The migration of China’s inbound foreign investment from labour-intensive sectors to services and high-end manufacturing has seen a seismic shift in 2015 which will potentially create a knock-on effect for investment into Southeast Asia. This investment will be welcome relief particularly to countries affected by falling commodity exports, even as the region positions itself as an attractive alternative to soak up such inflows.
Despite its slowing economy, China’s continued shift away from labour-intensive sectors to services and high-end manufacturing has escalated in 2015 and is translating to higher value Foreign Direct Investments (FDI).
Official figures show that China has attracted a total of USD 85.34 billion in FDI in the first eight months this year, up 9.2 per cent from a year earlier. Over this period, investment into the fast-growing services sector soared 20.1 per cent and the high-tech service sector saw an increase of 59.1 percent to USD 5.51 billion.
China’s rise up the value chain has been widely embraced by Southeast Asian countries eager to be an alternative destination for labour-intensive manufacturing.
This is especially since some agencies have forecast FDI to emerging markets this year to hit a low on the back of slowing growth and the prospect of the US Fed interest rate hike which has been haunting financial markets all year. The Institute of International Finance, for example, expect emerging markets to attract FDI of just USD 548 billion this year, lower than levels recorded at the height of the last global financial crisis.
However, the migration of FDI to Southeast Asia from China has been building for the past decade and still has potential for growth.
Since the early 2000s, ASEAN has increasingly positioned itself as a destination for companies seeking to diversify investment from China, where labour costs have been increasing at a fast clip. In fact, in 2013, ASEAN eclipsed China in terms of total FDI inflows.
A classic pattern looks like this: a company may manufacture various parts and components it requires in cost-effective locations like Vietnam or Cambodia; conduct final assembly of the product in higher-skilled locations like Singapore, where they also gain confidence for the availability of stronger Intellectual Property protection rights; and then sell the end-product either to China’s burgeoning middle-class consumers or to the more traditional markets of Europe and the United States.
For most ASEAN economies, inward FDI increased steadily over the past decade. According to a HSBC report released earlier in July, total FDI of ASEAN rose about 6.5 times from 2001 and 2013, with the majority being spread across Vietnam, Singapore, Indonesia, the Philippines, Thailand, and Malaysia. Within that, Singapore accounted for 53 per cent of the cumulative FDI in that period, largely due to its role as the region’s financial hub.
Despite the existing flows, Southeast Asian countries will be hoping that investment goes to the next level, particularly as many look to fill the economic void caused by falling global commodities trade and a general slowing in business activity and consumption.
Inflowing FDI into the region, especially in the form of new production facilities, will enhance private investment, develop industries and, most importantly, enhance productivity – a crucial element particularly in periods of reduced export growth.
Southeast Asia should remain as an attractive investment destination because of its demographic and growth fundamentals, despite the current cyclical slowdown.
As a whole, the Asian Development Bank expects economic growth of the region to come in at 4.4 per cent in 2015. In contrast, the US economy is forecast to expand by just 2.5 per cent this year and the Eurozone by only 1.5 per cent, according to the International Monetary Fund.
In addition, Southeast Asia has a growing capacity for handling sophisticated production of an expanding scale. But it currently accounts only for about 4 per cent of global manufacturing in value-added terms, still leaving a substantial amount of room for growth.
Looking ahead, it remains to be seen which country will be the biggest beneficiary of any large industrial relocation from China. Much will depend on the exact requirements of the production facilities being located there as well as the perceived ease of doing business, and the investment strategies developed by the various countries in the region, such as setting up special economic zones and other incentives for businesses.
Singapore stands out as it has increasing opportunities to play the role of a command centre –or more aptly, to serve as the cockpit – of corporates’ regional operations. Be it a regional invoicing centre, procurement or treasury hub, the city-state is set to see more opportunities come its way as businesses position themselves for scalability and sustainable success and must be poised to capitalise on this.
There is no doubt that China will remain an attractive place for foreign investors. The Chinese market is huge and infrastructure construction as well as an improving business environment will attract companies to invest and doing business there for years to come.
However, as China moves up the value chain, Southeast Asia can certainly step in and leverage its low-cost advantages – much like China successfully did 20 to 30 years ago. The overall result is likely to be positive and mutually beneficial for both geographies.