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Sept. 20, 2010

ASEAN has come of age as a market and producer

The Association of Southeast Asian Nations (ASEAN) is regaining its economic clout to the extent that it is now time for Japanese corporations to think about the group's 10 members not only as huge markets for their products but also as production bases.

A number of factors have contributed to the recent rise of ASEAN in the regional and global economic arenas: its geopolitical advantage of being adjacent to two economic behemoths (China to the north and India to the west), benefits accruing from a series of free trade agreements it has concluded with a number of trading partners since the 1990s, a combined population of 600 million whose personal consumption is on the rise, and a slowdown of the Chinese economy, which has suffered from the rising value of the renminbi currency and steep increases in labor costs.

The Asian Development Bank surprised economists and market observers alike when it predicted in July that ASEAN as a whole would achieve a robust economic growth of 6.7 percent this year, up 1.6 percentage points from the previous forecast in April. This is a remarkable figure by today's global standards, and not far behind the 9.6 percent and 8.2 percent expected of China and India, respectively.

The economic growth rate for Singapore this year is estimated at 12.5 percent, Malaysia 6.8 percent, and Indonesia 6.0 percent. Even Thailand, whose economy suffered after a violent confrontation between supporters and opponents of ex-Prime Minister Thaksin Shinawatra earlier this year, is likely to see 5.5 percent growth.

The history of ASEAN economies has had its ups and downs. During the 1980s, many Japanese, European and American corporations started investing in ASEAN-member production facilities — a major shift from the trend of concentrating investments in South Korea, Taiwan, Hong Kong and Singapore, collectively known as newly industrialized economies. New plants were set up in Malaysia, the Philippines and Thailand, one after another, ushering in an age of full-fledged ASEAN economic growth for the first time since its inception in 1967.

Following the Plaza Accord of September 1985, which pushed up the value of the yen currency, Japan's export-oriented firms started shifting their production bases to ASEAN- member nations, thus relieving those countries, except Indonesia, of trade deficits as oil prices plummeted.

The remarkable prosperity of ASEAN came to a sudden halt with the currency crisis that hit the region in the summer of 1997. One of the factors behind the crisis was that much of the huge investments in new factories had come in the form of foreign currencies from outside sources such as financial institutions in Japan, Europe and the U.S. That's because the area did not have a fully developed financial market for raising funds domestically.

Although a huge increase in imports of materials and components for these new plants led to trade deficits in ASEAN countries, the value of their currencies remained high. It was the massive sale of the Thai baht by foreign funds that began the collapse of ASEAN's economy.

ASEAN-member nations learned valuable lessons from the 1997 crisis. Subsequently they made it their top priority to export more than they imported to accumulate foreign exchange reserves. China at present ranks first in foreign currency reserves with $2.450 trillion; while Japan is second with $1.060 trillion, Singapore eighth, Thailand 12th and Malaysia 13th, each with more than $100 billion. These reserves have not only stabilized the regional economy but also encouraged foreign funds to invest more in the region.

The current ASEAN economic boom is reflected in booming sales of vehicles and other expensive consumer products. Although the car market in the area remained somewhat sluggish in 2009, total sales came to 1.9 million vehicles, not far behind India's 2.26 million vehicles. During the first half of this year, motor vehicle sales in the six principal ASEAN nations shot up by 41 percent over the same period for the previous year (1.18 million). Some have even predicted that the number for the whole year will reach a record 2.5 million vehicles.

Motorcycle sales in Indonesia during the first half of this year rose 31 percent over the same period of 2009 to 7.6 million units, prompting Honda to raise production capacity there from 3.3 million units to 4 million units a year. Yamaha went from 3 million units to 3.6 million units. Sales of flat-screen televisions, air conditioners and refrigerators throughout ASEAN were also up nearly 50 percent in the January-June period from the same period of 2009.

Even though China's per capita gross domestic product has risen to $3,700, topped only by Singapore, Malaysia and Thailand among ASEAN countries, ASEAN countries still offer lower production costs than China, especially with regard to labor. ASEAN offers a large labor force, as Indonesia has a population of 237 million and the Philippines, 88 million. Particularly low wages are available in Laos and Cambodia, broadening choices for enterprises outside the region that are contemplating off-shore production.

China is trying to lure factories to inland areas where wages are still low, but these areas have a transportation disadvantage. India has a young labor force, but it will probably take 10 to 15 years before India's electric power supply, roads and port facilities compare with those of ASEAN countries.

Above all else, the ASEAN region is ideally situated geographically to export manufactured goods not only to the neighboring big markets of China and India but also to North America, Europe, the Middle East and Africa.

At present, ASEAN is working with the Asian Development Bank to build a highway crossing the Indochinese Peninsula from the Vietnamese city of Da Nang on the South China Sea coast to Myanmar's port city of Mawlamyaing facing the Indian Ocean. When completed, this highway will dramatically improve the efficiency of transporting goods manufactured within ASEAN to Europe and the Middle East, since they will no longer have to go through the Strait of Malacca, long a bottleneck for Chinese exporters.

It is high time that Japanese manufacturers take a fresh look at the geopolitical advantages of the ASEAN region, where people in the middle-income brackets as well as their spending are ballooning. The region offers opportunities comparable to those of China and India.

This is an abridged translation of an article from the September issue of Sentaku, a monthly magazine covering Japanese political, social and economic scenes.
 

 

 

  
 
 
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