China is hardly waning but ASEAN is the Next Horizon

There’s a giant in Asia, shifting the tectonic plates of manufacturing, trade, services and the global economy. It’s not China.

With the flurry of activity around the Asian region - trade agreements, new financial institutions, geopolitical developments - it’s perhaps understandable the role ASEAN, the Association of South East Asian Nations, has receded somewhat into the background.

" ASEAN’s potential is greater than is commonly understood."

It would be a mistake to leave it there however. ANZ Research’s new report, “ASEAN: The Next Horizon”, re-emphasises the enormous potential of the regional grouping.

Indeed, that potential is greater than is commonly understood. New economic blocs will emerge. Demand for infrastructure – and hence Australian ore – is huge. A growing middle class will want a lot more of the calories New Zealand agriculture produces. Deepening economies will demand more of Singapore’s sophisticated financial services.
At the heart of the ASEAN opportunity is greater integration through the creation of a single market and production base.

During the next 10 years we expect ASEAN to replace China as the world’s manufacturing hub and we expect it to become the fifth largest economy in the world by the end of the decade.

ASEAN’s great attractions are favourable demographics, a young population and growing consumer class. Its potential is greater than is commonly understood. Consider iron ore: the infrastructure investment required in the region is double the size of the infrastructure investment to which China committed in the financial crisis.

The numbers behind ASEAN’s transformation are truly astonishing:

  • Greater ASEAN integration and the creation of the ASEAN Economic Community could drive annual regional GDP growth of 6-8 per cent.
  • Over the same period, annual intra-regional trade could reach US$1 trillion and G4 trade - trade with the US, Europe, Japan and China - could reach US$3.7 trillion.
  • Foreign direct investment into ASEAN from the G4 will continue to grow strongly to around US$106 billion as companies look to expand production bases in the region.

Central to our optimism about ASEAN and the region is the positive feedback which will emerge as foreign direct investment grows while productivity improves together with greater urbanisation and an emerging middle class.

The numbers, striking as they are, are just the starting point. Implicit in achieving them is the need for bold thinking by companies and decisive leadership in the region.

We know ASEAN’s political leaders accept that greater integration through a single market and single production base is essential to realising the region’s economic potential. 

That’s a start and there has been significant progress but much remains to be done. 

The most critical challenges are:

  • addressing infrastructure needs
  • harmonising business conditions and regulation
  • promoting greater financial integration. 

Progress has also been uneven with some new ASEAN members - Cambodia, Laos, Myanmar and Vietnam – trailing in trade and investment liberalisation.

The challenges can be complex. For example, increasingly firms are adopting a ‘Thailand Plus One’ strategy, whereby they outsource more labour-intensive manufacturing to cheaper, nearby Mekong countries then ship them back to Thailand for assembly.

But when they try to navigate their way out of Singapore or even move goods in and out of Thailand, things get complicated very quickly. Reducing such frictions promises great benefits.

Singapore’s place is crucial. At ANZ, we know many of our customers are basing their regional treasury centres in Singapore, with manufacturing or trading arms across the region.

We see this with the big agricultural houses and FMCG groups, as well as manufacturers.

But even in Singapore, which will have a key role as a hub for technology innovation, high value-added manufacturing and for financial services, there are challenges. It will face greater competition from the Mekong economies as they move up the manufacturing value chain.

Singapore will also need to recognise profound structural shifts in its economy may accelerate with ASEAN’s rise, particularly the gradual move out of manufacturing and into services.

The ASEAN story is powerful well beyond Singapore or Australia and New Zealand however.

Three ASEAN sub-regions will evolve:

  • Myanmar, Cambodia, Laos providing a large youthful labour force for new production platforms.
  • Thailand, Vietnam, Indonesia and the Philippines competing as the most cost effective mid-value manufacturing centres.
  • Singapore, Malaysia will develop as dominant finance, technology and design hubs.

The ASEAN-Australia-New Zealand Free Trade Area Agreement will be vital and completing the implementation of the agreement needs to be prioritised.

ASEAN could replace China as the world’s leading manufacturing centre and emerge as a key market for Australian exporters with the potential for the Australia-ASEAN trade and investment corridor to double and exceed US$210 billion by 2025, rising from US$90 billion in 2013.

The death of Singapore’s founding father Lee Kuan Yew has reminded us of the strength of leadership and vision necessary to create the Singapore of today. But it has also reminded us of the enduring regional vision Lee brought. ASEAN was central to that vision.

Political vision and leadership are essential for such grand transformations. In Europe, the creation of the European Union as we know it was driven by the vision of Francois Mitterrand and Helmut Kohl. 

There is now the opportunity in ASEAN for strong domestic leaders to take on similar regional leadership roles to accelerate creation of the ASEAN Economic Community.

Business also has a role in encouraging and supporting this type of political leadership. Greater regional integration is in the interest of economic growth for all our communities.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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