Rise of Southeast Asia as an economic hub
It has been some time since the name and importance of Southeast Asia suddenly re-emerged in discussions. The remarkable economic growth in the countries of this region has led to a notable position among the fastest-growing regions worldwide. Moreover, ASEAN (Association of Southeast Asian Nations) is gradually evolving into a geopolitical center, attracting international attention.
Some analysts believe that countries in Southeast Asia can not only benefit from the support of multinational corporations amid escalating geopolitical tensions but also that this region is progressively transforming into a new global production hub. It quickly becomes evident that this region has been an appealing destination for Foreign Direct Investment (FDI) with an export focus long before the COVID crisis.
With rising business costs in China, Southeast Asian countries have gained a better position providing a more attractive environment for investment and collaboration. Since 2018, with increased US tariffs on imports from China and signs of growing trade separation between the two, Southeast Asia has experienced a notable improvement in its position. It is not only the United States increasing imports from this region, but China is also buying more goods from Southeast Asia while reducing its imports from the United States.
To clarify this claim, some examples can be mentioned. Vietnam and Cambodia’s exports to the United States have increased by 165% and 231%, respectively. Although ASEAN’s share of total US imports is not yet significant (6.10% in 2022), this fact should not divert attention from the overall dynamics of the matter. Countries like Vietnam and Cambodia are emerging as production hubs, and it’s not just the United States increasing imports from the region – China is following the same path. Now, the noteworthy point is the increasing trend of Foreign Direct Investment in ASEAN, particularly in the production sector.
Some structural changes based on recent developments are occurring, primarily favoring the supply chain of ASEAN. For instance, as China strengthens its targeted value chain, its cost advantage is diminishing, as labor is no longer as inexpensive as before.
Since 2013, production wages in China have doubled, reaching an average of around $27.8 per hour. This increase contrasts sharply with production wages in Vietnam, Thailand, or Malaysia, which remain below $3 per hour on average. However, low wages are not the only significant advantage of Southeast Asia. Singapore has become a crucial player in advanced financial services and technology. Meanwhile, Southeast Asia can attract a considerable number of individuals aged 25 to 54, with higher education. Nevertheless, a sole focus on cost disparities can be misleading, as the issue of an efficiency gap remains significant. The reality is that most Southeast Asian countries cannot compete with China in terms of output per worker.
An instructive point for companies seeking alternatives in the supply chain is twofold: first, analyzing the “how of achieving lower production costs versus reducing efficiency rates,” and secondly, assessing whether, over time, addressing efficiency challenges can be achieved through on-the-job training and infrastructure improvement. It should be noted that the second aspect is crucial, as some cost advantages in Southeast Asia are likely to decrease in the coming decade.
What makes the ASEAN supply chain so distinctive?
Countries in ASEAN, like their Northeast Asian neighbors, opt for industrialization based on foreign direct investment and can be categorized into three groups. The first category is Singapore, functioning as a technological hub. The second category is the ASEAN-4 group (including Malaysia, Thailand, Indonesia, and the Philippines), known as newly industrialized economies with a mix of competitiveness. Finally, the third category includes the CLMV group (comprising Cambodia, Laos, Myanmar, and Vietnam), which holds appeal for companies primarily seeking cost reduction.
The supply chains of ASEAN are deeply integrated with the neighboring countries in Northeast Asia. Economists often use the “flying geese” pattern to explain the division of labor in the region, where Japan serves as the technology leader against newly industrialized economies and developing countries. In the network of Multinational Enterprises (MNEs), and in the pursuit of maximizing competitiveness in terms of cost and technology and cross-border transportation of a product throughout its production life cycle, regional supply chains dynamically evolve.
Due to its significant impact in the electronics and automotive industries, ASEAN will play a greater role in reshaping global value chains to enhance the flexibility of supply chains. Also, due to the cohesive regional division of labor, we witness the expansion of Japanese, South Korean, and Chinese multinational companies as strong (and shifting) leaders, similar to what happens in the flying geese pattern. However, the industry in Southeast Asia, facing the industrialization puzzle led by FDI, mainly based on technology input and the supply chain network of multinational corporations rather than competitive local companies, has encountered challenges.
Shift of electronic industry to ASEAN
The electronic industry, due to its reliance on modular technology, standardization, and high value-to-weight ratio, is significantly dispersed internationally and well-integrated into global and regional networks. This sector represents the largest export industry, allocating 29% of the total export value of the Southeast Asian region in 2022, varying between 20% and 50% in each country within the ASEAN region. With a share of $268 billion in regional gross domestic product, it guides the region’s economic growth, and created over 4.2 million jobs in 2019. Over the past three decades, ASEAN’s participation in the global value chain for the electronic industry has decreased from 3.74% to 68.9% of the value-added of exports. Meanwhile, its regional value chain participation has doubled from 7.8% to 8.17%, indicating a stronger regional production network.
Currently, the average foreign value-added in ASEAN’s export sector is around 53%, with major contributors being China, Japan, the United States, and Germany. Historically, China has surpassed Japan as the largest contributor, reflecting the relocation of multinational corporations and their shift to China, elevating China in the value chain from “final assembly” to “provider of intermediate goods” and, in some cases, to “leading companies”. The foreign value chain participation in the electronic industry is higher in certain countries, such as those with significant investments in advanced technologies like Singapore and Malaysia, compared to others mostly involved in final assembly, like Thailand, the Philippines, and Vietnam. In Laos, Cambodia, and Myanmar, this share is lower due to their status in initial labor-intensive processes. Meanwhile, Indonesia’s industry is focused on the domestic market, while Brunei remains an economy heavily reliant on fossil fuels.
Obstacles
Numerous obstacles lie ahead on the path for Southeast Asia to become an immediate substitute for China as the world’s factory. For this shift to happen, supply chains in this region need to become much more efficient and integrated. Currently, trade between countries in ASEAN faces significant challenges. On one hand, the lack of quality infrastructure hinders the seamless flow of goods from the outset. On the other hand, fundamental regulations and legal agreements between countries are absent, as regional differences and national ambitions stand in the way of forming a beneficial consensus. Moreover, a strong dependence on Chinese goods poses another obstacle for the region’s ability to transform into a new global production hub. Similarly, the transition to a low-carbon economy is a major challenge for Southeast Asia. If these challenges are not addressed rapidly and sufficiently, the region’s competitive advantages may quickly diminish, solidifying the possibility of losing competitiveness in Southeast Asia.
Center for Strategic Studies of Entrepreneurship in Iran`