ASEAN
BUSINESS CENTER The Asian Knowledge Institute (AKI) would like to introduce our ASEAN Business Center through our very first publication—ASEAN in Global Platform. We hope that our readers will find our report useful and will look forward to our future publications.
What is ABC? ASEAN BUSINESS CENTER (ABC) aims to create national and regional interest in ASEAN among business leaders, entrepreneurs, and academia by providing the essential information and most updated ASEAN’s business dynamics, as well as being a hub of diverse intelligence regarding ASEAN business landscape. Our specific objectives are: ! • To create national and regional interest in ASEAN • To provide comprehensive understanding of the strength and capability of ASEAN members in each area so together build the competitiveness for the country and thus the region • To address an agenda in order to build on ASEAN’s strengths and to address its weaknesses and ways to mitigate them • To brainstorm and deliver the suggestions to Thailand’s policy makers and business strategists in order to move the country forward to AEC 2015 in macro level and sectorial level.
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Executive
Summary
The aim of this report is to create awareness for the ASEAN Economic Community (AEC) and to serve as a business solution for entrepreneurs and executives on how to prepare for the impact, opportunities and challenges of this economic integration. To specify, this issue aims to shed some light on the opportunities and benefits that are foreseen by foreign investors and how ASEAN’s entreprenuers and executives can prepare themselves to capacitate the needs of these investors. With its growing GDP, trades and population, ASEAN is candidate for investors’ market expansion. Its increasing middle class and urbanization projections are in turn translating the regions’ domestic and private consumption. Incorporated into its large population, ASEAN is the source to cheap labor. Although its labor forces remains to be its most desirable resource, the region also have abundant natural resources. Moreover, ASEAN has a strategic location that allows trade to be done in 360 degress. Combined with its investorfriendly law and regulation, ASEAN is a great investment opportunity. To better illustrate the AEC picture, the ASEAN automotive industry is selected to analyze whether these investments will become an opportunity or an exploitation for ASEAN.
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Table of
CONTENTS Introduction to Issue 1
pg.
8
pg.
10 25 pg.
Or An Exploitation
6
Milestones to AEC
ASEAN An Opportunity
pg.
From A
Global Perceptive
Issue 1:
6!
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Over the past two decades, the Association of Southeast Asian Nations (ASEAN) has been able to leverage its strengths and improve its competitiveness in the global market. With its abundant natural resource, skilled and inexpensive labor force, and a fast adoption of technology, ASEAN has attracted trade and investment from all over the world. The economies of ASEAN are at the crucial stage of their development. By becoming the ASEAN Economic Community in 2015, all ASEAN countries will show strong acts to move the agenda forward. Now ASEAN countries are moving to the phase of collaborations among members in all levels, starting from policy level to microeconomic level, understanding our own strengths and weaknesses will enable us to better pave out our successful path together.
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1967
1992
to promote peace and stability within neighboring counties
marked the elimination of tariffs for member and nonmember countries
Establishment of ASEAN
Free trade Area & Custom Union
2015
Common Market AEC will become a single market for free flow of goods, service, capital and skilledlabors
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Free Flow of Goods An agreement that enforces ASEAN to become a single market and production base. Thailand have Free Trade Agreements with Australia, India and New Zealand for automotive and parts since
2005.
Free Flow of Service An agreement that allows ASEAN investors to own higher amount of shares in the tourism, telecommunication, health and air transports services Thailand’s leading department store, Central Group, joined forces with Singapore’s PageOne Holdings, to create
“Central PageOne” in order to penetrate the international book market.
50.1% Opportunity:
Attractive to investment for local and foreign investors
of PageOne Holdings is owned by Central
Milestones to AEC 20XX
Is a single currency a viable choice for ASEAN?
Economic Union AEC will have common currency, harmonized tax rates and a common monetary and fiscal policy.
Opportunity: No ASEAN foreign exchanged required. Challenges: Euro was not viable for Greece, with the current difference in ASEAN countries economy will AEC be the same?
With the various political structure with the AEC will political union be possible?
20XX
Political Union
Separate nations are essentially combined to form a single nation. The establishment of one parliament towards one political union or nation.
