In 2013, President Xi Jinping, in a speech to Indonesia’s parliament, announced an initiative for China to work with ASEAN countries for a 21st Century Maritime Silk Road to build together a closer China-ASEAN community with a shared future. For a decade, China and ASEAN have enjoyed growing connectivity, deepening economic integration and robust business ties. Since 2020, ASEAN has surpassed the European Union to become China’s largest trading partner, marking the official formation of a new regional economic and trade cooperation pattern in which China and ASEAN are each other’s largest trading partners.
Furthermore, China is the second highest contributor of foreign direct investment (FDI) to Indonesia. In 2022, the Regional Comprehensive Economic Partnership (RCEP) came into effect, which presented China a year-on-year trade increase of 15 percent with ASEAN. As the two economies partnership continues to deepen, beyond trade, we expect to see China’s growing footprint in ASEAN through FDI, planting seeds for growth in China and ASEAN’s share future. China and ASEAN, as two of the world’s fastest growing regions, are highly complementary of industrial structures. Southeast Asia enjoys strong manufacturing and production capacity, rising and young domestic consumer population, as well as increasing urbanization. The region’s growing trade and capital flows, continuing digital transformation, and greater focus on sustainability are creating tremendous opportunities. China’s modern economy was built on the strength of a solid and often low-tech manufacturing sector, making it the world’s single largest manufacturer today. As China continues to develop and move up the value chain – toward producing more high-tech manufactures and services and investing in more R&D – it is likely that some of the country’s lower-tech, labor intensive manufacturing will be ‘up for grabs. It is expected that ASEAN will emerge as the third pillar of Asian growth alongside China and India. The changing landscape of China’s manufacturing sector will present significant opportunities for ASEAN to capture some of China’s manufacturing, and to become a major source of consumption for the world. The garment and textile industry is the most obvious candidate for moving production out of China to other Asian countries.
There are also examples of intermediate-input and other tech manufacturing leaving China with countries like Vietnam, Thailand and Indonesia picking up electronics work. And as more companies seek geographic diversification and adopt the “China+1” strategy, Southeast Asia will continue to gain market share – as well as a greater slice of global foreign direct investment as the center of gravity of global manufacturing continues to shift. FDI flows into ASEAN as a percentage of total world flows rose to a record high of 11 percent in 2021, almost on par with China (12 percent). And China has become the joint largest source country for FDI into ASEAN (not counting intra-ASEAN) in 2021, on par with Japan. While the process was partially disrupted by the pandemic, after the re-opening, China’s investment push into ASEAN will continue to thrive. Most of mainland China’s FDI projects in ASEAN in 2022 fall into sectors where recipient countries have a competitive advantage. Over the years, China has been investing heavily in ASEAN’s booming manufacturing sector, ranging from the EV supply chain in Indonesia and Thailand, to consumer electronics in Vietnam, as well as Singapore’s promising pharmaceuticals.
For example, Chinese investment has been key in facilitating Indonesia’s nickel smelter boom, a key input for producing EV batteries. China-based CATL signed an agreement with Indonesia’s state-owned enterprises PT Antam and PT Industri Baterai Indonesia (IBI) to jointly develop an almost US$6 billion mining-to-batteries ecosystem (Bloomberg, April 2022). Indonesia is not the only candidate for China’s FID along the EV supply chain. BYD, China’s top EV producer, is planning to build a production center in Thailand, with a capacity of production of 150,000 EVs per annum. This will make Thailand its first production hub in ASEAN, partly thanks to the country’s generous subsidy which is as much as 150,000 bahts ($4,340) per EV (Nikkei Asia, September 2022). Elsewhere, China’s investment in Malaysia is equally important. Risen Energy, China’s solar energy firm, announced its first facility investment in Southeast Asia, worth $10 billion+ over 15 years, to manufacture high-efficiency photovoltaic modules.
Chinese firms have also made a move in Singapore. In late 2022, two Chinese firms, WuXi Biologics and WuXi AppTec, have announced a S$4 billion (US$2.98 billion) investment into the country’s pharmaceutical manufacturing, the second-largest sub-sector after electronics. The spreading supply chain across Asia is already resulting in increased capability and production quality in the countries closest to China. Continued investment, the right partnerships and new trade agreements such as the RCEP, will likely bring to the wider Southeast Asia region a degree of the economic advancement China has already been enjoying.
ASEAN has the potential to become one of the world’s key manufacturing hubs. The region has favorable demographics, comparatively lower wages, is strategically located, and boasts production synergies. The opportunity for Southeast Asia countries to “grab” some of China’s manufacturing advantage is ripe. Yet to attract more global production and remain competitive with China, deeper efficiency improvements will need to be implemented in the region. Despite the shadows cast by the global pandemic in the last few years and other market uncertainties, we see the coming years as a period of great promise for Southeast Asia, brimming with potentials ranging from sustainability and digital technology to trade and wealth.
This also creates unprecedented opportunities for Chinese companies that are seeking continuous growth and global presence in the post-covid era. The key to unlocking opportunities is not just to understand the dynamics of each market, but to understand how to help businesses across markets connect and work together – from the automotive sector in Thailand and electronic manufacturing in Malaysia to natural resources in Indonesia and pharmaceutical and financial services in Singapore.
Source : Thejakartapost
