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Asia Business Development – Asia Business Consulting » ASEAN: Asia’s under-hyped region

SpirE-Journal 2008 Q3

ASEAN: Asia’s under-hyped region

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ASEAN: Asia’s under-hyped region

In the early 1990s Southeast Asia was a more attractive market for international firms than either China or India. But over the past two decades, China and India have closed the gap or surpassed ASEAN on most economic and business indicators. Will ASEAN be left behind? Spire looks at the significance of the ASEAN market for business in today’s Asia Pacific.

ASEAN: back to the future

Of all Asia’s sub-regions, the members of the Association of South-East Asian Nations (ASEAN) have made the most progress in economic integration, aiming to create an ASEAN Economic Community (AEC) by 2015. This recognizes the fact that exports and foreign direct investment (FDI) have played a transformative role in Southeast Asia over the past two generations. The success of ASEAN’s export sector has been staggering, leading the bloc to become one of the most trade-dependent in the world.

ASEAN was established on 8 August 1967 in Bangkok by the five original member countries – Indonesia,Malaysia, Philippines, Singapore, and Thailand. By 1999, the group had expanded to include Brunei Darussalam, Vietnam, Laos, Myanmar, and Cambodia, and became known as the ASEAN-10.

As of 2006, the ASEAN region has a population of over 560 million, a total area of 4.5 million square kilometers, a combined gross domestic product (GDP) of almost USD 1,100 billion, total trade of about USD 1,400 billion and inflow of foreign direct investments (FDI) valued at over USD52 billion (see Appendix table 1 for full data). When taken as a whole, ASEAN ranks as the sixth largest economy in the world if we consider the countries of the European Union as a single economy1(see figure 1).

However, the Asian Financial crisis in the late 1990s disrupted much of ASEAN’s trade. The region’s growth since then has not returned to pre-crisis levels. In the mean time, other emerging economies are threatening to eclipse the region.

Of the world’s four largest emerging economies – Brazil, Russia, India and China (also known as ‘BRICs’) – the latter two countries are considered to be particularly important. ASEAN faces a need to redefine its economic position and radically lift its competitiveness with respect to Asia’s two giants if it is to remain a magnet for international business.

Contest to ASEAN’s growth

During the crisis period in 1997, many Asian countries were thrown into turmoil, including ASEAN’s largest economies.

The crisis started in Thailand with the collapse of the Thai baht. The Thai government decided to float the currency, cutting its peg to the USD, in the face of a severe financial overextension that was in part real estate driven. At the time, Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency.

As the problem intensified, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt. Foreign debt-to-GDP ratios rose from 100 percent to 167 percent in the four large ASEAN economies, then shot up beyond 180 percent during the height of the crisis.

Only Singapore proved relatively insulated from the shock, but it suffered a serious hit in passing, partly due to its size and trade dependencies with Malaysia and Indonesia.

The economies of Asia only began to show signs of recovery in 1999. Trade in the region played a critical role. However, ASEAN has not yet regained its pre-crisis momentum. Rates of economic growth since 1999 have tended to fall in the 4%-6% band (with the exception of Vietnam), while China and India tend to grow at 7%-10%.

In recent decades, China and India have opened up their economies, generating windows of opportunity for business. With their combined populations accounting for one-third of humankind and building on decades of sustained and rapid economic growth, China and India are poised to become economic powerhouses of the 21st century.

Their huge populations represent vast and low-cost labour pools as well as markets. Manufacturers,service-providers and other foreign investors have flocked to them like bees to honey,diverting attention from ASEAN. Trade has likewise been drawn to China and, to a smaller but growing extent, India (see figure 2).

Where previously the value of ASEAN’s exports had been twice as high as China’s,less than a decade later in 2005, the latter’sexport earnings had overtaken ASEAN’s byone-fifth, at a value of USD762.3 billion.

India’s exports, whilst still lagging behind, have been rising rapidly. In 1990,ASEAN’s exports were ten times larger than India’s, but the difference fell by more than one-third a decade later.