Opportunity: More political stability, higher power to monitor member countries. Challenges: will nations be willing to give away some of their powers?
Free Flow of skilled-labor
Free Flow of Capital and Investment Policy to liberalize investments and flow of capital among ASEAN countries In the future, any investors around the world can invest in
ASEAN Exchange
the and having access to
7
of ASEAN countries stock exchange
Malaysia, Thailand, Singapore, Indonesia, Philippine, Hanoi & Hochin Minh.
A mutual recognition arrangement that allows doctors, dentist, nurse, engineers, architectures, accountants and explorers to freely work anywhere within regional borders. In the future,
out of 100 doctors in Thailand,
40
will be Malaysian,
Laos, and Burmese doctors. Challenges:
How can member countries increase their own competitiveness, while they join forces to compete with the rest of the world?
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GDP
6%
GDP growth in 2012
Source: International Macroeconomic Data Set
While the United States and the European Union face economic down turns, the ASEAN economy is on the rise. Along its side, China and India ranked among the top economies with highest GDP growth (see the graph below). But with the intense competition within China and India’s market that even the countries’ large population and relatively low cost resources cannot outweigh, investors may be spearheaded to enter other markets. The ASEAN market will be seen as the best alternative for investors to come and harvest its promising growth and opportunities. ASEAN’s increasing domestic and private consumptions and growing intra and extra-ASEAN trade are key factors that investors are taking into 10! consideration. Combined with the region’s easing inflations rates and the government’s fiscal stimulus plans to boost spending, the community is becoming an evenmore attractive location to invest in.
Source: ASEAN Finance and Macroeconomic Surveillance Database and IMF World Economic Outlook Database
Urbanization Populous Regions Younger Population
=>
Private Consumption
ASEAN’s trade figures have significantly grown over the years. While its extra-ASEAN trade figures remain promising, its intra-ASEAN trade, shaped by domestic policies, is growing as well. Apart from shaping the patterns of intra-ASEAN trades, domestic policies also help determine the model of integration each sector needs to take. For instance, specialization in production of electronic and ICT products caused by a liberal policies environment that caused the sector’s intra-ASEAN trade pattern to be highly concentrated. Thus, marketdriven environment had enabled multinational corporates to expanse their operations across ASEAN. In addition, there is an opportunity for investors not only to produce goods and services with ASEAN border, but to identify ASEAN consumer behaviors and sell their goods and services in the region. By doing so, the ASEAN Economic Community will truly become a single market and production base.
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Source: ASEAN Finance and Macroeconomic Surveillance Database and IMF World Economic Outlook Database
COMPETITING IN GLOBAL PLATFORM ASEAN nations must identify their comparative and competitive advantages, strengthen its key industries and collaborate with one and another to increase ASEAN competitive in the global platform. Source: ASEAN Trade Database
Population
613
million
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EU 0.8 times of ASEAN
China 2.2 times of ASEAN
India 1.9 times of ASEAN
US 0.5
times of ASEAN
More than the population of
ASEAN 613 million people
the
EU or USA
By having a large population, ASEAN can provide investors with the opportunity of market expansion that results from increasing consumptions and urbanization, as well as having a larger labor force.
The Increasing Middle Income Class In the past, most of the ASEAN countries were classified as having lower-middle income economies, where their consumers’ purchasing power were relatively low. Nowadays, the market condition have change as South and East Asia have been reported as the regions with the fastest growing middle income. Unlike, the lower class, the middle class have more financial freedom with spending that reflects daily consumption. Therefore, it is inevitable that the middle class will be able to afford higher education, thus increasing the countries’ number of know-how and skilled labors. In addition, with higher level of education, these individuals will seek to come back to their homeland to improve the living standard, thus resulting rural development and these individuals becoming key drivers to urbanization.
Source: World Bank, IMF,IHS Global Insights
Market Expansion
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Source: World Bank
Market Expansion
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Source: McKinsey Global
URBANIZATION
Source: UN-ESA Population Division
With social patter ns development, technological advancement, better education systems, supporting infrastructures and positive impacts of foreign investments, ASEAN is pushing forward the idea of urbanization. Among the ASEAN member countries, Indonesia has the highest urbanization projection. Indonesia’s high urbanization rate resulted from an overpopulation in Jarkata that caused many moderate and high-income families moved out from the central city to the peripheral areas, while poorer natives were relocated to the fringe areas due to the the expansion of formal sector in the central city.
