By Noel Quinn
In its fascination with all things China, much of the world seems to have overlooked one of the great trading opportunities of the post-crisis global economy: The potential of Southeast Asia.
It is a strange omission: The 10 members of the Association of South East Asian Nations (ASEAN) comprise a market of 600 million people with a combined gross domestic product (GDP) of US $ 2.1 trillion, solid growth, low manufacturing costs and a rising middle class, hungry for the consumer experience.
We expect these trends to be amplified when the ASEAN Economic Community (AEC) comes into existence at the end of 2015. The AEC is designed to eliminate tariffs and other trade barriers between Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, The Philippines, Singapore, Thailand and Vietnam, effectively creating, could be one of the world’s biggest single markets.
Part of Southeast Asia’s attraction is the range of opportunities it offers, both as manufacturing base and market. ASEAN spans the spectrum from Singapore, a financial and high-tech industrial hub with a higher GDP per capita than Switzerland, through the established offshore manufacturing centres of Thailand and Malaysia, via the newly industrialised economies of Vietnam and Cambodia, to the natural resources of Indonesia and the raw potential of Myanmar.
But the heart of Southeast Asia’s potential lies in the middle class, both as consumers and as a source of highly educated, high-productivity labour. A recent report from Ernst & Young estimated that there were 529 million middle-class Asians in 2009 – 28 percent of the global total – and that will grow to 3.2 billion by 2030 or 66 percent of the global total. Much of that growth will be in China and India but Southeast Asia will also play a key role.
Southeast Asia has not been immune to the global headwinds – we forecast regional GDP growth of 3.9 percent this year – but that growth is robust, driven largely by domestic consumption and growing intra-regional trade.
Intra-regional trade has grown from 19 percent of total trade in 1993 to 25 percent in 2012 but its potential is vastly greater. Growth has been blunted by poor connectivity: For years there has been no rail link between Vietnam on the eastern seaboard and Thailand on the Andaman Sea for example and until recently goods travelling by road used to have to change trucks three times to comply with local legislations.
But Southeast Asia has used the global economic crisis to embark on a major infrastructure upgrade, building roads, ports and railways while dismantling the bureaucratic barriers to trade to allow the region to reap the full economic benefits of its diversity.
It is also working to improve the efficiency of its capital markets, which will have a major role to play in financing future growth. Although there is some way to go, today there is greater regional cooperation than there has ever been and overseas investors are looking closely at the possibility of public-private partnerships as a way to buy into the region’s growth.
In many instances Western companies identified China as a preferred option when setting up manufacturing facilities, encouraged by competitive wages, well-developed foreign direct investment (FDI) infrastructure and the bonus of the potential domestic market.
But this is beginning to change as Southeast Asian markets become more accessible and increasingly competitive on costs. Foreign direct investment into ASEAN grew 24 percent year-on-year in 2012 to reach US $ 114 billion.
The dismantling of the economic, physical and regulatory barriers between Southeast Asian nations envisaged by the ASEAN Economic Community will help unleash the full potential of what is already one of the world’s most dynamic regions. As the world’s economic centre of gravity moves inexorably eastward, Southeast Asia is sitting in the cockpit of growth: The diversity which critics had assumed was one of its weaknesses will become a strength and a growing middle class will drive both consumption and innovation.
(Noel Quinn is Group General Manager, Regional Head of Commercial Banking Asia Pacific for the HSBC group)