gaining momentum.

 

“Receiving seven-times the amount of foreign direct investment per capita than India in 2012, and almost as much as China, the ASEAN region is a quiet achiever on the world economic stage,” says the Economist report.

 

“The ‘Asian Tigers are now once again demanding renewed attention, says PwC Thailand in a comprehensive report entitled South East Asia – Investment Opportunities, Tax & Other Incentives, “but the Asian Tigers currently roaring are not the same ones as in the 1990s when the term was coined. Many of the tiger cubs of the 1990s are now fully grown and new cubs are growling”.

 

Back to ASEAN

 

“ASEAN has an aggregate economic size of USD 2.3 trillion, a combined population of 616 million, an average real GDP growth rate of 5.4% in 2012, and an estimated GDP per capita of USD 3,745. These are strong pull factors for global marketers,” says PwC.

 

“Just as the growth stories in other countries have become less rosy,” the report continues, “that of ASEAN seems to be on the rise. Many ASEAN countries are seeing healthy, if not robust growth rates, based on sound fundamentals and with decent mid-term prospects. Together with the advent of the AEC, this may position the ASEAN countries as attractive alternative locations for foreign direct investment”.

 

According to PwC, South East Asia is the bright spot in an otherwise dim global economy: as the US continues to limp out of recession, and the EU continues to deteriorate, SEA is a rising star that merits attention.

 

With its multi-faceted economies, high populations and cultural diversity, the region’s potential is hard to ignore. Strategically located at the centre of Asia Pacific, the economies these countries are driven by the growth of China and India, but more and more, they are being driven by the phenomenal and dynamic demands of the region’s own large populace, and growth rates in recent years are the envy of the West.

 

“The Dual Advantage”

 

South East Asia’s 616 million people represent nearly 9% of the world’s population – not as large as China and India, but dwarfing the US and Europe. However, population is just one part of the big picture. Attractive labour costs are perhaps the most obvious attraction, but as the region continues to emerge, another significant factor is revealed.

 

Says PwC: “While many of the countries in SEA have long been viewed as low-cost production centres, an important shift has been under way for a number of years. That shift, from commodity- and manufacturing for export-driven economies, to consumer economies continues to accelerate. Many SEA countries have been extremely successful in reducing poverty, enabling more people to consume goods and services that transcend basic needs. There is significant upward mobility of the population, a burgeoning middle class that is gaining in size and wealth, stoking demand for consumption of goods and services”.

 

Eastspring says that this rising economic wealth, coupled with its huge population, creates a powerful consumer spending story – and EAC agrees: “Huge swathes of ASEAN’s population stand on the threshold of middle class status, which we define as a household income of USD 5,000 or more. At this point, consumers no longer buy only necessary items such as food, but start to buy discretionary items such as smart phones. We forecast the number of middle class households in ASEAN will rise from 40 million in 2010 to 85 million by the end of 2017”.

 

The Main Attraction

 

Despite the rise in consumerism, the principal attraction of the ASEAN countries has historically been, and continues to be, their low costs of labour.

 

But PwC says that wage rates are just one factor in the total cost of employment: “The SEA countries are also remarkable for their low levels of social taxes, adding considerably to their cost competiveness. For instance, in Thailand the maximum employer’s social security contribution is about USD 15 per month”.

 

ASEAN also has low unemployment rates, particularly in comparison to the EU and the US – but still has the advantage of a large and growing labour pool, high birth rates, and a relatively young population, ensuring that plenty of new workers join the force each year.

 

The region has also accomplished steady increases in adult literacy rates over the past three decades, as the governments of every country are committed to further increasing spending on education, knowing that an educated work force is one of the keys to sustaining economic growth and stability.

 

Open for Business

 

“SEA is sending the message that they are open for business,” says the PwC report, “setting its sights not only on becoming a low-cost manufacturing base, but also on becoming a producer of more sophisticated goods and on moving up the value chain. While Singapore has already done so, Thailand, Malaysia and Indonesia are seeking to become more knowledge-based economies, encouraging investments based on innovation, R&D, technical capabilities and know-how”.

 

The report quotes one of the most famous sayings of philosopher, essayist, poet and novelist George Santayana: “Those who forget history are doomed to repeat it, adding that “probably one of the most impressive aspects of the ASEAN countries is that they have learned from the past. Having undergone the Asian financial crisis of 1997/98, ASEAN nations (with the exception of Vietnam) have avoided the financial crisis that began in the US and spread and intensified in the EU. In fact, financial institutions in SEA are, by and large, seen as some of the strongest in the global financial sector today”.

 

Among the reforms that make the region particularly attractive to investors are “making it easier to start a business through simplifying business application processes; reducing paperwork and establishing one-stop service centres; streamlining and accelerating processes for general trading licences and business registrations”.

Yes, ASEAN is “the next global business frontier” – but it can also be daunting with its cultural and geographic diversity, varied topography, languages, governments, histories and traditions. That is why it is so important to talk with experienced business consultants on the ground here in Asia.

 

 

Categories: ASEAN, Investment

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