AEC is like the islands of Indonesia, but in a
larger scale. Thus, there will be opportunities for the ASEAN member countries to become urbanized together, especially with their connectedness through supporting infrastructures. Urbanization will inevitably create opportunities for investors to seek and expand to new market potentials. Thus, providing consumers with more choices once these investors enter the market. Moreover, the challenges and competitions between old and new investors’ fight to capture their market segments will, eventually, lead to creativity and innnovaton. Assuming that infrastructures are supported by rural development plans, such as roads, railways and airports, the ASEAN linkage will be created and provide investors with an ease of transporting goods and services.
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Source: McKinsey Global
Labor Force
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ASEAN =
Source of human capital Labor intensive Cheaper labor
While China and India remains to be the world’s main sources of labor, investors have begun to relocating their production base to ASEAN countries. Tsingtao Brewery, for example, sees the ASEAN market as being large and open enough and having comparatively cheap labor.
ASEAN labor force is expected to grow by
15%
.
17! Source: ILO, Economically Active Population Estimates and Projections Database
Cambodia, Vietnam, Indonesia, China and Thailand ranked among Asia’s top providers of lowest cost labor. However, in recent years the wages in China has increased significantly. As a result, investors may become uncertain about their company’s long term cost efficiency and how long would they have before they need to shift their production base else where. Thus, the potential countries would be ASEAN member countries that hold free flows of skilled labor, high productivity and low labor cost. Source: International Macroeconomic Data Set
Most multinational corporations focuses on Asia due to its labor intensive characteristics that is led by the nations’ lower wage and high craftsmanship. Once a complete economic integration exist in 2015, labor movement and transfer will raise the productivity among ASEAN member countries and increase their competitiveness. Investors will therefore move to the countries with higher wage and better working condition, . Various research have shown that the growing productivity of the Chinese labor force have resulted from high FDI inflow. Knowledge and know-how sharing among investors and host nations have also lead to productivity development. In 2009, China’s productivity remains to continuously increase, whereas ASEAN’s productivity gradually declines. Out of all ASEAN member countries, Singapore has highest productivity, due to its high immigration rate of international workforces and expats, while the skilled labors of Thailand, Indonesia, Laos, Myanmar, Philippines and Vietnam are transferring to country with higher wage and better working conditions. In the Future, foreign investors will seek for skilled labor with high productivity from ASEAN, therefore, it is nescessary for ASEAN population to educate and develop themselves, in order to capacitate the needs of these investors. In addition, investors will look for highly productive labors anywhere within the region’s borders, since these labors are motivated by wages, but with high productivities.
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Source: The Conference Board and Groningen Growth and Development Centre Total Economy Database
Source: The Conference Board and Groningen Growth and Development Centre Total Economy Database
Where should investors go if they are looking for a labor force with the following qualifications within the next 5 years? 19!
Labor Force Growth
Low Labor Cost
Long term Cost Efficiency
High Productivity
Craftsmanship
Labor Force Growth
Laos
Cambodia
India
Philippines
Cambodia
Low Labor Cost
Cambodia
Cambodia
China
China
Cambodia
Long term Cost Efficiency
Philippines
Indonesia
Malaysia
Indonesia
Indonesia
High Productivity
Malaysia
China
Malaysia
China
Thailand
Craftsmanship
Cambodia
Cambodia
Indonesia
Thailand
Thailand Source: AKI
AEC integration allow will investors to seek labor opportunities considering cost effectiveness and skills. For example, investors may employ Thai labors to cut gems stones, since they are known for their flawless craftmanship. Whereas, a textile manufacturer may wish to use Cambodian labor , since they have high craftsmanship and lowest labor cost.
