As ASEAN continues its transition to greater economic integration with the implementation of the ASEAN Economic Community in 2015, the region is seeing strong growth in a number of industries. Among the key business areas are:
- information and communications technology
- textiles and apparel
- medical devices
Singapore’s highly educated workforce, reliable business environment and transparent legal and tax regimes have ensured that it remains a popular destination for global electronics companies
Foreign investors seeking to find the next manufacturing destination after China would be well advised to look closely at this dynamic region. In this article we provide a snapshot into each industry and provide context within the wider ASEAN region.
The electronics sector has long been a major force in ASEAN’s rapid economic development. In 2010, total ASEAN electronics exports accounted for over US$195 billion, or 18% of the region’s total exports.
Last year exports of electrical and electronic products from East Asia Pacific countries (31% of total exports among developing nations in East Asia Pacific) grew 9.2%, up from 7.8% in 2012 and 8.7% in 2011.
Traditionally it was China that assembled and shipped electrical and electronic products to the rest of the world. The parts were supplied by Indonesia, Thailand, Malaysia and the Philippines (the ASEAN-4 countries) and financed by high-income East Asia Pacific nations such as Japan and New Zealand.
However, China’s recent rise up the export market value chain – from mass manufacturing to more high-tech products – as well as its rising labor costs have resulted in a shift in foreign direct investment to ASEAN’s Mekong countries (Myanmar, Thailand, Cambodia and Vietnam).
In particular, Vietnam has emerged as an important electronics exporter. Electrical and electronic products have overtaken coffee, textiles and rice to become the country’s top export item in 2012. Computer and telecom equipment has captured a 6%-share of the country’s exports, up from zero.
Vietnam recently attracted substantial investments from multinational giants such as Samsung and Mitsubishi. Analysts predict that once Thailand moves up the value chain, Vietnam will take its place.
Vietnam’s Top Exports, First Half 2014
Thailand, long a global leader in the manufacture and export of computer hard-disk drives, saw its electronics-related foreign direct investment more than triple in 2010. However, the global shift away from personal computers to tablets resulted in its hard-disk drive exports contracting by 5.6% last year.
Despite this, due to the country’s continued strong exports in other electrical and electronic products such as radios, TVs and printers, a recent Credit Suisse report not only rated Thailand as the region’s most competitive country in electronic exports over the last 15 years, but also forecast it to rank first among ASEAN countries in 2014.
Singapore’s well-established electronics industry generated a manufacturing output of S$86.1 billion (US$68.9 billion) in 2011. As ASEAN’s de facto commercial center, Singapore’s highly educated workforce, reliable business environment and transparent legal and tax regimes have ensured that it remains a popular destination for global electronics companies. Electronics accounted for 45% of all investments in 2010.
From 2011 to 2013, however, the city state’s reliance on PC and semiconductor manufacturing as well as its rising labor and energy costs have resulted in a year-on-year contraction in its electronics cluster. Singapore will have to adapt to the needs of the global market – shifting its focus to higher growth industries – and manage costs if it is to compete with emerging economies such as Thailand and Vietnam.
But this should not pose a problem to highly developed and wealthy Singapore, nor will the large manufacturers be relocating any time soon.
As ASEAN marches closer to total economic integration in 2015, great strides are being taken to further regional cooperation within the group and to open up the ICT sector to the rest of the world
Information and Communications Technology
Historically, the information and communications technology (ICT) sector has remained one of the most closed off to foreign investment in ASEAN. Between 2010 and 2013, foreign direct investment in Indonesia’s tertiary telecommunications sector dropped by over 30%, representing a fall of US$3 billion. This was a direct response to the imposition of restrictions on foreign ownership of telecommunications companies.
In the Philippines, foreign equity in telecommunications is limited by the country’s constitution to 40%.
However, as ASEAN marches closer to total economic integration in 2015, great strides are being taken to further regional cooperation within the group and to open up the ICT sector to the rest of the world.
One such initiative is the ASEAN ICT Masterplan 2015 (AIM2015), which seeks to expand the reach of services such as broadband and telecommunications infrastructure, further develop innovation capacity, and encourage foreign direct investment. Since its launch in 2011, as many as 60 projects have been undertaken, ranging from capacity building and training workshops to the development of regional frameworks for cooperation and coordination.
