Low-cost manufacturing hubs emerge in Asean

While the Chinese manufacturing sector is in the process of transitioning to higher value-added manufacturing under the government’s new strategic industrial policy of Made in China 2025, a number of countries of the Association of Southeast Asian Nations (Asean) are emerging as new low-cost manufacturing hubs.

As China leads new regional initiatives to strengthen connectivity with large-scale infrastructure investment through the Asian Infrastructure Investment Bank and Silk Road Fund, both the country and Asean are set to benefit in the next decade and beyond from rapid regional growth in long-term trade and investment flows.

The Asean countries and Chinese provinces in the Greater Mekong Subregion (GMS) are expected to be among the biggest beneficiaries, as they are well-positioned to become low-cost manufacturing suppliers to the rapidly growing Chinese consumer market and industrial supply chain.

Average manufacturing wages in Vietnam, Myanmar, Cambodia and Laos are considerably below those in Chinese coastal provinces. Yunnan and Guangxi Zhuang autonomous region — the Chinese areas that are part of the GMS — also have relatively lower wage costs compared to the national average, and considerably lower wages than those of coastal industrial hubs such as Shanghai, Guangzhou, Tianjin and Beijing.

However, a major competitive weakness of the GMS is relatively poor infrastructure connectivity, which has been a constraint on economic development.

This issue was one of the main areas of focus at the 5th Greater Mekong Subregion Leaders’ Summit in 2014.

If infrastructure connectivity is strengthened in Southeast Asia to allow high-speed rail networks and modern roads to link Chinese provinces, such as Yunnan in southern China, to the Indian Ocean via Thailand and Myanmar, it could significantly improve freight logistics for southern China for both imports and exports.

It will also create significant opportunities for the development of major new ports and free trade zones in Thailand and Myanmar, thus boosting their economic development.

With rapid infrastructure development creating an improving business climate for low-cost manufacturing production in Vietnam, Myanmar, Cambodia and Laos, the GDP of the Greater Mekong Subregion is forecast to rise from $1.2 trillion in 2015 to $3.2 trillion by 2025.

Auto production hubs

Since the implementation of the Asean Free Trade Area in 2010, the Thai automotive industry has grown rapidly to become one of Asia’s leading hubs for auto and parts production. It produced 1.9 million passenger cars and light commercial vehicles in 2014. Total production could rise to 3 million cars and commercial vehicles by 2024, based on IHS Automotive’s projection.

Meanwhile, the Indonesian auto industry has also grown rapidly, helped by strong growth in domestic demand from the fast-growing middle class. Total Indonesian production of cars and commercial vehicles was 1.24 million units in 2014. It is projected to rise to 1.9 million units by 2024.

Annual production of passenger cars in Indonesia now exceeds that of Thailand, with 1,001,686 units produced in Indonesia in 2014, compared with 857,723 passenger cars in Thailand in the same year. IHS Automotive forecasts that Indonesian passenger vehicle production will rise to 1.5 million autos by 2024.

Electronics hub

A new wave of shifting manufacturing production is currently underway in the electronics industry, as multinationals reposition their East Asian production of electronics products such as semiconductor chips, mobile phones and printers toward lower-cost production hubs.

Vietnam has been a key beneficiary of this trend since 2009, when Samsung invested in a new mobile phone factory in the country. A year later Intel set up a semiconductor chip plant in Vietnam.

Many other multinationals have followed suit with more investments in electronics manufacturing, including major new investments by Samsung, as well as by other electronics firms such as Kyocera, Canon, LG and Nokia.

Samsung has become a major investor in Vietnam, with production facilities in Ho Chi Minh City, BacNinh and Thai Nguyen. The South Korean tech giant announced plans in late 2014 to build a second smartphone factory in Vietnam involving an investment of $3 billion. Samsung already accounts for around 20 per cent of total Vietnamese exports and has around 73,000 employees in Vietnam.

Textile industrial hubs

The China-Asean Free Trade Agreement that was implemented in 2010 has accelerated the growth of bilateral trade and investment flows between Asean and China, with the regional bloc’s textiles, clothing and footwear sector being a major beneficiary.

The textiles and footwear industry has been a key driver of Cambodia’s economic development in the last decade. Total exports of these products have grown from $27 million in 1995 to $5.8 billion in 2014, and are estimated to account for 600,000 jobs in the country’s economy.

Industry exports rose 10.6 per cent year-on-year in the first quarter of 2015, and are expected to be an important long-term growth engine for the Cambodian economy, which will benefit from the fast-growing Chinese consumer market.

The Vietnamese textiles industry has also been experiencing rapid growth, with total exports of garments and textiles reaching $24.5 billion in 2014, up 19 per cent on the previous year. The new European Union-Vietnam Free Trade Agreement agreed in principle in August will provide a further boost to Vietnamese garments exports to the EU, which is already a key market for Vietnamese garments.

The Trans-Pacific Partnership trade agreement, if concluded, will be another major boost for Vietnam’s garments sector, as it will provide duty-free access for Vietnam into the US market.

IT-BPO industry

Asean’s information technology and business process outsourcing (BPO) industry has also become one of the region’s fast-growing sectors, with Malaysia and the Philippines among the leading global hubs for the IT-BPO industry.

The competitiveness of Malaysia and the Philippines in this industry has been particularly helped by the large pool of university-educated workers as well as the strong English-language skills of the work force in both countries.

In the Philippines, the industry’s export revenue has more than doubled between 2008 and 2014, reaching an estimated $18 billion by 2014, while its total number of employees exceeded 1 million.

By 2016, the industry in the Philippines is projected to have 1.3 million employees. The rapid growth of this industry is also driving economic development in a number of cities across the Philippines, with Manila and Cebu now ranked among the world’s leading IT-BPO hubs.

In Malaysia, the industry has also posted fast growth, with major hubs having developed in Kuala Lumpur and Penang. A new IT-BPO Park being built in Penang is expected to create around 21,000 new jobs by 2020.

Asean has become one of the world’s fastest-growing economic regions, driven by a range of factors, including its large domestic consumer population of 600 million, dynamic economic reforms and trade liberalisation to boost competitiveness, and close trade and investment ties with Asia’s largest economy, China.

With China having emerged as an upper-middle-income economy with a fast-growing consumer market, Asean’s industrial hubs in a wide range of industries, including autos, electronics and textiles, are poised to experience rapid growth in exports to the Chinese market.

Intra-Asean trade will also grow rapidly, helped by trade liberalization and economic integration as the Asean Economic Community agreement is implemented. At a time when many emerging markets worldwide are struggling, the long-term growth and trade prospects for Asean still look very bright.