The ASEAN, or Association of South East Asian Nations, has been making headlines for a while, and is currently forming the AEC (ASEAN Economic Community). What exactly does this mean, and how will it impact businesses in Indonesia? There are lots of articles that explain in-depth what ASEAN is trying to accomplish, so I won’t go into too much detail here, but I do want to give you an overview of ASEAN and how it will change the economic landscape for companies in Indonesia.
ASEAN is comprised of 10 countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. These ten countries will form the world’s seventh-largest economy, with a little over 600 million consumers. The plan is to drive an open market, by removing barriers to the movement of goods, services, capital, and people throughout the region.
Inflows of foreign direct investment (FDI), particularly by multinationals, have nearly tripled over the last decade. All of these companies are looking to take advantage of the expanding middle class and ASEAN’s strategic location at the intersection of India, China, and Japan. ASEAN countries need to capture a larger share of the global manufacturing market, and ASEAN is hoping to harness their manufacturing potential with the formation of the AEC. If the implementation strategy is fully executed, the size of the prize is substantial: the McKinsey Global Institute (MGI) estimates somewhere between US $300-630 billion in annual GDP by 2030.
It’s not all sunshine and roses, however. In order for ASEAN to be successful, there is much work to be done, particularly with regard to restrictions on foreign investment and ownership, as well as inconsistent standards and regulations. The majority of ASEAN countries are dealing with barriers to efficient trade, specifically customs procedures and regulations, and these barriers must be addressed and removed.
Further, if you take Brunei and Singapore out of the mix, ASEAN productivity is approximately 40% lower than that of China. If ASEAN countries want to compete with China in the global manufacturing market, they cannot do so on the basis of lower wages alone; this is simply not sustainable. ASEAN must be prepared to increase productivity as well, and they hope to do so by implementing the new economic community.
The time is now, and the options are these: continue with the AEC plan or retreat into protectionism.
The fact that ASEAN is focusing on trade gives it an advantage: they are not looking to create another European Union with a single monetary system; the member states will sometimes have to compete with one and other for market share; but there is enough opportunity for all. This is a realistic approach, as the countries involved are too diverse to form a more cohesive coalition at this time.
In my view, ASEAN should continue on the journey to a more open approach. There are more positives than negatives, and the opportunities for growth and success far outweigh the risks.
Frank Findlow is a supply chain and logistics consultant at Triple EFF Consulting. He has been working directly and indirectly in operations, supply chain, and logistics for most of his career, and he loves figuring out better ways to do business. He is based in Indonesia and in his spare time he likes to tinker with old cars and motorbikes, constantly trying to make them better.