- FDI inflows into ASEAN-6, as proportion of world inflows, have exceeded China in the past two years.
- Western and advanced Northeast Asian countries have a strong FDI footprint in ASEAN, besides China.
- Singapore has been the key beneficiary in flows, followed by Vietnam and Indonesia.
- EV components, electronics supply chain, and green technologies are the key emerging opportunities.
- Geopolitical risks need to be monitored.
Below is a summary; for full report and detailed charts, please download the PDF
Beneficiary of Asia’s supply chain shifts
Supply chain shifts through the adoption of ‘China+1’ strategy have benefited the ASEAN region. While the regional economies have long attracted foreign inflows, two push factors have accelerated that move since 2017 - de-risking since the onset of US-China tensions, and next, supply chain reconfigurations brought about by the pandemic. While the region might be unable to absorb or replace all the displaced production capacity from China, ASEAN-6 countries offer unique advantages (see table in the PDF).
Shifting tide from the onset of US-China rivalry
The US-China tensions that started from 2017-18 marked the turning point for China’s and ASEAN-6’s trade and foreign direct investments (FDI). The resultant tariffs curbed trade between US and China, but trade in the affected products was relocated, spurring other countries to explore regional and multilateral trade agreements.
The ASEAN-6 region has made notable strides on foreign direct investments (FDI). Total FDI inflows into ASEAN-6 as % of world inflows have exceeded China in 2021 and 2022, particularly since 2018 (see chart in PDF). ASEAN’s trade integration via its already wide free trade agreement (FTA) network is likely to viewed favourably by investors.
Strength in numbers
Tapping the net balance of payments data for the individual countries, our analysis shows that about two-third of the flows into ASEAN-6 head to Singapore, totalling about $141bn last year, with the quantum up a sharp 50% from average 2017-18 flows (see chart). Vietnam and Indonesia attracted the most, while Philippines is playing catch up with rest of the region.
Key investors
The AmCham China 2023 China Business Climate Survey shows that most companies seeking to relocate production capacity from China, are opting for Developing Asia, which includes ASEAN. This is accompanied by an increase in preference for potential ‘reshoring’ to the US, likely drawn by the recent industrial policy push. In this mix, we make few observations. While investments from China to the ASEAN-6 region have broadly picked up, the share of Western and advanced NEA countries (Japan, South Korea and Taiwan) is the largest, with the proportion differing between countries, according to our analysis of ASEAN’s investment data (see table below; individual charts in Appendix 1 of the PDF) – see chart.
Booming sectors
At an aggregate level, four segments – manufacturing, financial & insurance, trade, and logistics (transport and storage) made up nearly 80% of the total inflows into the region in the past three years. By country, the weightage varies, with the manufacturing sector attracting nearly 60% of the total flows into Vietnam, whilst base metal processing dominates the sectoral mix in Indonesia.
Apart from the traditional sectors that have attracted flows to this part of the region, few sectors have witnessed much stronger interest. These include the electric vehicles (EV) segment (battery, ancillary, and automobile production), the electronics and semiconductors industries, and green technologies. While our focus in this report is on FDI inflows into the goods/real sector, the ASEAN region has also attracted strong interest in the digital sectors (e-commerce and fintech, for e.g.), information and communication, and data centres.
For country specific details, please refer to the PDF.
Concerted efforts to attract investments
Supply chain reconfigurations in the region have provided the push factor for the ASEAN-6 countries to expedite efforts to improve the ‘ease of doing business’, which are a mix of measures to facilitate as well as promote investments. In recent years, steps to facilitate investments have taken precedence, including actions to provide a predictable regulatory environment, investor services including centralising in the application process, environmental clearances, etc, and reforms involving the main agents of production.
Appendix 2 in the PDF summarises recent key reform initiatives by ASEAN-6.
We expect total FDI inflows into ASEAN-6 to grow at a robust pace over the coming years, amid tailwinds from the ongoing supply chain reconfiguration. Total net FDI inflows into ASEAN-6 rose by ~10% on a compound annual growth rate (CAGR) basis over 2018 to 2022, which was higher than ~6% CAGR over a longer time frame of 2013 to 2022, reflecting the stronger foreign investor interest since the US-China tensions began in 2017-18. Taking a conservative CAGR estimate of 6-8% between 2022 and 2030, we estimate that cumulative net FDI inflows into ASEAN-6 could reach almost $400bn from 2022’s tally.
Amongst the various sectors, there is room for the electric vehicle component supply chain and green technologies to expand exponentially in the coming years. Mobility transition and EV adoption is still small in this part of the region and large-scale adoption is still critical to meet the ambitious net zero emission targets.
Thailand and Indonesia stand to benefit from this transition, tapping on their strengths of an existing large auto industry base and as well availability of natural commodities, while Vietnam is home to a fast-growing EV player. Other countries in the electronics supply chain might also have room to participate by a higher proportion of components channelled to the EV ecosystem, from existing focus on communication and consumer electronics. Incremental domestic EV adoption will also draw in foreign investors to fulfil local needs.
ASEAN continues to rely heavily on foreign green investments, according to the South-east Asia Green Economy 2023 report by Bain and Company, Temasek, GenZero, and Amazon Web Services. More than 55% of 2022 private green investments came from foreign investors, both within and outside the region. Up to $2trn in new cumulative investment is needed up to 2030 to transition ASEAN economies and meet their NDC unconditional targets across all sectors, suggesting significant potential for foreign green investments over the coming years.
Risks
Geopolitical risks, including further sanctions on China, weaponization of the USD, and industrial policy in the West need to be monitored. – please read the PDF for details
To read the full report, click here to Download the PDF.
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Completed Date: 18 Jan 2023 11:04:34 (SGT)
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