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The two faces of ASEAN in global production networks

Updated on : 05-01-2015


The two faces of ASEAN in global production networks

Author: Buavanh Vilavong, ANU

The relocation of the production base towards Southeast Asia has brought about a significant shift in the center of gravity of industrial organization and trade. The ‘unbundling’ of production as coined by Richard Baldwin is made possible by fragmentability in production technologies and enhancement in information and communications infrastructures.

Low wages and, to a larger extent, favourable trade and investment policies have driven ASEAN to stand out in global production networks. The origin dates back to 1968 when two US companies, National Semiconductors and Texas Instruments, began assembling semiconductors in Singapore. By the 1980s, Malaysia, Thailand and the Philippines had followed suit. The exports of parts and components accounted for almost 70 percent of ASEAN’s manufacturing exports in 2009-10, up from 57 percent in the early 1990s. The region’s network trade is also relatively diversified ranging from the sectors that are technologically low-end (garments), to medium-end (electrical appliance), and high-end (automotive, electronics).

ASEAN has two faces in global production networks. On the one hand, ASEAN posits itself as one the most dynamic region in production networks. This is represented by Singapore, Malaysia, Thailand and the Philippines. Around 60 percent of firms in Malaysia and Thailand involves in production networks, chiefly in the electronic and automotive sectors. Singapore has even managed to move up to more high-tech industries such as medical equipment, and become a service hub in R&D, product design and marketing.  

On the other hand, ASEAN has some of the weakest links. Until recently, Laos and Cambodia have begun to take part in production networks. Even so, they are still in the low value-added chain like garments. Their advantages are mainly derived from cheap labors and preferential access to the European and US markets.   

Interestingly, Vietnam though a new ASEAN member has caught up well. Over one-third of its firms are now engaging in network trade as compared to only 14.5 percent in Indonesia. Vietnam not only has a large pool of hard-working workforce but it also creates relevant policies in such a way to attract quality foreign direct investment. After its market-oriented policy reforms in the late 1980s, a number of East Asian firms started to invest in the country. However, these ventures were not yet by big multinationals.  

A major breakthrough came in 2006 when Intel Corporation decided to set up a testing and assembly plant in Ho Chi Minh. Vietnam was on the verge of joining the World Trade Organization (WTO), which boosted investor confidence in the country’s predictable investment regime. Following the lead of Intel, more major players flooded in, including Taiwanese Hon Hai Precision and Compact Electronics, the world’s largest and second-largest electronics manufacturers. Nidec Corporation, a Japanese manufacturer of hard disk drives and electrical components, also invested in Vietnam. Likewise, Korean Samsung Electronics established a plant in Hanoi in 2009 for assembling hand-held products.

Despite being the biggest economy in Southeast Asia, Indonesia still lags behind in network trade. Even though the country is linked to the low-cost suppliers in the region via multinationals, Indonesia’s production is mainly to serve domestic market rather than export. A key factor believed to contribute to this is the unfavourable investment regime along with high transport costs and rigid labor policy.

What makes some of the ASEAN economies so successful in global production sharing? 

One of the lessons learned from the experience of Indonesia is that ‘low wage’ is not necessarily the decisive determinant in attracting foreign investment and promoting network trade. While labour cost is important, other factors such as business environment, technological capabilities, infrastructure, and other relevant policies usually determine multinationals’ locational decisions.

Taking the business environment as an illustration, Singapore was ranked first as the most business friendliest country based on the World Bank surveys in 189 economies in 2013. Thailand joined the 20th ranking while Malaysia was in the 28th. These countries are much smaller than Indonesia by either the measure of population size or natural resources but they have performed better and have successfully integrated into the global supply chain.

Another factor of equal importance is technological capabilities. The rise of China initially sparked concerns that multinationals would leave ASEAN and move towards a more competitive country like China. Over the years, it appears such concerns are not valid. Singapore has shifted from low-skilled assembly to component design and has managed to become a services hub for production units located in its neighbouring countries, thanks to the government’s policy emphasis on technological upgrading along with expanding human capital base, and infrastructure development.

With further rising labour costs in China, countries with cheap labour such as Vietnam and other new ASEAN members are expected to benefit more from manufacturing relocation out of China. The process is not automatic though. Laos was in the 155th ranking on the ease of doing business in 2013 while Myanmar was ranked at 178th. It takes traders around 25 days in Myanmar to complete export documentations and cargo handling, comparing with 14 days in Thailand.

This calls for substantive reforms in particular on trade facilitation within these newer members, if they are to integrate into production networks. Myanmar is being closely watched regarding its political and economic reforms; and it is interesting to follow if the country would ‘get it right’ as in the case of Vietnam.

 

Buavanh Vilavong is an Australia Leadership Awards PhD scholar at the ANU Crawford School of Public Policy. He is a deputy director general of the Department of Import and Export, Ministry of Industry and Commerce, and was previously in the core team of Laos on WTO accession negotiations.


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