Japanese companies are reportedly heading for the exits in China, but rushing into Southeast Asia. With the member states of the Association of Southeast Asian Nations (ASEAN) expected collectively to more than double their economy over the next 10 years, there are plenty of reasons to embrace the “next China.”
Slowing economic growth and surging labor costs have reportedly led an increasing number of Japanese companies to quit China. While more than 20,000 Japanese businesses are currently operating there, hundreds have left recently, hit by a weaker yen, a doubling of labor costs, and the end of China’s previous boom period of double-digit GDP gains.
Although Japan’s direct investment overseas hit a record $135 billion in 2013, direct investment in China dived 33 percent to $9 billion.
In contrast, direct investment in ASEAN nations surged 120 percent to nearly $24 billion, boosted by investments in ASEAN auto factories and the Bank of Tokyo-Mitsubishi’s acquisition of Thailand’s Bank of Ayudhya, according to the Japan External Trade Organization (JETRO).
Instead of China, Japanese companies ranging from apparel maker Flex Japan Co Ltd to copier company Konica Minolta Inc are migrating to Southeast Asia, lured by the prospect of cheaper labor and access to growing consumer markets.
“We liked the characteristics of the people of Myanmar,” Flex Japan’s Toshihide Sakai told the Nikkei. “No riots, no strikes, no emotional outbursts. We also noticed that they tend to stick with the company.” Myanmar joined the 10-nation bloc in 1997, 30 years after it was founded.
In contrast with Japan’s latest round of modest wage increases, the minimum wage in the southern Chinese city of Guangzhou was raised by over 22 percent on an annualized basis in May, albeit still low at around $300 a month.
However, it is not all about low wages. According to BMI Research, ASEAN’s collective GDP will grow from $2.4 trillion in 2013 to more than $6.2 trillion by 2023, increasing at a compound annual growth rate of more than 10 percent. ASEAN’s share of global GDP is predicted to rise from 3.2 percent to 4.7 percent by 2023, with its share of world trade increasing from 5 to 6 percent.
“Asia’s GDP will double, while ASEAN’s will more than double,” BMI Research’s Cedric Chehab said. “It’s quite difficult to find other regions with . . . growth prospects as [strong as those of] ASEAN.”
In a recent report, Japan Rebooted—ASEAN, the next frontier: Tapping Southeast Asia’s surging growth, professional services group PricewaterhouseCoopers (PwC) also highlighted Southeast Asia’s potential to become a central part of the future growth plans of Japanese and Western companies, particularly due to the region’s rapidly expanding middle class.
Since the organization’s formation in 1967, the bloc of nations it represents has grown to account for 8.8 percent of the world’s population, and the world’s sixth-largest economy.
The economic and political association is expected to post average annual GDP growth of 5.6 percent through 2019, led by the Philippines (12.3 percent), Laos (11.8 percent), Myanmar (10 percent), and Malaysia (9.4 percent), and with Indonesia, Malaysia, and the Philippines the three biggest economies.
Asia’s share of the global middle-class population will also rise from the current 30 percent to more than half, with the number of households with annual disposable income exceeding $10,000 set to reach nearly 64 million by 2020, according to market research company Euromonitor International.
Japan is currently the major source of foreign capital for Thailand and Indonesia, and the second-largest for the Philippines and Malaysia.
The ASEAN Economic Community (AEC) was cited by PwC as another reason for increasing investment, despite speculation that economic integration will not be achieved by the target date: the end of 2015.
According to the ASEAN Business Outlook Survey 2015 published by the U.S. Chamber of Commerce and AmCham Singapore, just 4 percent of respondents considered it likely that the organization would achieve the AEC goals by the end-2015 deadline.
Nevertheless, 66 percent of respondents said ASEAN markets would become more important to their companies’ global revenues over the next two years, with 89 percent forecasting increased trade and investment over the coming five years.
ASEAN has nominated 11 priority integration sectors, comprising agribusiness, air travel, the automotive sector, e-ASEAN, electronics, fisheries, healthcare, rubber, textiles, tourism and wood.
BMI Research sees major opportunities in the auto sector in Indonesia and the Philippines, which are expected to show strong growth in vehicle demand, with Thailand, Indonesia, and Malaysia expected to strengthen their position as manufacturing hubs.
The pharmaceuticals and healthcare industries will also benefit from integration, with ASEAN pharmaceutical sales expected to more than double by 2023 to reach $50 billion a year. This will be aided by increased government investment in healthcare, rising incomes, and aging demographics.
Another key winner should be the region’s consumer electronics, IT, and telecommunications sectors, particularly in Indonesia and Vietnam.
Some 60 million new consumers will gain Internet access over the next five years, especially in Indonesia. According to PwC, consumer spending will grow 45 percent between 2013 and 2020, leading to an estimated $2 trillion consumer market by 2020. Spending on communications, education, and hospitality is forecast to grow by between 50 and 60 percent.
Nevertheless, investing in ASEAN is not without its challenges. The World Bank’s 2015 survey on the ease of doing business in the region ranked Singapore top, but Malaysia 18th, Thailand 26th, Vietnam 78th, the Philippines 95th, and Indonesia a lowly 114th.
“While opening a subsidiary or regional headquarters in ultra-modern Singapore might pose few challenges, going further afield involves familiarizing yourself with cultural differences, business practices, logistical issues, and potential hiccups that can easily turn a good investment into one that struggles,” PwC warns.
According to a JETRO fiscal 2013 survey, more than 70 percent of Japanese companies highlighted rising wages as a concern, with Indonesia’s 17 percent rise in annual average wages topping the list, followed by Vietnam’s 11 percent gain.
Corruption, staff shortages, political and legal risks, and poor infrastructure are also seen as challenges, in addition to frequent bouts of political instability.
The JETRO survey shows that inadequate infrastructure was the biggest concern across ASEAN at 32 percent, although it was 70 percent for Myanmar, followed by political risks or problems in social conditions and law and order, at 25 percent.
Exchange rate risk was only reported by 15 percent, despite the effects of a weakening yen and rising US dollar.
Despite the challenges, PwC cited successes including Japan’s special economic zone in Myanmar, Marubeni Corporation’s and Mitsui Group’s power investments, and rapid expansion by retailers such as 7-Eleven Inc., Aeon Co. Ltd., Lawson Inc., and Uniqlo Co. Ltd.
For companies that have not already invested in ASEAN, the Japan Bank for International Corporation’s Masaaki Amma suggests acquisition is now the “only solution,” given increasing competition.
Japan Post’s $5 billion acquisition of Australia’s Toll Holdings Limited may be an example of such investment, with the state-owned company citing Toll’s Asia-wide network as key to expanding its growth prospects.
With China’s stock market tanking and economy slowing, as of this writing ASEAN looks an increasingly attractive prospect for Japanese and global businesses as full-scale economic integration fast approaches.
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