Amid the cross-currents of a US economy that is still running hot, a Chinese economy that is losing steam, and an overall shift towards a greener economy, the Asean economic landscape is undergoing a significant transformation. Driven by these structural forces of geopolitics and a green transition, manufacturing investments in the region have been increasing in the past several years, says a Asean Economics report by Maybank Research published on Sept 1.
Maybank’s team of economists — Chua Hak Bin, Erica Tay, Brian Lee and Luong Thu Huong — believe Asean could be on the “cusp of a green manufacturing renaissance”. Their report highlights the region’s growing role as a hub for clean mobility and renewable energy, in a geo-economic landscape painted with the tense brush of economic giants on different trajectories.
For the US, which is still firmly on an economic and manufacturing ascent, strong fiscal stimulus in the form of landmark legislature have continued to spur industrial development and innovation, namely the Creating Helpful Incentives to Produce Semiconductors and Science (Chips) Act and Inflation Reduction Act. The capital injection of these bills, worth a total of US$780 billion ($1.06 trillion), have fuelled a surge in factory construction, revving up the American manufacturing engine.
The Maybank economists also point out that the consensus at the start of 2023 was for “cold US, hot China”, as the market was anticipating the Chinese economy to rebound from its reopening. However, this supposed post-reopening recovery has failed to materialise miserably. On the other hand, earlier worries that the US economy would spiral into a recession due to aggressive rate hikes seem to no longer be the case. “Markets now expect the US economy to avert a recession and achieve a soft landing, or no landing at all,” they say.
This backdrop has seen Asean economies attract manufacturing investments from both sides of the US-China divide, with its top sources of manufacturing foreign direct investment (FDI) including the US, China, South Korea, Japan and Taiwan. As a result, the region has witnessed a remarkable uptick in FDI, with its share of global FDI climbing to 17% in 2022, almost triple its 6% share in 2016. Manufacturing in the region has been a standout performer, experiencing an average growth of 18% per annum since 2016 and reaching a record high of $62 billion in 2022.
Maybank says that while the FDI wave has yet to drive a “decisive upturn” in Asean’s overall fixed capital formation, it will likely catalyse a manufacturing renaissance in parts of Southeast Asia, help the region climb the industrial value chain and solidify the region’s status as a pivotal player in the transition towards clean mobility and renewable energy.
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Green energy begins to ignite
As the world moves towards reducing emissions and achieving net-zero targets, the demand for clean energy and electric vehicles (EVs) continues to surge. Asean economies are uniquely positioned to meet this demand given the increasing geoeconomic fragmentation of the global economy, and are starting to strategically position themselves to capitalise on this global shift.
Asean governments are beginning to align their policies in recognition of the increasing significance of green manufacturing practices. These measures include incentivising EV adoption, opening previously protected sectors to foreign investment and developing dedicated green industrial zones. Singapore, which often plays a policy-leading role for the region, plans to sharply increase carbon taxes in 2024, with other Asean economies also pushing for renewable energy adoption and production.
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Maybank’s report points out that an increasing proportion of new MNC investments across multiple sectors also require renewable energy inputs, with progress towards an Asean Power Grid likely to spur renewable energy production and therefore trading with the region.
Several regional governments have set ambitious targets to bolster their renewable energy capacity and increase the share of renewables in their energy mix. Investments in clean energy, including solar and wind power, are becoming increasingly prevalent in the region. Thailand and Vietnam have emerged as a leader in solar and wind power, while Malaysia’s New Energy Transition Roadmap aims for a 70% RE capacity mix by 2050. Singapore, with its plans to raise carbon tax rates, is also poised to boost renewable energy imports.
Considering that the region boasts abundant natural resources, large domestic markets and established car manufacturing capabilities, major EV and battery manufacturers from the US, EU and Northeast Asia are establishing their presence in one or more Southeast Asian countries, solidifying the region’s role in the EV supply chain.
Already, high-tech manufacturers from China have begun exploring alternative production bases in countries like Vietnam and Thailand, with this strategic shift igniting a wave of new EV-related investments in parts of Asean, further enhancing the region’s importance in global manufacturing.
Manufacturing-4 economies rev engines
The Maybank economists point out that Asean economies have experienced “varying degrees of success” in recent decades by attempting to replicate the “Flying Geese” pattern of industrial upgrading, in which a region is characterised by a leading economy. First seen in Northeast Asia and led initially by Japan before China took over the reins, this allowed regional economies to climb up the value chain and assume increasingly sophisticated manufacturing tasks.
With the shifting of manufacturing supply chains and rising foreign investment, the nascent manufacturing boom in Asean is expected to catalyse an increase in production capabilities up the industrial value chain to greater effect, they say.
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Their report highlights the notable surge in advanced manufacturing investment commitments in the key Southeast Asian industrial hubs of Indonesia, Vietnam, Malaysia and Thailand — often referred to as the Manufacturing-4. These hubs have become magnets for investments in electronics, renewable energy and the EV ecosystem. “The manufacturing investment boom speaks to the economies’ strengths of relative political neutrality, large domestic markets and resource endowments,” say the economists.
Charts: CEIC, Maybank Research
Indonesia, in particular, has emerged as a linchpin in the EV supply chain. This is hardly a surprise, considering that its treasure trove of natural resources includes a quarter of global nickel reserves. The country has grown into a vital hub for EV battery production and is now home to diverse players across the EV value chain, from nickel mining and smelting to EV production and charging infrastructure.
Indonesia has benefited from its government’s strategic push towards downstream activities, which has attracted investments from global battery makers and EV manufacturers, positioning the country as a formidable player in the global EV race.
Meanwhile, Thailand continues to leverage its automotive manufacturing pedigree and is swiftly expanding its EV production capabilities. Major automakers like Toyota and BMW have expanded their presence in Thailand to produce hybrid and electric vehicles. The Thai government’s proactive stance, offering incentives like tax breaks and reduced import tariffs, has opened the doors for a wave of foreign investments. In the first half of 2023 alone, investment applications surged by 70%, driven by foreign investments soaring by 141% y-o-y. This drive has attracted 14 new-energy vehicles or NEV producers, signalling a promising future for EV manufacturing in Thailand.
And as part of the green manufacturing value chain, Vietnam is on the cusp of becoming a major renewable energy producer thanks to its expertise in solar and wind energy generation. The country, which is home to VinFast, a major homegrown electric car manufacturer aiming to increase its production capacity substantially, continues to draw attention from EV-related investors through its attractive investment environment.
Finally, Malaysia has unveiled ambitious plans to develop into a hub for next-generation vehicles. Chinese automaker Geely has already committed a substantial $10 billion investment to transform Tanjung Malim into the region’s largest auto city by 2030 under the Automotive High Tech Valley initiative. Furthermore, Tesla’s regional headquarters has plans to establish a network of Supercharger stations, underscoring Malaysia’s growing appeal to EV giants.
Outside of the Manufacturing-4, the Philippines is not far behind, with its vast nickel deposits. Its government recently lifted a nine-year moratorium on new mining contracts, signalling its intent to participate in the EV supply chain.
While key structural shifts and favourable government policies have been instrumental to attracting investment into the region, the Maybank economists emphasise that despite the welcome inflow of funds, these investments have yet to translate into a significant improvement to Asean’s overall fixed capital formation.
They believe anchor MNCs in the region will likely crowd in an ecosystem of suppliers upstream and downstream, setting off a “virtuous circle”. “This should catalyse a manufacturing renaissance in parts of Southeast Asia and help the region climb the industrial value chain,” they add.