FDI inflows have seen a rising trend in China and India as well. The combined share of FDI going to China and Hong Kong exceeded 10 percent of global FDI inflows in 2003, while India has also been increasingly successful in attracting FDI especially after 2000. Except for Singapore, total inflow of FDI into India is larger than any other ASEAN country. In contrast, the absolute amount of FDI inflow has greatly declined in most of the ASEAN countries after the crisis.

Given the importance of exports and FDI to ASEAN, the challenge for member countries is to work out how to grow their mainstay industries in the face of mounting competition.

Towering China

China has been the world’s fastest growing major economy in the last two decades, expanding at a phenomenal rate of nearly 10 percent annually. Chinese leaders have set a target of quadrupling GDP by 2020.

China’s entry into the World Trade Organization (WTO) in 2001 created a new market for ASEAN’s commodities and agricultural products, but it also undermined the region’s textile, clothing, footwear, toy and electronics producers in the competition for export markets. Economies like Thailand, Indonesia and Malaysia compete head-on with China in many low-technology,labour-intensive industries.

In particular, there is severe competition between ASEAN and China for the US market. Trade between the US and Southeast Asia has always been crucial to the latter’s growth and amounts to more than USD170 billion. The share of China in the US market, however, has almost doubled from 7.3 percent in 1993 to 13.2 percent in a decade. On the other hand, that of ASEAN declined during the same period.

Nothing demonstrates more clearly China’s achievement in raising its game one notch than its success in attracting regional headquarters (RHQs) to locate in the mainland. MNCs are increasingly lured to locate their RHQs in China as the Ministry of Commerce broadcasts attractive RHQ incentives such as tax rebates/exemptions, special distribution and export/import rights and wider market access.

In 2003, 400 of the Global Fortune 500 enterprises had investment in China. By the end of 2006, 154 MNCs had set up RHQs in Shanghai and 181 in Beijing.

Moreover, China is not planning to relax its currency peg any time in the near future. In a weak dollar environment, that means it enjoys a pricing advantage over most of the rest of Asia. Even the plan to establish an ASEAN-China Free Trade Area by 2011 will not bring relief to Southeast Asia because of the difficulty of implementing meaningful tariff waivers on the unwieldy 10-member ASEAN.

Transforming India

In the past five years or so, India has repeatedly been ranked among the fastest growing of the world’s major economies, although the rate of growth and the absolute size of its economy is behind that of China. The Indian market has begun to transform qualitatively, with the advent of organized mass-merchandizing, rising internet penetration and a broadening range of products catering to a more differentiated spectrum of segments. India’s structural challenges include revamping infrastructure, establishing a new fiscal adjustment road map, raising labor productivity and enhancing labor market reforms.

The key contributor to India’s growth is services, which generated about 53 percent of GDP and has been continuing its rapid growth, at 10.7 percent in 2007. It was led by the trade, hotel, transport, and communications sub-sector.

In particular, the Indian IT business process outsourcing (BPO) sector is expected to rake in revenues in excess of USD47.8 billion – almost a 10-fold increase over 1998. IT services exports are growing at an estimated 36 percent. Inward foreign investment for the industry may scale new heights this year, with multinationals planning to invest over USD10 billion in the next few years.

India is also on the crest of an inward FDI wave. The nation surpassed South Korea to become the fourth largest recipient of FDI in the Asian region in 2006, just behind China, Hong Kong and Singapore. FDI flows into India trebled from USD6 billion in 2005 to USD19 billion in 2007 and are expected to hit USD25 billion in 2008

Given that FDI is a pillar of ASEAN’s economy and half of ASEAN’s income comes from the services sector, it can be seen there will be keen competition with India on these fronts.

Where ASEAN stand

The China and India stories are well-known. What is often missed in the conversation about Asia’s future is an accurate perspective on where ASEAN stands. A close look at the facts reveals that ASEAN enjoys some advantages over India and China. Its marketplace is resting on solid foundations. For instance, key indicators such as income levels and population demographics put ASEAN ahead of the competition (see figure 3).

