Sino-US trade war provides an escape from the low-profit, high volume intra-Asia market
Apart from the continuing political crisis and protests in Hong Kong and the fall-out from the Sino-US trade war, also clouded by the coronavirus pandemic, there are factors other than country risk that drive multinationals to diversify to South East Asia - namely cost.
Over the past few years, big companies have increasingly reacted to the trend of rising Chinese wages by relocating labour-intensive manufacturing to Southeast Asia.
This has brought about a considerable wealth transfer into the intra-Asia trading zone, which is still the poor relation of global trade, and in which it is notoriously hard to achieve profitability with its high volume and perennially low dollar volume.
But with more and more crumbs falling off the Chinese giant's table, and the likelihood of more to come, the South East Asian nations of Vietnam, Cambodia, Laos, Burma, Indonesia and the Philippines are likely to generate more wealth and become more interesting to buyers and sellers alike.
The impetus of this phenomenon is straightforward enough. Rapidly rising wages and production costs in China, exacerbated by labour shortages, have prompted Hong Kong companies become more active in the search for alternative production bases away from the Chinese mainland as the monthly Shenzhen-Shanghai minimum wage has more than doubled from CNY1,000 in 2009 to 2,480 (US$369) this year. Although the monthly minimum wage in Vietnam has increased almost fivefold since 2009, it is still only $145 a month, according to the Hong Kong Trade Development Council.
Aside from wages, decisions regarding the relocation of manufacturing also tend to consider the size of the workforce in each country. Particular attention is paid to sustainability in the supply of low-cost labour over time in each market, especially as regards the provision of skilled labour capable of handling more sophisticated processes. More than half of the population of mainland Southeast Asian countries participates in the workforce, while Vietnam has the largest workforce in the bloc and Laos, the smallest.
More thought needs to be given to the proportions of the workforce residing in urban and rural areas. In the case of Thailand, the official unemployment rate is under one per cent, the lowest in the world. About half of the Thai people live in cities and the rural-urban migration rate is projected to be three per cent annually, suggesting that there may be difficulties ahead in ensuring a sustained labour supply over time.
While a similar rural-urban migration pace is expected for Vietnam, its population is 30 per cent larger than Thailand’s. This, combined with an anticipated eventual pickup in city-bound migration due to ongoing industrialisation, which is accelerating, will certainly generate a much larger supply of workers for the many newly established industrial parks scattered about the country.
There is also the problem of finding a sufficient supply of skilled or trainable workers, and to supply the need of engineers and managers. The supply of managers and engineers in any given country is reflected to an extent by the ratios of their average wages to those of workers. For example, a manufacturing manager in Thailand earns a monthly basic salary of $1,487, which is about four times that of an average worker. This is the lowest ratio among the mainland Southeast Asian countries, followed by Vietnam, Cambodia, Laos and Burma.
This shows the difficulty of recruiting manufacturing engineers and managers in places like Burma and Laos, and the consequent need to import senior factory personnel from abroad, at least in the initial stages.
Cost issues that have driven companies out of China are likely to be faced in new locations as higher wages are demanded. In response, there is an increasing tendency among foreign manufacturers to move to second-tier locations in Vietnam to maintain export-competitiveness, particularly in more labour-intensive industries like garment manufacturing. For example, two companies with Korean investment began construction of textile and garment factories in an industrial zone in central Vietnam’s Quang Nam Province, taking advantage of the port system Da Nang.
Export-oriented economies of the Association of Southeast Asian Nations (ASEAN) will suffer most from trade barriers and tensions, particularly Singapore, Thailand, and Malaysia, according to Washington's Centre for Strategic and International Studies. If they are to win from the trade war they will need to overcome protectionist inclinations and continue to deepen the regional integration and take full advantage of shifting supply chains.
Southeast Asia extracts the raw materials or produces intermediate goods that are assembled in China and exported to western markets. And while the United States is shunning deeper economic integration, global trade volatility is driving ASEAN countries closer together.
Across the region leaders and policymakers are emphasising the importance of ASEAN unity. At a World Economic Forum in Hanoi, Malaysia's Minister of International Trade and Industry Ignatius Darell Leiking said: “We need to start taking the opportunity of what was already built several years ago and that is ASEAN. That is to work as a single ASEAN, to trade among ourselves and to make it seamless. That could reduce the impact of a tariff war.”
It sounds tempting. Intra-ASEAN trade is the largest share of total trade in the region, at 24 per cent of total trade. ASEAN is also a driving force behind regional economic cooperation and architecture. ASEAN is the basis of the Regional Comprehensive Economic Partnership (RCEP) agreement.
That agreement, between ASEAN nations and Australia, China, India, Japan, South Korea, and New Zealand, will encompass 25 per cent of global GDP, 45 per cent of the world’s total population, 30 per cent of global income and 30 per cent of global trade when it is ultimately finalised.
Similarly, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) has fostered trade liberalisation in Southeast Asia and the Asia Pacific and a tool for shaping policy and enhancing growth through greater foreign direct investment.
Yet, this understanding is far from unanimous in Southeast Asia and a hard sell to constituents. The consequences of the 1997 Asian Financial Crisis are deeply ingrained in the collective memory of ASEAN states and economic and financial liberalisation has left a bitter taste ever since.
While these trends, partly caused in China's growing country risk, but just as much by rising wages there, have benefited Southeast Asian nations with the influx of new business, it all can so easily be lost if appropriate steps are not made to secure trade accords its leaders appear to agree on, but are reluctant to take. The question now is, ASEAN, the core of the intra-Asian trade, has what it takes, but will it take it?