The Southeast Asian region holds remarkable growth opportunities for investors and multinationals that will take the time to study the complexities and contradictions at play in one of the world’s most exciting emerging markets, according to a new report.
The McKinsey&Company report said that while the 10 dynamic economies that make up the Association of Southeast Asian Nations (ASEAN) may be vastly different in developmental stage, they all share immense growth potential.
“ASEAN is a major global hub of manufacturing and trade, as well as one of the fastest-growing consumer markets in the world,” said study authors Vinayak HV, Oliver Tonby, and Fraser Thompson.
They said there are several reasons the ASEAN—composed of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam—is emerging as a promising hot spot for investment and expansion, if the region is able to unite and move in unison toward mutual economic progress.
One of these is that ASEAN, with a combined GDP of US$2.4 trillion in 2013, would already be the seventh largest economy in the world if it were a single country, and it is projected to rank as the fourth largest economy by 2050.
Almost 60 percent of total regional growth since 1990 has come from productivity gains, as sectors such as manufacturing, retail, telecommunications, and transportation grow more efficient.
“To capitalize on these trends, however, the region must develop its human capital and workforce skills,” the paper said. “In Indonesia and Myanmar alone, we project an undersupply of 9 million skilled and 13 million semiskilled workers by 2030.”
Moreover, the region has shown economic stability that has underpinned its growth. “The region proved to be remarkably resilient in the aftermath of the 2008 global financial crisis, and today it is in a much stronger fiscal position: government debt is under 50 percent of GDP—far lower than the 90 percent share in the United Kingdom or 105 percent in the United States,” the authors added.
“In fact, ASEAN has experienced much lower volatility in economic growth since 2000 than the European Union. Savings levels have also remained fairly steady since 2005, at about a third of GDP, albeit with large differences between high-saving economies, such as Brunei, Malaysia, and Singapore, and low-saving economies, such as Cambodia, Laos, and the Philippines.”
ASEAN is also a growing hub of consumer demand. Income growth has remained strong since 2000, with average annual real gains of more than 5 percent. Already some 67 million households in ASEAN states are part of the “consuming class,” and that number could almost double to 125 million households by 2025, making ASEAN a pivotal consumer market of the future.
ASEAN consumers are also increasingly moving online, with mobile penetration of 110 percent and Internet penetration of 25 percent across the region.
“There is no typical ASEAN consumer, but some broad trends have emerged: a greater focus on leisure activities, a growing preference for modern retail formats, and increasing brand awareness,” according to the report.
Another plus factor for ASEAN is its increasingly prominent role in global trade flows. ASEAN is the fourth largest exporting region in the world, trailing only the European Union, North America, and China/Hong Kong. It accounts for 7 percent of global exports, and boasts diversified exports ranging from textiles and apparel from Vietnam and electronic products from Singapore and Malaysia, to vehicle and automotive parts from Thailand.
Indonesia is the world’s largest producer and exporter of palm oil, the largest exporter of coal, and the second largest producer of cocoa and tin. Myanmar has large reserves of oil, gas, and precious minerals, and the Philippines has established a thriving business process outsourcing industry.
The region sits at the crossroads of many global flows, said the report titled “Understanding ASEAN: Seven Things You Need to Know.” Singapore is currently the fourth highest ranked country in the McKinsey Global Institute’s Connectedness Index, which tracks inflows and outflows of goods, services, finance, and people, as well as the underlying flows of data and communication that enable all types of cross-border exchanges.
Malaysia (18th) and Thailand (36th) also rank among the top 50 most connected countries.
“ASEAN is well positioned to benefit from growth in all these global flows. By 2025, more than half of the world’s consuming class will live within a five-hour flight of Myanmar,” the paper said.
At the same time, intraregional trade in goods is likely to increase with the implementation of the ASEAN Economic Community plan, which aims to allow the freer movement of goods, services, skilled labor, and capital among the member-states.
Progress has been uneven, however. While tariffs on goods are now close to zero in many sectors among the original six member states (Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand), progress on liberalization of services and investment has been slower, and nontariff barriers remain a stumbling block to freer trade.
At the same time, ASEAN has forged free trade agreements elsewhere with partners that include Australia, China, India, Japan, New Zealand, and South Korea. It is also party to the Regional Comprehensive Economic Partnership trade negotiations that would form a megatrading bloc comprising more than three billion people, a combined GDP of about $21 trillion, and some 30 percent of world trade.
The paper also pointed to the increasing foreign direct investments flowing into ASEAN, now home to many globally competitive companies. ASEAN includes 227 of the world’s companies with more than $1 billion in revenues, or 3 percent of the world’s total.
The ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) attracted more foreign direct investment than China ($128 billion versus $117 billion) in 2013. In addition, ASEAN has become a launching pad for new companies; the region now accounts for 38 percent of Asia’s market for initial public offerings.
“Despite their distinct cultures, histories, and languages, the 10 member-states of ASEAN share a focus on jobs and prosperity,” said the paper. “Household purchasing power is rising, transforming the region into the next frontier of consumer growth. The ASEAN Economic Community offers an opportunity to create a seamless regional market and production base. If its implementation is successful, ASEAN could prove to be a case in which the whole actually does exceed the sum of its parts.”
Photo: Marc Veraart
