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New Series: ASEAN Economic Integration and Japanese Companies (Part 1 of 4) Company Strategies Change and Evolve in Response to ASEAN Economic Integration | Tomikazu Hiraga Senior Research Fellow and General Manager for Asia NLI Research Institute [Date of Issue: 30/April/2014 No.0230-0928]

Date of Issue: 30/April/2014

New Series: ASEAN Economic Integration and Japanese Companies (Part 1 of 4)
Company Strategies Change and Evolve in Response to ASEAN Economic Integration

Tomikazu Hiraga
Senior Research Fellow and General Manager for Asia
NLI Research Institute

The ongoing economic development of the Association of Southeast Asian Nations (ASEAN) member countries has boosted their standing in the world economy, and with the ASEAN Economic Community (AEC) about to take off in 2015, the behavior of Japanese and other foreign companies in the ASEAN region is exhibiting some fascinating changes.

In this series, I will identify recent key points, changes and key words, primarily from the perspective of company activities. Here in Part 1, I will overview some of the interesting developments and changes occurring in ASEAN markets, based on which I will explore more concrete themes in the rest of the series, illustrated with the cases of key companies.

1. Growing interest in ASEAN

Announced in November 2013, the results of the Japan Bank for International Cooperation (JBIC) Survey Report on Overseas Business Operations by Japanese Manufacturing Companies, subtitled Results of the JBIC FY2013 Survey: Outlook for Japanese Foreign Direct Investment (25th Annual Survey) highlighted the recent ASEAN focus of Japanese firms. The survey has been conducted annually since 1989, collating the responses of Japanese manufacturers about those countries and regions which they regard as promising for business expansion over the medium term (around the next three years) (p. 20, 25th Survey Report; see the figure below). The FY2013 results were particularly interesting, in that Indonesia took first place among promising countries/regions for the first time since 1992 when the survey questions took their current format, while China lost its top seat for the first time since 1992 to drop to fourth. In addition to Thailand (3rd) and Vietnam (5th), which have featured regularly in the top rankings, Myanmar rose to 8th and the Philippines to 11th, with Laos making it into the top 20 for the first time. These results brought nine of the 10 ASEAN members (Brunei was the exception) into the top 20. (The rankings for the other ASEAN members were 12th for Malaysia, 16th for Singapore and 17th for Cambodia.)

Promising Countries/Regions for Overseas Business over the Medium-Term Ranking Speaking in broad-brush terms, these results reveal that where China has traditionally monopolized top place in the rankings, the appeal of its investment environment appears to be undergoing a relative decline due to factors such as soaring personnel costs. By contrast, ASEAN is becoming an increasingly important investment destination for Japanese companies due to (1) economic development and the concomitant growth of the upper and middle income brackets in a region which boasts a population of some 600 million and (2) the positive attitude of many ASEAN countries toward Japan. (See the table below for the economic scale and degree of development of the various countries, as well as their respective international rankings.)

Overview of the Asian Economy (84KB)

2. Features of three groups within ASEAN

Below is an outline of the key points which emerge when the nine ASEAN countries (excluding Brunei) are divided into three groups and their respective features overviewed.

(1) Indonesia, Vietnam, Philippines
These are key countries in terms of a "China + 1" strategy boasting large populations with many young people. Their high evaluation reflects the consequent long period of time that they will be able to offer a "population bonus" (in which the working age population outnumbers the dependent population (elderly people and children), providing an abundant labor force and enabling rapid economic growth), while labor costs are cheaper than in China, Malaysia and Thailand. The ongoing expansion of their consumer markets is also attracting attention. Particularly in Indonesia, which for the first time reached top place in the above survey rankings, increasing political stability and a middle class burgeoning on the back of economic development team with ASEAN's largest population (240 million) to make the Indonesian market both important and attractive to companies (service companies included). Vietnam is also receiving priority as a production base because of lower costs than in China and elsewhere and a hard-working labor force. Korean firm Samsung Electronics' new mobile phone factory in particular has given a substantial boost to Vietnam's exports, with Samsung's exports from Vietnam accounting for more than 10 percent of the country's total exports. It is highly symbolic that those exports were a major factor behind Vietnam achieving its first trade surplus in 20 years in 2012. The Philippines is also again being viewed as a promising investment destination in recent years because of the strong merit presented by its large English-speaking population, making it an important base for the business process outsourcing (BPO) industry (accounting, finance and other administration, as well as animation production, software development and call center services, etc.)

(2) Thailand, Malaysia, Singapore
These three countries have among the highest levels of economic development in ASEAN. As "Asia's Detroit", Thailand is of course extremely important as a major production hub for Japan's auto industry and many other Japanese companies, and the Japanese presence there has remained on an upward trajectory despite the coup d'etat and flooding disaster (although the impact of the current resurgence in political instability on the economy and on investment will bear close observation). In the case of Malaysia, with economic development lifting per capita GDP over the US$10,000 mark, the country is now aiming to upgrade its industry, and various Japanese companies from the service industry, including retail (Aeon, for example, is now the second largest retailer in Malaysia), restaurant business and finance have established a presence there. There are also a growing number of cases where Japanese companies have selected Malaysia as their administration and service hub in ASEAN, as well as a key base for employee education, taking advantage of Malaysia's many English-language speakers. The government is also pushing ahead with bold initiatives such as the Iskandar Comprehensive Development Plan, which utilizes a large chunk of land close to its border with Singapore, and is working to attract numerous companies. Further, Malaysia leads other countries in terms of the sensitivity to halal foods (those permissible to eat according to Islamic law) vital in developing Muslim markets not only in Asia but also the Middle East and Africa and also in attracting Muslim tourists. Singapore's per capita GDP is higher than Japan's, and it enjoys a strong reputation not only as an ASEAN financial and business center but also as a global center, as well as for its outstanding institutions and systems, language environment, public order and many other elements that make it easy for foreign companies and foreigners to operate there, which is why Singapore's international competitiveness always stands extremely high in international rankings. More and more leading companies are also positioning Singapore as their regional headquarters and as a survey and research hub.

(3) Cambodia, Laos, Myanmar
These three countries, the least-developed in the ASEAN region and the most recent ASEAN members, are still in the early stages of economic development, but their low labor costs are attracting the attention of many companies as new production bases and consumer markets, with moves afoot to establish operations there. Manufacturers with bases in Thailand in particular are developing a "Thailand + 1" strategy whereby labor-intensive tasks that have traditionally been conducted in Thailand are being moved to a third country.

The above changes reflect two key developments: (1) the redistribution of labor and the redistribution of manufacturing hubs on a regional basis as companies seek to create more efficient supply chains in response to the launch of the AEC in 2015 and various other moves to liberalize trade and strengthen economic partnership (FTAs and EPAs), which is in turn encouraging more small and medium enterprises and medium-ranked companies to establish operations in ASEAN; and (2) the construction and expansion of production bases and the growing number of service companies establishing ASEAN operations with a view to capturing the consumer markets that are expected to appear as the upper and middle income brackets in the various ASEAN countries continue to swell. In addition to local firms and foreign firms from Japan, the US, Europe, China, Korea and elsewhere, leading Asian companies too are increasingly moving into other countries in the region, spurring more and more intense corporate competition. Proactive efforts by ASEAN governments to attract leading and outstanding companies to their shores are another trend meriting attention. These points will be explored in more detail in the next articles in the series.

(original article : Japanese)
(For the Japanese version of this article)

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