The ICT industry has been developing at a remarkable pace and currently employs over 11.7 million people across the region, contributing more than US$32 billion, or over 3%, of ASEAN’s GDP. Mobile penetration and internet penetration across all member states, which make up the second largest community of Facebook users in the world, stand at 110% and 25%, respectively. Vietnam, Indonesia, and the Philippines each have a subscriber base of over 100 million.
The region’s large, young, tech-savvy population is shifting from feature phones to smart phones, which currently make up about 66 percent (and rising) of ASEAN’s mobile market. Despite this, the market (largely dominated by Android devices) remains far from saturation, with mobile commerce opportunities continuing to increase.
Internet Usage Across ASEAN
A recent Mastercard study rates hyper-connected Singapore (which has the fourth highest smartphone penetration in the world and 73% of its population online) as the most mobile-payment-ready member state, followed by the Philippines, Malaysia and Thailand.
At the other end of the scale is Myanmar, which only has 1% of its population online. The country also has underdeveloped telecoms networks, infrastructure and power grids. However the newly outward-looking nation has been making significant efforts towards opening up its telecommunications sector, and hopes to achieve 50% wireless accessibility by 2015.
In January of this year, in an unprecedented move, formal licenses to operate networks in Myanmar were granted to two foreign telecoms firms, Telenor and Ooredoo. A target has been set to raise the country’s mobile penetration rate from 9% to 80% by 2016.
Indonesia has 282 million mobile subscriptions and is expected to have 100 million Internet users by 2016. Jakarta has the highest density of Facebook users in the world. The Nusantara Super Highway (currently under construction) will expand broadband penetration to even the country’s most rural provinces.
Opportunities abound across ASEAN’s ICT sector, whether in Malaysia, which is seeking to privatize its telecoms industry, Thailand and Indonesia, which have a rapidly growing middle class, or even Myanmar, with its projects for improving infrastructure.
In 2010, exports in information-technology products accounted for more than a quarter of the region’s total shipments, or US$258 billion. As barriers to foreign equity continue to be relaxed or abolished, investment is only likely to rise in this very exciting growth industry.
Textiles and Apparel
Another industry to watch for foreign investment opportunities in the lead up to AEC 2015 is textiles and apparel. Long a bulwark of China’s manufacturing sector, textiles and apparel represents a fast-rising sector in the greater ASEAN economy, where it is the largest industrial employer in the majority of member states.
Early on, the importance of textiles to the ASEAN economy was marked by its inclusion as one of 11 sectors selected for accelerated regional integration as part of the Vientiane Action Programme (2004).
It is not simply the case, however, that ASEAN stands to siphon production from China. Rather, in addition to the region’s rise as a low-cost manufacturing center, ASEAN is also the fastest growing export market for Chinese textiles (30% year-on-year in 2013).
It is already China’s third largest export market overall, as facilitated by the China-ASEAN Free Trade Area agreement. Additionally, in a recent report by Standard Chartered, apparel and clothing was identified as one of six areas in which Indian exports to ASEAN could boom in the coming years.
Within ASEAN, Vietnam is the strongest competitor for inheriting low value-added textiles and apparel manufacturing from China. In contrast to other leading textile exporters in the region such as Indonesia, Thailand and Malaysia, Vietnam’s textile exports in terms of share of total exports have grown in recent years.
As of 2012, there were over 3,800 companies in the industry in Vietnam, the majority of which are cut-and-sew enterprises. The industry’s comparative lack of upstream suppliers, which means various fabrics and accessories must be imported, makes it a prime candidate for regional integration.
Cambodia’s textile and apparel industry faces similar problems as that of Vietnam in terms of moving up the value-added chain, albeit on a smaller scale. Nevertheless, the country’s production capacity exceeds 500 factories, which are staffed by upwards of 500,000 textile and apparel workers.
Low wages and weak enforcement of labor laws, however, have led to endemic volatility in the industry and hesitation on the part of foreign investors to continue sourcing from the country.
Overall, challenges remain for creating an intra-ASEAN comprehensive supply chain capable of competing on a global footing. Such is the aim of the Source ASEAN Full Service Alliance (SAFSA) established in 2010 by the ASEAN Federation of Textile Industries (AFTEX).
Within the region, the Thai and Vietnamese apparel industries are already very closely tied: bilateral trade in garments reached US$160 million in the first half of 2014, which was heavily weighted towards imports into Vietnam.
A rapidly expanding middle class and, for some countries, the beginnings of a greying population, has been driving the boom in trade of medical devices in the region. ASEAN’s medical device market, which was worth about US$4.6 billion in 2013, is expected to double to US$9 billion by 2019, according to Pacific Bridge Medical.
Local medical device markets within the region have been charting double digit growth rates in recent years, and will likely continue to do so. The upside market potential for medical devices in the region is immense, given the increased demand for better healthcare, encouraged by government focus on healthcare as a priority sector for trade and service liberalization under the AEC Blueprint.
Forecast Growth in ASEAN’s Medical Devices Market
Currently, the individual medical device markets across ASEAN’s ten member countries are in various stages of development. Countries such as Malaysia and Indonesia, which are rich in rubber, lead global production in latex products such as surgical gloves and syringes.
Singapore, the region’s medical and technological hub, has a thriving biomedical research and development industry, and a strong comparative advantage in the advanced manufacturing skills valued for medical manufacturing, including precision engineering.
In recent years, Thailand has been gunning to become the next regional medical hub, with its Healthcare 2020 Masterplan. Together, Malaysia, Indonesia, and Thailand make up about 65% of the current medical devices market in ASEAN.
On the regulatory side, countries have made significant strides towards developing a mature regulatory framework for medical devices, both individually and regionally. In 2012, Malaysia made it mandatory for all medical devices to be registered with the Medical Devices Authority, under the Medical Devices Act 2012. Brunei, Cambodia and Laos are still in the midst of developing their own requirements.
After years of negotiations, the ASEAN Consultative Committee on Standards and Quality’s Medical Devices Product Working Group has finalized the ASEAN Medical Device Directive (AMDD), a set of non-legally binding stipulations to harmonize regulations across the region, in line with its aim to liberalize trade and investment in the healthcare sector under the AEC Blueprint.
The AMDD is expected to take effect on January 1, 2015, and will mark a significant step towards promoting easier access for medical device companies to the regional market of more than 600 million people.
At present, ASEAN countries are still reliant on imports to feed their demand for medical devices. As much as 97% of the medical devices used in Indonesia in 2013 were imported, mainly from the United States, Japan and Europe. Nevertheless, momentum is building for local manufacturing to transition towards higher-level products, as foreign companies move into the region to take advantage of the lower costs and rising demand.
In Malaysia, which produces about 62% of the world’s rubber gloves and 79% of its catheters, diagnostic imaging exports have been growing in recent years, particularly in electrocardiographs and other electrodiagnostic apparatus, according to research by Espicom.
In December, operations are slated to begin at Malaysia’s first diagnostic imaging systems manufacturing base by Toshiba Medical Systems. Espicom estimates the country is likely to see compound annual growth of 16.1% to 2018, with growth for consumables as high as 24.8%.
Singapore is home to more than 30 medical technology firms that have set up manufacturing bases in the island-nation, according to its Economic Development Board. All of the largest medical technology firms also have their regional headquarters in Singapore, tapping the state’s extensive entrepôt trading network.
Throughout the region, strong government support is accelerating growth for the medical devices industry.
In Thailand, the Board of Investment offers incentives for investors, ranging from import duty exemptions for machinery to tax breaks and land ownership rights for foreign investors. In April 2012, the Thai government announced approval of a plan to establish a medical industrial park for manufacturers of medical devices, as it aims to raise Thailand’s medical devices exports to 30% of the global market.
About the Author
Dezan Shira & Associates, a specialist foreign direct investment practice that provides advisory services to multinationals investing in emerging Asia. This article was first published in Asia Briefing and was reedited for clarity and conciseness. For further details or to contact the firm, please visit www.dezshira.com.
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