Association Of Southeast Asian Nations (ASEAN ): An Upcoming Manufacturing Powerhouse

As the global geopolitical landscape becomes increasingly uncertain, volatile and complex, corporates are starting to prioritize diversification and enhancing the resilience of their existing supply chains.
Worldwide Government, Public Sector
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As the global geopolitical landscape becomes increasingly uncertain, volatile and complex, corporates are beginning to focus on diversification and improved resilience of existing supply chains. Improved resilience means Boards and Financial sponsors are reevaluating existing value chain models and exercising options to absorb short and long-term risks. For many organizations this means relooking at the Chinese mainland-centric manufacturing models.

However, the Chinese mainland remains a major supplier to the world, despite current tariffs and trade barriers such as the 25 percent import duty on a range of products including aluminum and cars and sanctions by the US Department of Commerce on multiple Chinese mainland companies. Despite this, the Chinese mainland's export volume to the US and Europe has grown by 5 percent and 9 percent annually in the past four years with


manufactured and industrial goods still accounting for more than 70 percent1 of the Chinese mainland exports. Therefore, building a diversified and more resilient supply chain, will require extensive planning, investments, and forward thinking.

With most manufacturing concentrated in the Chinese mainland, ASEAN countries have a significant role to play as they are likely to be a natural choice for many corporates opting for a diversification strategy. ASEAN countries have physical proximity to the Chinese mainland and have similar cost advantages and favorable demographics. While still early, ASEAN countries have started gaining share of global exports. In recent years, ASEAN has been the largest recipient of FDI inflow among emerging markets.


Key Drivers in the Shift toward ASEAN Countries

Structural Factors

  1. Geographical proximity to the Chinese mainland Proximity to the Chinese mainland, established transport infrastructure and contiguity of supply chains are key factors in adopting ASEAN as an alternative manufacturing destination. This enables a gradual and segmented shift of work packages to the region more easily. For example, the semi-conductor auxiliary value chain has developed in Vietnam and Malaysia. Malaysia and Thailand fare best on the logistics performance index, but Vietnam and Indonesia are making rapid progress with increasing investment. 1468764b.jpg
  2. Favorable factors of production ASEAN countries have the advantage of a demographic dividend. They are collectively the world's third largest labor force, offering significantly cheaper manpower vs. the Chinese mainland (for example, Vietnam labor costs are 50 percent2 lower compared to the Chinese mainland) and have a growing middle class. Public investments in upskilling the workforce are helping transform this labor force. While productivity is still lower than the Chinese mainland, the improvements are trending on the right trajectory. 1468764d.jpg li>
  3. Government initiatives and incentives Outside of proximity to the Chinese mainland and low labor costs, countries have actively taken steps to be first in line. Some of these countries have made foundational changes and invested in reforms to provide an overall conducive environment to become one of the preferred manufacturing destinations. This factor will be covered in greater detail in our section on country-level analysis.
  4. Competitive corporate tax rates Corporate income tax rate is one of the key factors contributing towards overall cost of doing business in a country. Vietnam and Thailand have a significantly lower corporate tax rate compared to others. This, when combined with specific investment-based tax incentives like Vietnam's four-year tax exemption for enterprises investing in projects in prioritized industries (electronics, automobiles, machinery engineering, hi-tech industries), is a very attractive proposition for potential investors.
  5. Extensive network of free trade agreements Trade agreements are also a key competitive advantage, e.g., Vietnam has an extensive network of 18 active free trade agreements covering most of the largest economies in the world including the EU and the UK, the Chinese mainland, Japan, and South Korea. Vietnam is one of the few countries which has already ratified a free trade agreement with the EU, the second largest economy globally. No other country in ASEAN, nor India has developed such a wide range of free trade agreements.

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Originally published 19 May 2024

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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