On the heels of the US-ASEAN summit in Myanmar, manufacturers are considering ASEAN (Association of Southeast Asian Nations) to be a much closer horizon for business opportunities compared to other economic goliaths in the region.
In fact, the ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore and Thailand) has been attracting more businesses than China, with about $128 billion in foreign direct investments, overtaking that of China’s $117 billion in 2013.
This year’s plans for economic integration throughout ASEAN should further grow the strategic importance of the 10-member collective as it will further open up trade, make commerce across the region more seamless, and come closer to being a single market of more than 600 million people.
While market entry into Asia is not without significant challenges, multinational companies have found that they can adapt their business strategies to Asia’s complex and diverse business landscape by investing in local hubs. This recognition comes at a critical juncture, when higher wages and currency appreciation in China are prompting companies to look elsewhere. ASEAN stands to benefit from this, with each nation offering a unique value proposition be it advanced technological innovation, an abundant labor force, or a growing shift towards more high-skilled industries.
For example, Singapore, is a strategic entry-point for companies to better access pan-Asian growth markets. The city-state boasts numerous resources valuable to MNCs such as a business friendly environment, highly-skilled labor force, well-established financial markets and infrastructure that support them, opportunities to test bed new products for the region and a predominantly English-speaking population. As a result, Singapore serves as a high tech manufacturing hub which also ranks first for foreign subsidiary density and fifth in the world for corporate headquarters.
As a base for knowledge, partners, and talent, Singapore enables companies to access increasingly critical markets like Indonesia and Vietnam, where revenues are growing. A recent example is General Motors, which moved its international headquarters from Shanghai to Singapore in August of last year for easier access to the company’s priority markets like ASEAN, Africa and Australia.
Along a similar vein, Archer Daniels Midland (ADM) is also centralizing the coordination of its Asia Pacific activities. The American agricultural processing company announced in June 2014 that it will be relocating it regional headquarters from Shanghai to Singapore. This is testimony that many corporations are seeing that their business strategies for Asia can no longer focus on just the region’s largest markets, and are moving their headquarters to Singapore as a gateway to the growing ASEAN customer base.
ASEAN is also home to Malaysia, a country which has been encouraging its universities to invest in R&D centers and partnering with private sector companies to create more high-skilled jobs. These initiatives have yielded significant results. Malaysia is a particularly attractive investment destination for companies looking to capitalize on the lower cost of electricity in developing manufacturing sectors like solar energy. The country plays home to six First Solar plants, which collectively produce more than 80% of the American company’s solar panels. The Southeast Asian nation is currently ranked the world’s third-largest producer of solar equipment; companies including Panasonic, SunEdison and SunPower have also set up shop in the country.
The Philippines is another increasingly attractive business hub with a GDP growth of 7.2% –second only to China’s 7.7% in 2013. An important component of the country’s growing economy is the information technology sector, which contributed to 6% of the GDP last year, or $16 billion. With multinational companies entrusting their customer services to the Philippines, the sector aims to increase annual revenues to $25 billion by 2016. Increasing investment in the region from high-tech companies is likely the reason for this confidence; Accenture, for example, is capitalizing on local talent by establishing business process outsourcing operations in rural regions like Tanjay.
Additionally, the Philippines is uniquely insulated from international market fluctuations due to the number of allowances it receives from citizens living abroad. With the economy more resilient to shifting global economic conditions, heavyweights including JP Morgan and Procter & Gamble have recently taken advantage of the stability the Philippines offers by expanding their operations in the region.
While each nation offers a unique investment proposition, it is important to note that a one-size-fits-all strategy towards the region is unrealistic. There are wide gaps between the economic development stages and political landscapes of different nations. For example, Indonesia represents almost 40% of the region’s economic output and is a member of the G20, while Myanmar is still an emerging market working to build its institutions after a period of isolation from the global community.
Investors need to be aware of local preferences and cultural sensitivities when looking at ASEAN as a business opportunity.
Building Trust and Infrastructure
Other areas of risk as companies look to invest in Asia include intellectual property (IP) protection – a critical element not just for risk mitigation but also for encouraging innovation. Asia does not hold the best reputation in this area and, recently, relations have grown tense between the United States and China on these issues.
However, some countries in ASEAN pose significantly less IP risk. Singapore, for example, was ranked the best place in Asia and the second best globally for IP rights protection according to the 2013 World Economic Forum Global Competitiveness Report, while Malaysia also fared well coming in at 30th for IP rights protection of 148 countries ranked globally.
ASEAN is also beginning to paint a different picture of effective IP protection for Asia. The ASEAN Working Group on Intellectual Property Cooperation (AWGIPC), an ASEAN regional platform to foster a business-friendly IP environment in Southeast Asia, met in Ho Chih Minh City in July of last year. The group was encouraged by strong progress made toward various initiatives under the ASEAN Intellectual Property Rights (IPR) Action Plan. Guided by the IPR Action Plan, ASEAN has made notable progress in improving its IP ecosystem and is fast becoming a business-friendly region.
In a similar vein, the ASEAN region is certainly not exempt from the global business risk of cyber threats and data breaches. As President Obama noted during his time in Myanmar, one of the biggest trade initiatives currently in discussion with Asian countries is the need for stronger IT regulation, which is absolutely essential towards cultivating “an innovation culture.”
While there is always work to be done, companies are already starting to recognize Southeast Asia’s efforts for the development of cyber security solutions to tackle these challenges. For example, Interpol’s Global Complex for Innovation, a cutting-edge R&D facility, recently made its home in Singapore. A first of its kind, the center and its 200-strong highly skilled workforce will pioneer new solutions to cybercrime and espionage and host a digital forensic laboratory to coordinate investigations.
The Road to Community in 2015
Going forward, the region is also working to combat criticism that differing standards and regulations limit intra-ASEAN trade by increased integration. This is particularly true for traded goods such as textiles, wood and the automotive industry, which is helping boost Malaysia’s already established reputation as a major exporter of vehicle and automotive parts.
Additionally, by 2015, ASEAN is collectively launching two major economic projects: the ASEAN Economic Community (AEC) and the Regional Comprehensive Economic Partnership. These initiatives will promote regional sourcing, private sector involvement and economic integration all in the effort to transform ASEAN into a region with free movement of goods, investment, skilled labor and freer flow of capital. By 2030, these opportunities could create an estimated $280 billion to $625 billion.
Emerging markets, and specifically ASEAN, is thus becoming too critical to ignore. China was one of the leading investment destination for nearly 20 years, but companies are rightly recognizing the changing tides in the global business landscape. Going forward, it will be critical for them to look beyond a China-centric strategy and unlock the potential of the ASEAN region.
Damian Chan is the International Director, Americas for the Singapore Economic Development Board.