Integration and collaboration – How businesses can capitalise on ASEAN’s growth story


Simon Constantinides, HSBC’s Regional Head of Global Trade and Receivables Finance for Asia Pacific, explains why ASEAN-based companies, as well as those further afield, are well-positioned to capitalise on the opportunities made possible by regional trade flows and the unique resources of each member state.

In its fascination with all things Chinese, much of the world has overlooked one of the greatest trading opportunities of the post-global financial crisis economy: the potential of Southeast Asia.

This is a somewhat strange omission, as together the 10 members of the Association of Southeast Asian Nations (ASEAN) comprise a market of more than 600 million people with a combined GDP of US$2.1 trillion. In addition, the region offers sustainable economic growth, low manufacturing costs and a rising middle class who are hungry for the consumer experience.

A decade ago, the majority of Western companies that came to Asia identified China as the preferred option when setting up manufacturing facilities. They were encouraged by the nation’s competitive wages, developing infrastructure and the vast opportunities presented by its domestic market. But this is beginning to change as Southeast Asian markets become more accessible and increasingly cost-competitive.

In 2011, foreign direct investment (FDI) into China increased by almost 10% year-on-year, reaching US$116 billion. FDI into ASEAN for the same period, however, grew by almost 25% year-on-year, reaching US$114 billion –indeed, if the region’s economies were a single entity, it would be the eighth largest in the world.

ASEAN trade, past to present

Since the association’s formation in 1967, economic growth throughout the region has been exponential. For instance, in 1975 manufactured goods made up around 18% of ASEAN exports. Yet by 1991 its share was around 63%. Between 1990 and 2010, the association’s economy increased by 10% annually, driven by commodity exports. Trade with China and India, which grew an average of 24% year-on-year between 2000 and 2009, contributed greatly to this rise.

A key factor behind ASEAN’s success is its diversity. Looking across the various member states, there are frontier markets like Cambodia, Laos and Myanmar that are largely untouched by foreign investors, but which manufacture low-value goods such as agri-commodities and export them elsewhere; there is Vietnam, which has now become a hub for textiles, garments and footwear; there is Malaysia and Indonesia, both with a huge commodities base and, in the case of the former, has become very strong on the technology front; and there is Singapore, which houses high-value chain industries – including pharmaceuticals, IT and chemicals – and acts as the region’s financial hub. As such, Southeast Asia boasts all stages of the value chain, which in turn, has made it a highly competitive trading bloc. Furthermore, each member state has built up a competent labour force in their respective sectors.

Stemming from this, the trading opportunities for businesses from all corners of the region are somewhat staggering. Not only can they look to trade with counterparties from neighbouring ASEAN states, but they can also capitalise on trade flows that carry goods to China, India and the rest of the world.

Indeed, the burgeoning growth of trade volumes between each member state has given rise to the proposed ASEAN Economic Community (AEC), which is due to commence in 2015. Among many other goals, the AEC aims to encourage inter-regional trade and investment, free movement of capital, and freer movement of skilled labour. Furthermore, it is hoped that the community’s formation will boost the region’s competitiveness within the global economy and thus expand on the trade and investment opportunities currently presented to the region.

In Indonesia, for instance, producers of commodities and other low-value goods could capitalise on the trade routes that carry coal from the archipelago to Japan and South Korea, which is eventually used to make steel. From the beginning to the end of its journey, the coal will pass through various ports. The movement of this coal is heavily reliant upon people and infrastructure, which could be used to help shift other commodities and manufactured goods along the same route.

Likewise, Malaysia’s particular expertise in manufacturing high-tech goods could encourage other industries that involve similar skill sets. This too provides opportunities for various manufacturers from other ASEAN states.

Trade facilitation

A key challenge associated with inter-regional trade is that member states are at vastly different levels of development and market sophistication. With regard to labour, some markets are less open to foreign workers than countries like Singapore are. This is particularly challenging when companies are looking to upskill their staff, yet do not have the management in place to transfer knowledge and expertise. In the financial services industry, for instance, there are certain markets where it is very hard to find skilled workers, which has had a detrimental impact on the sophistication of banking services offered in such places. The same can be said for IT and other high-value chain industries, which means that unless certain countries modify their labour laws, these places will be unable to rise further up the value chain.

Infrastructure, too, plays a significant role in the facilitation of trade and investment, as without ports, railways, highways and airports commodities, manufactured goods and people are simply unable to move elsewhere. Across ASEAN there are examples of where infrastructure development has significantly led to GDP growth. Singapore is a fine example of this. However, there are countries where connectivity remains a big challenge. In Indonesia, infrastructure development cannot keep pace with the nation’s burgeoning economy, which causes bottlenecks in the supply chain. In addition, transportation costs are among the highest in Asia, which impacts the efficiency and profitability of trade. Frontier markets such as Cambodia, Laos and Myanmar are attractive to businesses because of their low-wage workforces, but the infrastructure needed to transport goods from these economies are greatly underdeveloped. In the wake of the Thai floods of 2011, companies have learnt that having just one plant in a particular destination exposes them to production risks. Corporations are therefore back to operating in multiple locations or are using several suppliers for the same goods.

Regulatory transparency and consistency of financial services are other areas required to facilitate trade. With regard to the former, markets need reporting systems and processes in order to guide companies on what they need to do to make trade and investment easy and hassle-free. Furthermore, ASEAN’s markets must enforce strict rule of law and bring their local regulations in line with one another. Without these, businesses cannot trade effectively throughout the region. Banks too must play their part in enabling businesses to achieve their growth ambitions. Apart from performing in a transactional capacity, they must also act as voice for their customers when speaking to regulatory authorities. Banks must also ensure that they governed to the highest of standards.

Collaboration and future growth

All the above challenges can be overcome, irrespective of how large they may appear today. But it will take much collaboration between importers, exporters, services providers and government agencies to remove these hindrances.

In addition, the introduction of the AEC will too go some way to alleviating these challenges. With each member state promoting the free flow of goods and services, investment and capital, and skilled labour, they will be removing many of the barriers that stand in the way of inter-regional trade.

With the assistance of HSBC, companies can capitalise on these vast openings, but they will need to go about this with some caution – indeed, this is precisely what the bank is well-positioned to advise on. At HSBC, we fully understand the importance of international trade within the global economy. Trade creates jobs and sustainable businesses, and improves communities. Almost 50% of global GDP is derived from international trade.

Our key focus is to understand what our clients are looking to do and to make sure that we understand their aspirations and challenges. As the world’s largest trade bank, we also want to work with regulators in order to make international trade and investment easier for our clients. A large part of this is having a deep understanding of regulatory frameworks and the many pitfalls associated with particular economies.

What is clear is that opportunities for ASEAN-based businesses are in abundance, and that these will grow further with the advent of the AEC. HSBC can act as a trusted partner to make these openings a reality, whether within the region or beyond.

 

Other related articles:

Capitalising on commodities-infrastructure trade-offs

New China, new opening

ASEAN – An opportunity for treasury

 


References

Strategies:

Best Global Trade Finance Bank, GTR Leaders in Trade 2014

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