China + 1 = ASEAN: A winning formula

BOE Technology (BOE), a Beijing-based supplier of electronic displays for global smartphone makers, plans to invest hundreds of millions of dollars in new factories in Vietnam. BOE is following its biggest clients: Samsung keeps expanding in Vietnam where about half of its smartphones for global markets are already being produced. Similarly, Apple, another BOE client, is reported to be planning to make MacBooks in Thailand.

While China is still a global manufacturing powerhouse, a growing number of companies are eyeing Southeast Asia, and the 10-member ASEAN block (short for Association of Southeast Asian Nations), as they pursue a “China-plus-one” strategy to diversify their supply-chain risks by reshoring parts of their production.

A rising force 

If viewed as a country, ASEAN would be the world’s third most populous state after India and China. And what sets the region apart from places like China and Japan, where populations have peaked, is that ASEAN is young and growing, with the economic dividend that brings. An enviable median age of 30 across the region compares with 39 in China, 49 in Japan, 38 in the US and 42 in Europe. ASEAN’s fast-rising middle class is boosting consumption, with GDP per capita in most countries in the region forecast to grow by 3 to 4 per cent annually through 2030.

While multinational firms branch out into Southeast Asia, we think global investors can also benefit from diversifying their emerging-market exposure into this region, where growth is decent and valuations fair. We see a tendency among global funds to go underweight ASEAN relative to its economic clout, which suggests ample room for future inflows to the region’s equities and fixed income markets.

Expanding production

The Covid-19 pandemic and China-US trade tensions have both exposed the fragility of supply chains relying too much on globalisation and just-in-time practices. Russia’s invasion of Ukraine has also disrupted the supply of many key commodities and weakened global logistics networks. These factors have combined to accelerate the realignment of global supply chains. 
As reshoring gathers momentum, Southeast Asia has caught up with China on foreign direct investment over the last few years to become one of Asia’s top two destinations for inflows.
Highly competitive and diversified manufacturing hubs are popping up around the region, indeed. Vietnam increasingly looks like a mini-China when it comes to electronics manufacturing. In Malaysia, factories are churning out desktop computers for global brands like HP and Dell. In Thailand, where Japanese and Chinese carmakers have rebased some of their production lines, a new regional hub for automobile manufacturing is emerging, increasingly for electric vehicles, too. Meanwhile, Indonesia’s rich resources allow it to develop nickel mining and related battery production for electric vehicles.
Exports have jumped on the back of this manufacturing boom, with Southeast Asia recording a 22.6 per cent growth in exported goods last year, the highest among Asian regions.
Meanwhile, Southeast Asia’s service exports expanded by 19.1 per cent in 2022, also the fastest in Asia.  

Where factories lead, will markets follow?

The development of ASEAN financial markets, however, has lagged the pace of business investments into the region. For instance, Southeast Asian countries combine to account for less than 8 per cent of the MSCI Emerging Asia index, versus around 18 per cent for India, whose 2022 GDP came in lower than ASEAN’s. 
It’s understandable that most global investors are not yet overweight ASEAN. For outsiders, the region’s financial landscape can be difficult to navigate, with varying legal systems, market infrastructures, as well as thickets of bureaucracy. A lack of overall liquidity in ASEAN markets has also turned some investors off. In addition, the memory of currency valuations crumpling in parts of the region during the 1997-98 Asian Financial Crisis still lingers for some. 
Despite these concerns, Southeast Asian countries have been making progress on strengthening their balance sheets and improving their legal systems. Most notably, many have cut their reliance on external funding, thanks to the growth of domestic capital markets. And most ASEAN members have accumulated much larger foreign exchange reserves than they had in previous financial crises.
While the region’s financial infrastructure still appears underdeveloped, this implies room for future growth and opportunities for early movers. With strong demographic and “China plus one” tailwinds, provided local financial markets also catch up, a new factory of the world could rise in ASEAN.