Part of ASEAN’s strength lies in its rich natural resources. With the exception of Singapore, the bloc’s nations are endowed with agricultural and mineral wealth.

Indonesia and Malaysia, for example, together account for 88 percent of global crude palm oil (CPO) exports. Including Thailand, these three countries in ASEAN are also the world’s biggest producers of natural rubber. Their output is 72 percent of the world’s total production, at a total of 7,062 million tons in 2007.

Thailand is the largest rice exporter in the world, and the Philippines the biggest coconut exporter. Timber, precious metals, coal, natural gas and many other commodities are also abundant across ASEAN.

Simply exporting natural resources, however, is hardly sufficient to build a vibrant economy, let alone support rapidly growing populations. In the race to globalize, different ASEAN countries have come to specialize in various categories of manufactured exports:

Textiles and garments – The textiles and garments sector in Indonesia and Vietnam have produced exports valued at approximately USD 14 billion in 2004.Indonesia’s exports of textiles and garments alone totaled USD9.9 billion, making it the country’s second-largest earner of foreign exchange after petroleum. In Vietnam, exports of textiles and garments have increased from USD2 billion in 2001 to USD4.8 billion in 2005. Similarly, footwear exports have doubled to USD3 billion in the same period.
Automotives – The Thai government has been aggressively striving to make the country the “Detroit of the East” by encouraging foreign auto manufacturers to build factories there. The strategy has met with success – Thailand produced more than 1.1 million vehicles in 2005, almost twice the output of 2002. Of that record total, 440,000 vehicles worth USD9 billion were exported.
Electronics and electrical goods – The production of electronics and electrical products has proliferated in many ASEAN countries, including the Philippines, Singapore, Malaysia and Thailand. In Malaysia, for example, the value of electronic and electrical goods exports was USD63.8 billion in 2004 and accounted for just over half of all exports.

ASEAN also boasts areas of strength in the services sector:

Medical tourism – Thailand is very much ahead of the curve in medical tourism. In 2006, Thailand received almost 90 percent of the 1.32 million patients to Asia, be they in-patient or day surgery patients. Thailand’s facilities offer a full spectrum of services from executive health tests to cardiac packages, cancer therapy and cosmetic options
Aerospace maintenance, repair and overhaul (MRO) – Singapore is currently the largest aerospace MRO hub in Asia, servicing 25 percent of the region’s MRO needs. Singapore-based MRO service provider SIA Engineering Company is one of the region’s leaders in the industry and provides MRO services to over 60 international airlines at Singapore’s Changi Airport.
Energy – Two-thirds of the world’s energy and liquefied natural gas pass through the straits of Malacca and Singapore. The two are also competing to become the region’s first biofuel-refining hub.

Furthermore, some of the countries in ASEAN can boast more mature political, regulatory and legal institutions, which translates into an attractive environment for business. In fact, Singapore was ranked in the top spot for its business-friendly environment in Doing Business 2009, followed by Hong Kong, Thailand, and Malaysia.

It is largely Singapore, Malaysia and Thailand that have garnered ASEAN more cumulative FDI from the US than even China, Hong Kong and Taiwan combined. Two-way trade between the US and the Southeast Asian region amounts to over USD170 billion, exceeding trade with Latin America and establishing ASEAN as the fourth largest trading partner of the US, after Canada, Japan and Mexico.

Meanwhile, ASEAN’s substantial consumer market remains an economic attraction in itself. It is larger than India’s, is narrowing the gap with that of coastal China, and was estimated to be worth USD330 billion in 2005.

Ready, get set… wait a minute

To be or not to be? Competitive, that is. ASEAN has been an open and outwardlooking region, benefiting from external trade and FDI, the principal engines of globalization. The rise of China and India is threatening ASEAN’s position in trade and FDI. Yet the two economies also spell opportunities for ASEAN,with their big pools of labor and sizeable markets.