Source: CIA World Factbook
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A Basket Full of
Natural Resources By 2015, foreign and local investors will have opened or are opening a door to a commodity rich community that holds many promising investment opportunities. Out of 10 nations that make up the AEC, eight of which are a leading source for oil and natural gas. Malaysia, Indonesia and Brunei ranked among the world’s top six producers of liquefied natural gas. Furthermore, countries like Philippines and Indonesia are sitting on the Ring of Fire and having resources like gold, copper and coal at hand. Indonesia, for instance, holds one of the world's largest gold reserves and has become the largest exporter of thermal coal in the world. Moreover, ASEAN is also mine for various agricultural products that have been continuously been exported to the rest of the world. For example, expertise have indicated that several ASEAN nations, such as Malaysia, Indonesia, Thailand, are considered the world’s most ideal places for growing palms, due to these countries being located near the equator and enough rainfall.
ASEAN’s natural resources accounts for only 1% of the world’s natural resources?
LEADING INDUSTRIES Machinery and transport equipment: • • •
Office and telecommunication equipment Transport equipment Other machinery
Although, ASEAN has many abundant natural resources, the region’s most desirable resources remains to be its cheap labor, as it is one of the world’s manufacturing hubs. ASEAN has been known for being the production base and assemblers of automotive, computers and other electronics good. However, the manufacturing and assembling goods, alone, are not sufficient in adding value to the regions and member countries’ economies. To add value to its economy, ASEAN countries should look to become the destination for research and development, distribution and marketing. By evolving into a region with research and development implies that knowledge has been transferred from the investing country to the host country. Like Singapore becoming a center of or portal for trade that lead it to become more economically developed, other ASEAN nations should look to become part of the supply chain.
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Market Share
ASEAN’s Leading Exports Goods
Food and live animals and by-products
Machinery and transport equipment
Other manufactured products
Crude materials, incredible, mineral fuels, lubricants and related material
Chemicals and related products
Market Growth Source: AKI
Trade can be done in 360°:
Strategic Location of ASEAN Strategic location of ASEAN has raised the competitive advantage in borderless trade, namely, widening trade areas to emerging countries. Whether investors are heading south to trade with Australia and New Zealand, turning left to trade with beautiful India or turning to the right to trade with the land of art: China, Korean and Japan, trade can be done in 360 degrees, thus, making ASEAN hold a strategic location. Furthermore, over 60 percent of the world’s maritime trade passes through ASEAN waters
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ASEAN Logistics ASEAN’s location in itself has a geographical advantage that allows many goods and services to be transferred across it borders. By improving its transportation system, the region will have an even greater competitive advantage, especially once it has a well developed logistics system. With such geographical advantage, ASEAN is linkage to the rest of the world.
AEC is a strategic plan to strenthen the region’s location, thus ASEAN needs to be prepare for the opportunities that is to come.
Greater Mekong Sub Region
concentrate in land transportation that comprise of 6 countries, namely, Thailand China Vietnam Cambodia Lao and Myanmar. The objective is to promote trade , investment , industry , agriculture and service in region and attract FDI in global opportunity. GMS divided into 3 main line; 1. East-West Economic Corridor –EWEC to link Myanmar , Thailand ,Lao and Vietnam 2. North-South Economic corridor – NSEC to link China , Thailand , Lao , Malaysia and Singapore 3. South Economic corridor – SEC to link Vietnam, Cambodia , Thailand , Malaysia and Singapore
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Over 60% of the world’s maritime trade passes through ASEAN waters.
Sea transportation development is another important issue to build up ASEAN competitiveness in Logistics.
Thailand!is the aviation and!air!transport!hub!of Southeast Asia for priorities sectors in Agreement Free Flow of Services.
Benefiting From The
Legal Loopholes
24! Source: World Bank
Base on an international survey, some of ASEAN’s member countries ranked among the world’s leading countries with the highest ease of doing business. These countries have investored-attractive laws and regulations and combined with the current environmental concern issues, ASEAN member countris are becoming more attractive to invest in. Factors Contributing to Ease of Doing Business
Lower taxes and tariffs
Less restricted laws and regulations
The Revenue Department of Thailand planning on re d u c i n g t h e n a t i o n a l corporate tax rate to a level with Singapore, in an effort to increase Thailand’s competitiveness among other South-East Asian nations.
