The Jakarta Post
Most people see Thailand through the prism of pristine beaches and a laid-back lifestyle. Few, however, know it is Southeast Asia's biggest automobile manufacturing hub and a leading production center for the global electronics and electrical parts industry.
Travel outside the capital of Bangkok to the vast industrial parks elsewhere in the country, and one will find multinational companies such as Sony, Seagate, Philips and LG having set up assembly operations for products including hard disk drives, integrated circuits, semiconductors and automotive electronics.
The same goes for Vietnam, which has attracted major investments from the likes of Samsung, LG, Canon and Nokia. Samsung alone accounts for around 20 percent of total Vietnamese exports.
Malaysia and the Philippines are now among the world's leading hubs for information technology and business process outsourcing in Southeast Asia.
Much of the low-end, labor-intensive manufacturing that was once the sole domain of China has migrated to the Greater Mekong Subregion (GMS), Asia's new low-cost production hub.
Comprising Vietnam, Myanmar, Cambodia, Laos and Thailand, the GMS also includes Yunnan province and the Guangxi Zhuang autonomous region in southern China.
Although China is still perceived as the world's factory, much of the low-end, labor-intensive manufacturing has moved offshore, with much of it within the Association of Southeast Asian Nations (ASEAN).
Investors, too, are increasingly turning their gaze toward the 10-nation regional trade bloc ' Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
Although their economies are at different stages of development, they all have one thing in common ' they share enormous potential for growth.
When the Asean Economic Community (AEC) comes into being at the end of this year, such growth potential is expected to accelerate in a market of more than 600 million people with a combined GDP of more than $2.4 trillion.
At the World Economic Forum in Jakarta, Indonesia, earlier this year, delegates were told Asean could expect to grow around 5 per cent annually over the next decade. The European Union, on the other hand, projects growth of around 2 per cent and the United States at 3 per cent.
Asean already accounts for 5 per cent of global manufacturing with dominant shares in such sectors as chemicals, food and beverage, metals and motor vehicles.
Sandra Seno-Alday, a lecturer at the University of Sydney Business School and the Sydney Southeast Asia Center, said one of the key factors that have contributed to the rise of Aseab as a manufacturing hub is wages. China has priced itself out of many sectors a long time ago, she added.
'The natural move, especially for low-end, labour-intensive manufacturing, has been to countries like Vietnam, Cambodia, Thailand and Indonesia, where wages are a lot lower,' she told China Daily Asia Weekly.
According to the International Labor Organisation's Global Wage Report 2014/15, real wages in the Asia-Pacific region grew 6 per cent compared with a world average of 2 per cent. In China's case it was 7.1 per cent, which has led many commentators to claim China's competitive edge is being undermined.
But despite rising wages, China still remains highly competitive, because it now competes on productivity rather than low wages, and its comparative advantage is gradually shifting away from labor-intensive sectors such as garments toward higher-value added ones like electronics.
'A lot of the labor-intensive business has since shifted to Asean countries,' said Seno-Alday. And it is not just Chinese companies that have relocated to Southeast Asia.
'The Asean region is no stranger to international companies,' she added. 'For the best part of two decades, significant foreign capital has moved into the region.
'Countries like Singapore and Thailand have developed the infrastructure needed to support international companies.'
Nations including Singapore, Malaysia, Thailand, Indonesia and the Philippines have developed their infrastructure to support international businesses. Such infrastructure covers export-processing zones, training and education systems and an investment-friendly regulatory climate.
Singapore has been the destination of choice for the regional operating hubs of many international companies, Seno-Alday said.
According to Glenn Maguire, chief economist with ANZ Bank for South Asia, Asean and Pacific, the full potential of Asean is 'massively underappreciated'. He sees ASEAN as a manufacturing hub becoming just as important as China.
'Workers are not only growing older in North Asia, they are becoming more expensive,' he said in a commentary earlier this year.
Maguire added that the migration of manufacturing platforms south into the 'youthful and cheaper Southeast Asian economies seems all but inevitable'.
'More importantly, the commencement of the Asean Economic Community from December (2015) will be an important multilateral enabler of the drift of factories in Asia to the south.'
A large, youthful work force and strategic location are just some of Aseab's many advantages, which should draw more companies to establish production bases in the region, according to analysts.
'Productivity improvements and labor force expansions will drive most of the growth in Asean, along with increased trade fragmentation in the region,' Maguire said.
By 'fragmentation' he means the process by which multinational companies break up the manufacture of their more elaborate goods into components, 'leading to a rise in trade of those components, and an extension of global supply chains'.
Fukunari Kimura, an economist with Keio University in Tokyo, said Thailand's auto sector is a good example.
'Despite Thailand's domestic politics, it is still one of the world's major automobile manufacturing hubs and a critical part of the supply chain network for a number of Japanese and US manufacturers,' he said.
A report by management consulting firm McKinsey Global Institute said that while China has many advantages, including a developed supply base, advanced infrastructure, robust manufacturing and engineering capacity, and a huge domestic market, there is still room for Southeast Asian economies to become the next 'factories of the world'.
Wages are a key driver. According to the institute, the average cost of factory labor is about $7 a day in Vietnam and $9 in Indonesia ' far lower than the $28 average in China, 'which has posted a 19 per cent compound annual growth rate in labour costs since 2007'.
But not all sectors in the region are low-cost and labor-intensive. Air transport is one of them.
It is, in fact, one of the 12 priority sectors in the establishment of the AEC. According to consultancy IHS, rapid growth in 'Asean airline fleet size will drive a boom in the Southeast Asian aviation industry', particularly in the maintenance, repair and overhaul (MRO) sector over the next two decades.
Singapore is particularly well-positioned to benefit from this trend.
'Singapore is currently the leading hub for MRO in Asia, accounting for an estimated 25 percent of total Asian MRO market, and will be a key beneficiary of the rapid future growth of the ASEAN airline fleet,' IHS said.
'Singapore has become one of the centers of excellence globally for MRO for commercial aircraft engines.'
The decision by Rolls-Royce in February to establish a regional customer service center in Singapore will strengthen operational support to Asia-Pacific airlines and further build the city-state's role as a leading global aircraft MRO hub. The center will support 20 per cent of Rolls-Royce's large civil aircraft engines worldwide.
IHS said a new wave of shifting manufacturing production is currently underway in the electronics industry, as multinationals reposition their production of products like semiconductor chips, mobile phones and printers away from coastal China toward lower-cost production hubs.
Seno-Alday of the University of Sydney said the Asean region is no stranger to working with international companies.
'Significant foreign capital has already been invested in the region and that is likely to continue,' she said.
The 1997 financial crisis was good for the region, Seno-Alday added, as it forced 'countries to put their financial houses and institutions in order'.
'Significant challenges, however, remain. These include physical infrastructure and transport systems, which have a detrimental effect on efficiency and productivity, and the need to speed up the development of the smaller economies in the region.' (k)(++++)
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