Southeast Asia’s economic clusters face a pivotal turning point, as these focused areas of economic activity consider an accelerating green transition.
From Malaysia’s semiconductor hubs to Thailand’s food processing clusters, from Indonesia’s growing automobile hubs to Vietnam’s textile clusters, Southeast Asia is home to numerous economic clusters that are engines of growth and job creation.
These clusters are characterised by adjacent and complementary industries, providing an ecosystem of operators — upstream and downstream supply chains, financial service firms and skilling providers alongside shared service providers — that collaborate and enable economies of scale to maintain their competitiveness in a global landscape.
Now, policymakers and decision-makers face the pressing need to adapt to the green transition, driven by regulatory pressures, economic factors and evolving consumer demands. So, are Southeast Asia’s economic clusters ready for the green transition?
Clusters chasing transformation
Regulatory demands are driving growing pressure to transform in a global marketplace. The EU’s Carbon Border Adjustment Mechanism, the EU’s Strategy for Sustainable and Circular Textiles and the Methane Emissions Reduction Plan of the US are three prominent examples, which place newly emerging restrictions on supply chain emissions that will have major implications for Southeast Asian producers.
With trade between Southeast Asia and the US set to reach US$236 billion ($317.11 billion) by 2031 and trade with the EU projected to reach US$172 billion, Southeast Asian clusters that do not adapt to these trends risk losing out.
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In addition to regulatory headwinds, a growing preference for sustainable products is underpinning shifting consumer demand. The “say-do” gap between what consumers claim to value and what they are willing to pay is narrowing — particularly for Millennials, Gen Zers and urban residents. BCG research shows that more than four-fifths of consumers across many sectors and geographic regions now view sustainability as an important consideration in their buying decisions.
Transition efforts are already underway globally. For example, the World Economic Forum’s Transitioning Industrial Clusters Towards Net Zero initiative brings together 20 industrial clusters in 10 countries — representing US$362 billion in economic activity and 626 million tonnes of CO2-equivalent emissions — to accelerate decarbonisation efforts. Now is the time for Southeast Asian clusters to act.
Opportunities in transition
There are two strategic pathways to unlock this opportunity for clusters in Southeast Asia.
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Through the Safeguard Strategy, governments can support existing clusters by helping them evolve, optimise for resilience, and continue to thrive through change. Governments can utilise three levers: enabling access to clean energy, supporting the greening of existing processes and facilitating green reskilling.
On the other hand, the Spark Strategy seeks to spur new opportunities for economic clusters by helping them realise their emerging green competitive advantage. Four key tools to successfully deliver on the Spark Strategy include attracting investments within new green zones, incentives for demand generation, upskilling to build a future-ready workforce and proactively promoting innovation.
Both strategies provide a path to transform economic clusters through green transition, opening up significant opportunities and unlocking new products and capabilities in renewable energy and cleantech solutions.
The falling cost of renewable energy highlights this opportunity. New utility-scale solar power costs US$0.039 per kilowatt hour (kWh) in the US, compared to US$0.052/kWh for once-dominant coal — a scenario reflected globally. With leaders at COP28 pledging to triple renewable capacity by 2030, clusters must rapidly adapt to new power sources to remain competitive.
Falling costs of cleantech also underpin a rapidly expanding market opportunity. For example, the capital expenditure for producing green hydrogen could drop by 25% by 2030 as the prices of electrolysers and energy fall. Meanwhile, battery costs have plummeted about 90% from 2010 levels, reaching US$0.25 per watt-hour (Wh) in 2023.
Green transition also provides a pathway to important investment opportunities. Green investments worldwide have seen staggering growth in recent years, with a 40% increase in clean energy investments alone.
Transitioning to thrive
New green zones are being created around the world to attract sustainable investment. In the broader Asia-Pacific region, South Korea’s Songdo International Business District has become a model for sustainable urban development, while Australia’s Pilbara Renewable Energy Zone is developing 26 gigawatts of renewable and solar capacity to support the world’s largest green hydrogen project.
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In Southeast Asia, Indonesia is planning a Net Zero Industrial Park in South Sulawesi. The park will focus on nickel processing and EV (electric vehicle) battery manufacturing, relying solely on wind and solar energy.
Government efforts are being scaled up to green innovation. Examples include the US Inflation Reduction Act and the Buy Clean Act, which support clean energy and catalyse green jobs. Australia’s National Clean Energy Skills Initiative and the UK’s Green Jobs Taskforce drive upskilling programmes to meet the workforce needs of the green transition.
Southeast Asia is heading in the same direction. A 500-megawatt YTL Green Data Center Park is underway in Johor, Malaysia. This MYR1.5 billion ($430 million) project will have Sea as its anchor tenant, helping reduce its carbon footprint and meet sustainability goals.
The green textile industry in Vietnam is developing to comply with EU importers’ eco-regulations. For example, the Hanosimex and Hansae group will be the first in the country to form a complete supply chain made of recyclable fabrics. In Indonesia, a consortium led by the Bakrie Group aims to support the end-to-end global EV supply chain and bring in multi-billion-dollar investments between Indonesia and the UK.
The important role of Southeast Asian government
Coordinated action is vital to delivering an effective energy transition, and government will be essential. Public-private partnerships and knowledge sharing will underpin the collaboration that is key to the transition.
Governments should design a strategic portfolio combining safeguarding and spark strategies — protecting and supporting existing clusters while spurring new ones through emerging green opportunities.
Building a coordinated but multifaceted green cluster strategy will unlock multiplicative, rather than additive value, resonating far beyond clusters themselves.
What’s next in Southeast Asia?
Southeast Asian governments, industries and communities must move quickly and embrace the green transition. Sustainable practices will not only build competitive industries today but also be the foundation for long-term economic growth.
Immediate and proactive measures are needed to navigate the green transition. With the correct steps, Southeast Asia is poised to lead in creating resilient and prosperous green clusters. It is a moment the region must seize with both hands.
The green transition is a pivotal moment for Southeast Asia. The region must deliver a united effort to ensure a sustainable and prosperous future.
Regional decision-makers should leverage strategic approaches to navigate the challenges and opportunities ahead. Governments will be particularly vital in driving innovation, sustainability, and success across multiple clusters and unlocking sustainable value for the region.
Varad Pande is partner & director of sustainable finance & investment at Boston Consulting Group. Timmy Caparros is consultant at Boston Consulting Group