Since English government have passed on the Climate Change Bill to! reduce the amount greenhouse-gas emissions, investors may have found it difficult to operate in the most efficient way and now seek alternatives to production efficiency.!
FDI incentives
ASEAN has set up laws and r e g u l a t i o n t h a t international firms to be able to reduce it taxes if it has a factory set up within ASEAN land and have the majority of the shared owned by ASEAN citizens. !
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An opportunity or An Exploitation:
ASEAN’s Automotive Industry
Source: The Nation
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! Thailand’s automotive industry has become one of South East Asia’s largest and most advanced automotive industries. It is the automobile hubs, with current significance presences, for several major car companies like Toyota, Honda, Mitsubishi, Isuzu, BMW, Mercedes, GM, Ford and Mazda, thus making it the Detroit of Asia. With a population of over 610 million and a production total of 1.3 million vehicles in 2003, it has been predicted that an integrated ASEAN automotive market will lead the AEC to the becoming of the world's fifth largest automotive market.
Have trade agreements with India, Australia and New Zealand
6 motorcycle assemblers yielded a total annual production capacity of 2,804,000 units per year.
Does not limit the number of new companies or imported vehicles and components to enter the market.
12.36% growth in domestic consumption
Access to airports, seaports and railways
Is ASEAN's largest automotive market and assembler and is also the world's second largest pickup truck market after the U.S.A.
Is a strategic regional bases & a Gateway to Indochina
Size of the work force: 34.1 million, most under 30 years of age. About 800,000 people join each year, with a literacy rate above 90 percent.
Opportunity • • •
Possible knowledge and know-how transfer Market expand Market exposure for gain reputation and international recognition
Exploitation • • • •
Game to reduce tax Taking advantages of cheap labor Opportunity cost of using natural resources Damaging ASEAN’s environment and ecosystem
Who Will
SMILE OR
Who Will
CRY?
Industry Discussion The Thai automotive industry is an excellent example of the benefits that ASEAN has to offer to and is foreseen by investors. As a leading manufacturing hub of the world, Thailand is able to supply the world with automobile and automotive parts. One of the benefits of being a manufacturing hub is the opportunity of knowledge and know-how being transferred to the local people. However the lack of any Thai-designed and manufactured automotive brand clearly indicates that Thailand is unable to harvest the opportunity of this knowledge transfer. Malaysia, on the other hand is now supplying the world with Proton. India has Tata. But the BIG question is when will Thailand have its own car or will Thailand simply be a source of relatively cheap labor with no room for improvement?
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ASEAN’s
Self Reflection There is no doubt that the AEC is upon us and the member countries must prepare for what is to come. As foreign investors enter the ASEAN borders, they may bring with them opportunities and risks of exploitations. Due to immature laws and regulations, exploitation by foreign investors are widespread in ASEAN.
"Even though the EIA process has been very successful in many countries, it has not worked out so well in Thailand. An inherent weakness of the EIA rules are the provisions which sets deadlines on the deliberation and consideration process.…Moreover, there is! no! punishment for any official or private person!who!fails to!comply with the EIA rules.” 28!
- NUS, Thai Environment Law, pg, 8 -
While foreign investor use our labor and natural resources, they are also sharing their knowledge and know-hows with us. In order to increase our national capabilities and competitiveness, we therefore must focus on harvesting these knowledges and turning them into something of value. These knowledge transferred will, eventually , lead to further research and development, thus creating innovation and creativity. To compete globally, ASEAN members countries must strengthen they competitiveness via collaborations in public, private and educational sectors. Effective partnership among ASEAN member countries will surely create value to the ASEAN community. Moreover, ASEAN should place more emphasis on research and development as it can add economic values. They should in turn, focus less on being the manufacturing hub of the world, since it adds no value to the economy.
AKI’s ASEAN Business Center! Dr. Poomporn Thamsatitdej College of Innovation , Thammasat University poomporn@gmail.com Dr. Karndee Leopairote Thammasat Business School karndee@gmail.com Ms. Wisuta Jaengprajak Research Fellow wisuta@akiedu.org Ms. Tuangpat Visuddhidham Research Fellow tuangpat@akiedu.org Ms. Varitta Komalasen Graphic Designer varitta@akiedu.org!
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