- High value-added manufacturing is moving to developed economies: There has been a significant number of instances of “re-shoring” where manufacturers look to move production facilities back to their home base even though land and labour costs can be much higher. Taiwan and Japan have seen a number of facilities being repatriated. Such re-shoring of production can make sense for higher value-added niches of manufacturing, which have high profit margins and where the availability of high skills, R&D facilities and specialised suppliers of components take precedence over land and labour costs — such as in the manufacture of machinery and in electronics. Taiwan’s economy has done better than expected as a result, as exports and private investment out-performed expectations.
- Chinese firms are also moving: Chinese manufacturers are in the same predicament as foreign ones based in China; they too have been hit by US tariffs and need to move production to countries that do not face US protectionism to the same degree. However, the Chinese relocation is more selective, involving lower-value manufactured goods. Chinese producers have complained that they cannot find the same degree of competence among component manufacturers in Southeast Asia as they can in China. There have even been a few instances of Chinese firms relocating production to a Southeast Asian country only to reverse the decision once they encountered local difficulties.
- First, there is a real need to address shortfalls in skills development. The region still struggles to produce the technical supervisors and production foremen needed in modern manufacturing plants.
- Second, despite progress in countries such as Indonesia, businesses still find the business environment in many parts of Southeast Asia challenging. Under President Joko Widodo’s (Jokowi) vigorous reform programme, Indonesia has leapt ahead in the World Bank’s Ease of Doing Business rankings, but this has not been enough to persuade foreign investors to change their minds on Indonesia as a base for export-oriented manufacturing.
- Third, infrastructure remains a constraint in many parts of the region. Even in Vietnam, where infrastructure has been relatively good, the rapid expansion of manufacturing plants is beginning to place a strain on power and transportation capacity. Last week, Vietnam’s Prime Minister Nguyen Xuan Phuc expressed his concern that power shortages could emerge by 2021 and called on state planners to step up the pace of construction of power generation plants.
- Fourth, component suppliers in the region need help in moving up the value chain so that they can match their counterparts in China.
- Fifth, economies of scale are increasingly important in determining competitiveness in the 21st century economy. China with its vast and unified market retains formidable advantages over Asean’s smaller and much more fragmented market. Asean needs to work harder at creating these scale economies for its companies. The Asean Economic Community, for instance, is a move in the right direction, but its implementation lags behind the rhetoric, which means that Asean-based businesses struggle to gain from the scale advantages that Chinese firms enjoy.
Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy