China has a new contestant for the mantle of the ‘world’s factory’, according to a new study by US consultancy McKinsey. With the People’s Republic experiencing a shift from an export-driven economic model to a more consumption-driven one and the subsequent rise of wages and urbanisation, manufacturers in the heavy vehicle field as well as transport and logistics businesses are now considering nearby Southeast Asia the next big thing.
Although China can draw on a developed supply base, advanced infrastructure, robust manufacturing and engineering capacity, as well as a huge domestic market, McKinsey found that the time has never been more opportune for the Association of South East Asian Nations (ASEAN) economies to attract additional production from multi-nationals and become the third pillar of regional growth after China and India.
The region has seemingly been preparing for the shift since 2006, when it first created the ASEAN Economic Community (AEC) plan. Due to come into effect by the end of 2015, the goal is to unite 10 cooperating countries – Indonesia, Malaysia, Laos, Thailand, Vietnam, Myanmar, Cambodia, Brunei, Philippines and Singapore – as a single production base with a combined population that would make it one of the largest economic zones in the world, with a combined GDP approximately the size of the UK’s.
What will likely assist that shift is the connection between low-cost labour in places like Myanmar, Cambodia and Laos, cost-effective manufacturers in Thailand, Vietnam, Indonesia and the Philippines, and sophisticated producers in Singapore and Malaysia. By enabling the free movement of goods, services, capital and labour between the 10 member states, the AEC intends to leverage the various strengths of each nation, with the globally recognised logistics hub of Singapore taking the lead.
“Multinational companies and investors in ASEAN stand to benefit from the financial savvy and capital of developed economies such as Singapore and the competitive costs and abundant labour and resources of the less-developed member countries,” explains Al Jazeera journalist, Tom Benner – with Andrew Géczy, CEO International and Institutional Banking at the Australia and New Zealand Banking Group, adding that ASEAN’s main attractions are favourable demographics, a young population and growing consumer class.
“With the flurry of activity around the Asian region – trade agreements, new financial institutions, geopolitical developments – it’s perhaps understandable the role of ASEAN has receded somewhat into the background,” he says. “[But] its potential is greater than is commonly understood. The infrastructure investment required in the region is double the size of the infrastructure investment to which China committed in the financial crisis.”
Experts like Benner and Géczy agree that a single community that combines the advanced technology and infrastructure of Singapore and Malaysia with the cheap labour cost found in Cambodia and Myanmar provides significant improvement in the region’s investment appeal to the manufacturing industry and, subsequently, logistics and transport.
The challenges of such a project can be complex, though, says Géczy. “For example, increasingly firms are adopting a ‘Thailand Plus One’ strategy, whereby they outsource more labour-intensive manufacturing to cheaper, nearby Mekong countries then ship them back to Thailand for assembly. But when they try to navigate their way out of Singapore or even move goods in and out of Thailand, things get complicated very quickly. Reducing such frictions promises great benefits.”
Global logistics giant DHL is one future-focused firm already working on reaping those benefits, with plans to vastly increase its warehousing footprint throughout the region by 2018. “Since the announcement of our regional growth strategy in 2013, DHL has committed a total investment of €140 million across South and South East Asia,” says DHL Supply Chain CEO, South and South East Asia, Oscar de Bok.
With the majority of initial investments focused on setting up Singapore as the region’s key hub, DHL has now also committed to investing in an integrated road freight network to link Singapore, Penang, Bangkok, Hanoi and Shenzhen. According to Kelvin Leung, CEO of DHL Global Forwarding Asia Pacific, road freight growth in the Asia Pacific region is forecast to grow at about 8.3 per cent annually until 2019 – driving the sector to a value of €757 billion by the end of the decade.
“DHL’s integrated road freight network touches five crucial Asian markets – Singapore, Malaysia, Thailand, Vietnam and China – which are expected to play prominent roles in … initiatives in the region such as the ASEAN Economic Community,” he says. “We are confident that intra-Asia trade will continue to grow and our road freight network stands ready to support the potential trade expansion from these initiatives.”
Leung is not alone in his prediction, with Elaine Low, Ceva Logisticsʼ Executive Vice President for South East Asia, saying the company’s outlook for the region is bullish. “With the progress of ASEAN and AEC, we hope to see more investments going into logistics infrastructure, and a more conducive trading environment, which will in turn boost logistics and supply chain activities in and around the region.”
Leading by example, Ceva has begun construction on a 33,000m2 facility in Shah Alam, Malaysia, which is planned for completion before the end of the third quarter, and has just finished a 48,000m2 facility in west Singapore. “[Singapore’s] strategic location within Asia as well as across the globe is a definite advantage,” she explains. “More importantly, over the years the country has also invested heavily in building a world class infrastructure network with excellent global connectivity, and a solid reputation for being a hub for supply chain talent and technology know-how.”
While the McKinsey findings align with predictions by DHL and Ceva, some experts warn that full AEC integration will not take place for another decade or so, with Martin Russell of the European Parliamentary Research Service predicting that the December implementation target is likely to be missed: “The ASEAN Economic Community is unlikely to be ready in time for the 2015 deadline,” he says – adding that ASEAN countries and their trading partners will still benefit from the economic reforms and closer cooperation introduced under the AEC agenda.
Others doubt that political coherence across the ten nations is strong enough for the region’s grand transformation to be successful in the long run, with many pointing to the creation of the European Union as a reference point. “Political vision and leadership are essential for such grand transformations. In Europe, the creation of the European Union as we know it was driven by the vision of Francois Mitterrand and Helmut Kohl,” says Géczy. “[However,] there is now the opportunity in ASEAN for strong domestic leaders to take on similar regional leadership roles to accelerate creation of the AEC.”
While the McKinsey study admits that China is likely to remain the ‘goliath’ in the story for the time being – it still accounts for half of Asia’s output today (see graph) – investment special Géczy says there is a realistic chance for ASEAN to replace it as the world’s leading manufacturing centre in the long run.