The manufacturing sector today is filling a huge chunk of National GDP for several nations within Southeast Asia. The manufacturing sector in the SEA region could generate up to USD 600 billion/year, as per a report by Boston Consulting Group. Also, since the big manufacturing companies in the market have started to move their manufacturing units, smaller companies are also following suit.
The residents of the Southeast Asian countries like Thailand, Malaysia, Singapore & Vietnam are all open to foreign trade. Since most of these countries within these geographic locations have free trade agreements that are signed with several partners such as Japan, South Korea & Australia, it is a huge plus for international manufacturers. Southeast Asia is not only popular for its rapid economic growth but it is also known for its low labor costs, as well as commitment to trade and these are some of the important and impressive traits the foreign manufacturing companies are expecting. The talent pool diversity in the SEA region helps foreign organizations to keep up with the surging demand across the region. Some of the top companies that have moved their production to other southeast Asian countries like Vietnam, Thailand, Indonesia and Taiwan include Samsung Electronics, Nike, Adidas, HP and Dell. In this article let us look at the various factors that have helped international manufacturers to shift manufacturing to SEA region.
Increasing investments in infrastructure
Huge investments are being made into the infrastructure sector in order to encourage Foreign Direct Investments and particularly in Indonesia. In order to take advantage of lower costs the emphasis on manufacturing has shifted to East and Central Java, which has been bolstered by railway connectivity, new toll roads, new ports etc.
Particularly designed as an auto-export hub, the Patimban Port in Central Java is and this will help in attracting auto manufacturers looking to export from Indonesia, which is potentially for 4W Electric Vehicles.
Furthermore, the Omnibus law passed in Indonesia has made it easier for applying for licenses, given that it relaxes as well as centralizes employment law for encouraging foreign investment in creating supply chains in Indonesia. The complexity of setting up new ventures in terms of licensing as well as employment laws has always been a barrier for investments in Indonesia.
The Electric Vehicle battery supply chain has moved to Indonesia owing to the rich nickel deposits as well as the requirement to process the metal onshore and this has helped many firms in the Electric vehicle battery supply chain for building smelters in the country that attracts huge amounts of Foreign Direct Investments from the mining industry to processing as well as battery manufacturing, with Electric Vehicle manufacturing as the next phase.
“We are currently in an investment race where [Association of Southeast Asian Nations (Asean)] countries are competing to get foreign investors to come in,” says Alloysius Joko Purwanto, energy economist at the Economic Research Institute for Asean and East Asia. “That is the current situation, not only in EV manufacturing, but also in its batteries.”
The growing investments in the sustainable power generation has also given birth to increase in solar panel manufacturing in Indonesia by manufacturers from China with an aim to get closer to the market. Furthermore, there are also plans of building “green” industrial estates which supply sustainable energy for tenants right from solar to biomass & hydro. One such estate is the one present in Kalimantan - Adaro-owned Green Industrial estate. Therefore, this is facilitating in attracting manufacturers with commitment from an aluminum manufacturer for Electric Vehicles with focus on sustainable manufacturing.
Supply chain shifts driving the Economic Growth
The shift in several supply chains to the countries in Southeast Asia is facilitating in increasing the value-added production component to GDP instead of focusing mainly on commodity-driven sectors that are subjected to cyclical downturns. The shift in nickel processing in Indonesia has led to creating a positive impact & tailwind for the country’s economy as well as a huge trade surplus that has meant a stable IDR.
Because of the rapid pickup in Foreign Direct Investment to Southeast Asia the transfer of supply chains is giving rise to huge demand for industrial estates rendering the right type of connectivity as well as infrastructure. One such example is the JIIPE industrial estate that is located in Gresik. The is owned by AKR Corporindo which is close to Surabaya.
An increase in share of the Foreign Direct Investment to ASEAN is now channeled to the manufacturing industry and this leads to increase in employment opportunity in the ground. This also means that there is huge training facilitating to enhance Southeast Asia’s human capital. Increased investment must enhance the workforce quality via training over time, specifically owing to the young population. And this is particularly in Philippines, Vietnam and Indonesia. This in turn will lead to surge in investment in attracting surge in pool of skilled workers.
While Thailand has established itself as one of the auto manufacturing hubs for exports, Indonesia – owing to the presence of abundance of raw materials for Electric Vehicle batters, also possesses the opportunity of achieving the same in the Electric Vehicle landscape. Vietnam has already taken the lead in the electronics production which includes the manufacturing of Apple earphones, and possesses experience growth in numerous industries like apparel & footwear.
“Asean, with its growing economy, has a big potential for the EV market,” says Nuki Agya Utama, executive director at the Asean Centre for Energy. “This demand pull is also complemented with policy push from the government that strengthens the environment for industry investment.”
The manufacturing cost in southeast Asia are low however there is still a productivity gap with countries like China that requires to be closed with the ongoing requirement for enhancing manufacturing efficiency. On the whole, the disruption owing to the pandemic coupled with cost considerations & enhanced infrastructure have augmented the shift of supply chains to Southeast Asia. And this momentum is all set to grow and has a long way to go, which makes the prospects for SEA more exciting.