Friend not foe

“The partnership between China and ASEAN is more than just a business arrangement and both sides must avoid direct competition to bring about greater benefits in the future,” ASEAN Secretary-General Ong Keng Yong was quoted as saying in an interview with Xinhua in 2006.

China is a particularly important dialogue partner for ASEAN after both parties signed the Treaty of Amity and Cooperation. ASEAN’s current secretary-general believes that China can contribute to the increased prosperity in Southeast Asia while the region could also bolster China’s efforts to develop healthy relations with the rest of the world.

India is another important trade partner for ASEAN. Growing at 25 percent a year, India-ASEAN trade reached USD38 billion in 2007. A target of USD50 billion has been set for 201011. Negotiations for a free trade agreement (FTA) have been concluded in August this year and the agreement will be implemented come January 1, 2009.

Clearly the synergies between China, India and ASEAN are fully appreciated by the leaders of ASEAN’s governments.

To the battlefield

Yet some degree of rivalry between ASEAN and China and India is undeniable – they rely on the same large export markets, namely the European Union (EU), US and Japan, and they do compete directly in some export categories, such as textiles/garments, electronics and BPO services.

In 2004, Malaysian Prime Minister Abdullah Ahmad Badawi urged the ASEAN-10 to speed up economic integration to better compete with China and India. He said it was crucial for the region to pool its resources and create a mass market of half a billion people to “position ourselves in competing with China and India, the two giants of Asia that are coming up very, very quickly”.

More recently, the consensus amongst leaders at the ASEAN summit in 2007 echoed the same sentiments. “Either ASEAN gets into the act or (economic) integration will bypass ASEAN and will involve new players like China and India and other emerging economies,” Singapore Trade Minister Lim Hng Kiang said. “The thinking is that ASEAN has this window of opportunity in the next three to five years to get this economic integration done, so as to be able to compete with India and China.”

Bridging the development gap between countries would continue to be a key challenge, however, as ASEAN is made up of countries that are heterogeneous in terms of culture, economic development and political culture. Not to mention the political tensions between some ASEAN members that have long historic roots, such as Malaysia-Singapore and Thailand-Cambodia.

Business as usual?

In a nutshell, China is rocketing ahead and India is gathering momentum while in ASEAN, the perception is that it is business as usual. Can the ASEAN integration process change this dynamic in time?

Exports and services will remain critical for Asia as for ASEAN, but the local consumer will need to fuel a bigger share of growth, particularly in the context of the current economic crisis in the West. Domestic demand has been on the rise as Asia’s economies blossom (see figure 4).

Fortunately retail sales in the Asia-Pacific have held steady over the past year, and in some countries are showing robust growth. According to a study by PricewaterhouseCoopers, the ratio of Asia consumption to the global market will rise from 33 percent (USD130 billion) in 2002 to 50 percent in 2008. China’s annual consumption, in particular, has grown by an average of 13 percent in the past five years. With a per capita GDP of USD2,456, the mainland is slated to become Asia’s largest consumer market by 2009, ahead of even Japan.

Then there is the flow of FDI and trade within ASEAN, China and India. Total trade in ASEAN reached USD1.2 trillion in 2006, 15 percent of which was with China and India. The flow of FDI amongst these countries was almost USD 77 billion in 2003. And the stakes are just going to get higher.

While China and India pose competition to ASEAN’s global trade and FDI position, it is an adversity that brings with it huge opportunities for synergistic growth. The threat also carries another less obvious benefit – the impetus to accelerate ASEAN integration.

With a structure of disparate and independent states united in a loose economic union, ASEAN may be able to mimic the historic advantages enjoyed by the city states of classical Greece, the German states of the Middle Ages, or even the states of the Gulf Co-operation Council today. What these regions enjoyed was the dynamism that comes from internal competition, specialization and comparative advantage, while at the same time benefiting from a shared security and economic framework fuelled by a consciousness of greater competitive dangers from other regions.

If ASEAN succeeds in striking the right balance between internal co-operation and competition, it could secure for itself a golden age in the 21st century.

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