The future of manufacturing in Southeast Asia

Southeast Asia is one of the world's largest manufacturing hubs, with firms producing high-quality goods across a range of industries. As the 10 countries across the Association of Southeast Asian Nations (ASEAN) become more integrated, how will the markets change for manufacturers?

According to a recent survey by the Economist Intelligence Unit (EIU), 96.5 per cent of businesses are confident the ASEAN Economic Community will be achieved, though only 3.5 per cent expect it to happen this year. Despite the pessimistic forecast for 2015, 76 per cent of multinational manufacturing firms have a strategy in place for the joining of economies, which will lead to businesses increasingly managing Southeast Asia as one region rather than 10 separate markets.

In fact, 64 per cent of stakeholders already believe customers across the ASEAN are becoming more similar and 62 per cent are standardising their products and services to match the trend, EIU reported.

But what is driving investments in Southeast Asia? And how will the impending ASEAN Economic Community plans change manufacturing activity across the region?

Why invest in Southeast Asia?

According to EIU, there are a number of key reasons manufacturers are choosing to set up shop in Southeast Asia, but they may not be as expected. While cheap labour is an obvious drawcard in most emerging markets, business leaders ranked this factor at 10th among the influencers on why they choose to produce goods in the ASEAN.

So what is at the top of their list? The number one reason for manufacturing in the ASEAN is to increase capability to cater to local demands. This is followed by a desire to be more effective against local competitors and to reduce transport and shipping costs by being close to markets.

Currently, 96.1 per cent of manufacturing firms surveyed by EIU are doing business in Singapore, with the same amount having activity in Malaysia. And this number is growing, up fractionally between December 2012 and July 2014. Similar growth is seen in Indonesia, Thailand, Vietnam, the Philippines and Myanmar.

Where to next?

So, what would the ASEAN look look like if it were one country instead of 10? The EIU found the region would be home to 10 per cent of the world's population, rank as the world's seventh-largest economy and control a US$2.4 trillion economy. 

In fact, this one-nation market is expected to see such strong investments through the coming years that by 2018, the ASEAN should have the world's fifth-largest economy, at $3.9 trillion. This is largely due to the fact the ASEAN has a trend annual economic growth rate of 5.6 per cent. In comparison, the USA is trailing on 2.6 per cent, while India and China surge ahead on 6.4 and 6.8 per cent respectively.

With the impending connection of the 10 ASEAN countries, 88 per cent of firms believe an integration strategy is crucial to their ASEAN business plans. With 64.4 per cent of companies certain that customers across the ASEAN are becoming more aligned, it seems that strategies for growth and expansion through the region can be more effectively applied between the different nations. This should make it easier for businesses to move between countries, setting up multinational corporations in the ASEAN mega-market.

Within Southeast Asia, global companies expect the greatest increases in manufacturing investment to go to Indonesia and Myanmar over the next few years, the report revealed. The companies surveyed predicted they would establish 27 factories in Myanmar by 2019, up from none today. The number of plants in Vietnam will probably increase from 51 to 71, and from 74 to 98 in the Philippines, the survey showed.

However, investments in Myanmar are currently hampered by a lack of skilled workers, according to the Directorate of Investment and Company Administration. This opens the door for multinational companies to establish a base supported by imported labour in order to take advantage of the lack of competition across the emerging market.

Focusing on Indonesia

Indonesia is an area of particular interest for manufacturers in the ASEAN, with huge potential for growth in factory activity, value and profits. According to EIU, 54 new plants are planned in Indonesia by 2019, increasing production by 68 per cent and edging Indonesia ahead of Malaysia and Thailand. 

A survey by the British Chamber of Commerce in Indonesia found that business confidence grew significantly in 2014. The board forecasted that investment could increase by 15 per cent this year, particularly as the government makes it easier to do business in the country by cutting permit procedures.

"Labour is cheaper in Indonesia, and energy is cheap. Indonesia has abundant coal, and we've built our own captive coal-fired power station to serve the plant," explained Indorama Ventures CEO Dilip Agarwal. His company is the world's largest producer of polyester and controls a US$7.5 billion revenue.

For these reasons and more, manufacturers are looking increasingly to Indonesia and its neighbouring nations to unlock efficient and responsive operations across the ASEAN.

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