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ASEAN – The next PRD? Special Report: Shop Talk – China, ASEAN and robotics The biggest attraction of moving production overseas, particularly to ASEAN, is the availability of better labour supply, both in terms of quality and quantity. This was the most-cited reason for moving out of China, to both the ASEAN region as a whole and to Vietnam and Cambodia individually. In addition, our respondents cited attractive tax incentives and other non-wage business cost savings – such as lower rents, land acquisition costs and energy costs – as key positives. ASEAN’s growing young and affluent population makes it an attractive demand destination Along with ample availability of cheap labour, ASEAN’s rising importance as a demand destination is also a significant driver of investment in the region. Manufacturers shifting production to ASEAN are positioning to capture a share of the region’s growing consumer market, which is being driven by high economic growth and a rising middle class. In addition to low operating and labour costs, the Mekong region offers a large and growing consumer market. The 10 ASEAN countries have a combined GDP of over USD 2.4tn; as a single bloc, ASEAN is the world’s eighthlargest economy and third-most populous market (after China and India). Vietnam’s affluent households are estimated to be the third-fastest growing in the world Vietnam’s affluent households – those with financial assets of USD 100,000 to USD 2mn – will be the third-fastest-growing demographic globally from 2014-20, according to Economist Intelligence Unit (EIU) projections. The EIU estimates that the country’s affluent households will grow at a CAGR of 34.9% in 2014-20, ranking just behind India and Indonesia. Rising household wealth is expected to boost demand for better-quality goods and services, making Vietnam more attractive to investors. Vietnam’s involvement in regional trade pacts is an added incentive, according to our clients Furthermore, the perceived benefits from Vietnam’s involvement in several regional trade deals, including the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP), are an added incentive driving investment in the country, according to our clients. Vietnam’s involvement in trade deals was cited as the third-strongest reason for wanting to move there, while it was a relatively minor reason for moving to other parts of ASEAN. We forecast another spurt of increased investment in Vietnam as details of the TPP and the RCEP are ratified (see ‘ASEAN – The next PRD’ and ‘Vietnam – The emerging alternative for manufacturing’ for more details). Figure 7: Equipment and non-electronics manufacturers keen on ASEAN How do you respond to labour shortages? % of respondents Non-electronics Semiconductor manufacturing equipment Semiconductor fabrication Electronics packaging assembly More capex Move capacity inland Move capacity out of China Component manufacturing Source: Standard Chartered Research 0% 10% 20% 30% 40% 50% 19 July 2016 30
ASEAN – The next PRD? Special Report: Shop Talk – China, ASEAN and robotics Further infrastructure development in ASEAN is crucial to removing bottlenecks and attracting more FDI Infrastructure investment is crucial to facilitate further capital inflows On the flip side, the region’s lack of well-developed infrastructure remains a major hurdle for companies to move to ASEAN. One in four respondents keen on moving out of China cited this as a major concern. Poor infrastructure is also likely to be a key reason for several corporates not considering ‘moving out of China’ as a viable option; this option might gain traction if infrastructure investment increases. We maintain that infrastructure development is critical for the region; without strong infrastructure, ASEAN economies will find it difficult to achieve their potential as an economic bloc comparable to China, in our view. The long-term shift in manufacturing requires both hard and soft infrastructure in order to succeed. Seamless transport infrastructure across ASEAN, in particular, is needed longerterm, although the important question of who will pay for infrastructure development remains. Vietnam has focused on the public-private partnership (PPP) model to develop infrastructure; its success could see the model replicated in the rest of ASEAN, particularly in the Mekong Delta region. We believe the ASEAN governments’ increased focus on infrastructure investment will make the region more attractive, with early movers standing to gain significantly. Figure 8: Moving capacity is attractive for firms trading with US, EU; Where are your major business partners? No. of respondents Figure 9: Where are your major business partners? No. of respondents Other ASEAN Move capacity out of China Move capacity inland Invest more in capital equipment Other ASEAN Bangladesh Myanmar Cambodia Emerging Asia Emerging Asia Vietnam Europe Europe USA USA China China 0 10 20 30 40 0 5 10 15 Source: Standard Chartered Research Source: Standard Chartered Research Figure 10: Firms that find borrowing harder prefer to move out; How easy is it to borrow money, now vs 2014?; no. of respondents Figure 11: How easy is it to borrow money, now vs 2014? No. of respondents Thailand Harder Harder Same Easier Move capacity out of China Move capacity inland Invest more in capital equipment Same Easier Bangladesh Myanmar Cambodia Vietnam Thailand Bangladesh Myanmar Cambodia Vietnam 0 5 10 15 20 25 30 35 Source: Standard Chartered Research Source: Standard Chartered Research 0 5 10 15 20 19 July 2016 31
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