Glenn Maguire explains why Southeast Asia has the potential to become one of the world’s key manufacturing hubs in the next decade.
As the Chinese economy continues to slow after offering over a decade of bountiful support to the Australian and New Zealand economies, many regional observers are looking for where the next key plank of economic support is likely to emerge.
Australia and New Zealand Banking Group believes Southeast Asia will eventually be as important to Australia and New Zealand as China is today. Our research and analysis finds that over the next ten years the Association of Southeast Nations (ASEAN) has the potential to become one of the world’s key manufacturing hubs and an emerging source of consumption for the world. Factors in its favour include:
- Demographics – a large body of potential workers between 20 and 40 years of age.
- Comparatively lower wages – cheaper labour will attract more production platforms to the region.
- Production synergies – the strengths of the ASEAN member countries are often complementary.
- Scope for productivity improvement – initiatives such as the ASEAN Economic Community (AEC) should create economies of scale across the bloc and improve productivity by removing barriers to trade and investment.
- Geography – strategically positioned at the junction of the Indian and Pacific Oceans ASEAN is uniquely placed to benefit from growing trade in the region.
The formation of the AEC aims to create a single market and production base from December 2015. This will lay the groundwork for an integrated economic entity that should emerge as the third pillar of Asian growth alongside China and India.
Good progress has already been made on trade integration, reducing tariffs on intra-ASEAN trade and speeding up customs clearance. However, in our view, it may take the AEC another 15 years to achieve full economic integration. Some significant impediments to rapid integration include a lack of infrastructure connecting the bloc, variable business conditions and regulatory regimes, and a lack of financial integration.
Over the next 10 – 15 years, as economic integration progresses, we expect three sub-regions to develop:
- The Mekong frontier economies of Myanmar, Cambodia and Laos, which will provide labour for the production bases moving into the region.
- The mid-manufacturing competitors of Thailand, Vietnam, Indonesia and the Philippines, which will compete to become the lowest cost manufacturer in Asia.
- The high income economies like Singapore and Malaysia, which will provide higher value-added services such as electronic circuit design and financial services.
The three sub-regions should allow multi-national companies to more readily take advantage of cost efficiencies and skills specialisation across ASEAN. We believe the synergies between these sub-regions will deliver strong economic gains for the region and the world.
By 2025, we project intra-ASEAN trade will exceed USD1 trillion in value, extra-ASEAN trade with the G4 economies will reach USD3.7 trillion, and foreign direct investment (FDI) into ASEAN from key partners will continue growing strongly to around USD106 billion as more companies look to establish production bases in the region and global supply chains lengthen.
Australia and New Zealand
China currently dwarfs ASEAN in terms of its significance as a trading partner for both Australia and New Zealand (the Antipodes), but that disparity may shrink over the next 10 – 15 years. Already there are signs that ASEAN is assuming much greater importance for the Antipodes in certain industries such as agriculture and overall exports to ASEAN are growing strongly. Strong demand growth, rising standards of living, and a sizeable infrastructure deficit in the ASEAN region all present the following opportunities for businesses and consumers in the Antipodes:
- We expect agriculture exports to grow strongly for both Australia and New Zealand due to urbanisation and rising standards of living in ASEAN.
- Australia’s hard commodity exports stand to benefit from the upcoming infrastructure build in ASEAN and strong growth in manufacturing.
- Australia should remain a popular destination for ASEAN travellers and students.
- Australia is well placed to benefit from financial and other business service opportunities “on the ground” in ASEAN.
For Australia, our projections show total trade and inbound FDI increasing from around USD90 billion in 2013 to USD155 – 210 billion in 2025. For New Zealand, that total is projected to increase from around USD13 billion in 2014 to USD22 – 27 billion in 2025.
However, the trading, business and investment opportunities won’t come on a platter, because the rest of the world will also be contesting those opportunities. In fact, while Australia and New Zealand have been growing their exports to ASEAN at a strong rate, their share of ASEAN’s total imports has barely held its line and in certain sectors like food, Australia’s share has actually shrunk.
Australia may have to adopt New Zealand’s more structured approach to ASEAN trade and investment in order to compete for these new opportunities.
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