- The share of manufacturing employment stagnated in the mid-1990s in Thailand and Indonesia and is in decline in Malaysia and the Philippines.
- The share of manufacturing exports is low and falling, despite strong inward FDI and growing processing and assembly activities.
- Japanese companies in China are increasingly sourcing domestically. For Japanese companies in ASEAN the trend has reversed.
- High-end manufacturing is losing ground in Malaysia and the Philippines while it has been stagnant in Indonesia for the past eight years.
- Thailand with roughly the same GDP per capita produces 70% less patents than China. Malaysia with roughly double China’s GDP per capita still registers 30% less patents.
ASEAN with its biggest countries – Malaysia, Thailand, Indonesia and the Philippines – has been everybody’s darling over the past year or two. While most Asian countries languished well below their historical growth rates in recent quarters, ASEAN countries beat historical records by a healthy margin.
But can this performance last? Does it represent a structural shift or simply a cyclical swing fuelled by fiscal largesse, capital inflows, and strong credit growth? One way to approach this question – if by far not the only one – is to look at the ASEAN manufacturing sector.
Manufacturing plays a special role in a country’s development, as evidenced again and again by examples as diverse as England, Germany, Japan, Korea, Taiwan and China. The reasons why manufacturing is so important for development have been explored recently by Joe Studwell in ‘How Asia Works’ and are summarized below.
Through the use of machines, manufacturing boosts the output of a largely unskilled or semiskilled workforce. For people to create significant value in services they need to undergo extensive education and training which is a drawn- out and expensive undertaking.
Manufacturing processes lend themselves to scaling up and productivity gains more easily than services. A waitress can serve only so many tables and there is little she can do to optimize her work routine. In contrast, a Chinese manufacturing worker today produces eight times more than he did 25 years ago.
Manufactured goods are traded much more freely globally than services. Trade is essential for less populous nations to realise economies of scale. But it also increases competition and forces manufacturers to constantly move towards the technological frontier.
How then is the manufacturing sector faring in ASEAN? The chart below shows the growth contribution of manufacturing for Indonesia, the Philippines and Malaysia during 2010-12 (and 2005-07 for Thailand, to exclude the floods and global financial crisis).
This is contrasted with the prowess of manufacturing in China, Taiwan and Korea when they were at similar stages of development, namely at the stage when their per capita income stood at US$5,200.
Manufacturing contributed 2.5-3 percentage points in our control group (China, Taiwan and Korea), compared with 2.2 percentage points in Thailand, 1.8 percentage points in Malaysia, 1.6 percentage points in the Philippines, and 1.4 percentage points in Indonesia.
Contribution of manufacturing to growth
Three-year average centred on the year with a GDP per capita of US$5,200. The Thailand figures is centred on 2006 to exclude the impact of the global financial crisis and flooding in Bangkok. Source: CEIC, RBS
There is little evidence that labour is being reallocated from agriculture to higher-yielding manufacturing. In Thailand and Indonesia, the employment share of manufacturing stagnated at around 20%, the high water mark reached in the mid-1990s. In the Philippines, this share fell from 17% in the late 1990s to 15% in 2011; in Malaysia, it fell by 6 percentage points over the same period to 28%.
Contrast this with China, which is at about the same level of development. Here manufacturing employment climbed from 21% in the early 2000s to 29% in 2010 and is now higher than in all ASEAN economies (see chart below).
Employment share of manufacturing
Source: CEIC, RBS
ASEAN’s manufacturing share in exports also falls short of peers. Only a third of Indonesian exports are manufactured goods, but also Malaysia’s 75% and Thailand’s 72% are significantly below the 95% recorded by Japan, Korea, Taiwan, and China at similar stages of development. The trend is also far from encouraging, with Malaysia and Indonesia showing pronounced falls and the Philippines and Thailand stagnation at best (see chart below).
Share of manufacturing exports
Source: CEIC, RBS
In addition, export figures may be painting too favourable a picture. Many products are actually manufactured abroad and merely assembled in ASEAN countries. Assembly and processing though do not entail the knowledge transfer and industrial upgrading that is so crucial to economic development.
RBS economists Louis Kuijs and Tiffany Qiu have shown that an increasing share of Chinese manufacturing exports is sourced domestically – which they take as clear evidence of industrial upgrading. Similarly, Japanese companies in China are increasingly sourcing from the domestic market, while the trend has reversed for Japanese companies located in ASEAN, according to data from Japan’s trade ministry (see chart below).
Procurement of Japanese firms in China and ASEAN
Source: CEIC, RBS
To capture the domestic sourcing angle, the chart below shows the value added of high-end manufacturing as a per cent of total manufacturing. High-end manufacturing is losing ground in Malaysia and the Philippines, while it has been stagnant in Indonesia for the past eight years. Thailand managed to upgrade its manufacturing industry for most of the observation period, but the data ends in 2009.
Value added of high-end manufacturing
High-end manufacturing includes computers, communication, transport and optical equipment. Source: CEIC, RBS
Finally, take a look at the chart below, which shows the number of registered patents per million inhabitants. Data for ASEAN and China refers to 2011, while data for Japan and Korea refers to 1976 and 1989, when they were at similar levels of development.
Registered patents at same level of development
Source: CEIC, RBS
While the comparison with Korea and Japan may be unfair – it becomes harder to find new patentable processes as more countries industrialise – ASEAN’s know- how gap vis-à-vis China is striking. Thailand with roughly the same GDP per capita registers 70% less patents than China. Malaysia with roughly double China’s GDP per capita still registers 30% less patents.
To sum up, a key motor of economic development, the manufacturing sector, seems to be sputtering in ASEAN countries. This doesn’t mean that growth will falter, but unless this is tackled, the growth rates associated with rapidly industrialising countries may prove elusive.
About the Author
This article is excerpted from “Top View Asia: The State of ASEAN Manufacturing,” a report by Royal Bank of Scotland and affiliated companies that was published on 28 May 2013. It has been re-edited for conciseness and clarity.