Southeast Asian countries provide attractive alternatives for businesses looking to move production out of China, but investors must be aware of the hazards.
As the conflict between the United States and China continues unabated, more and more companies are rethinking their investments there and considering “decoupling” from the biggest exporter in the world. Companies from the U.S., the European Union, and other regions are searching for new markets to serve as industrial centers and commodities suppliers for a variety of reasons. While the COVID-19 outbreak brought attention to the dangers of depending on one nation for essential imports, Western companies doing business in China had been raising concerns about unfair business practices including IP theft and forced technology transfers even before then. Recent federal legislation, like the Uyghur Forced Labor Prevention Act and the Biden administration’s semiconductor export controls, which require Western companies to reevaluate their business ties with China, demonstrate how China’s growing assertiveness on the international stage, along with allegations of human rights abuses in Xinjiang and Hong Kong.
Southeast Asian countries have been among the main winners as decoupling progresses. According to the ASEAN Secretariat, foreign direct investment in the Association of Southeast Asian Nations (ASEAN) increased by 42% in 2021 to an all-time high of $174 billion. Foreign direct investment has dramatically decreased since the second quarter of 2022, according to China’s State Administration of Foreign Exchange and Ministry of Commerce, which recorded high inflows for the majority of the year. Just a few of the well-known companies that recently moved manufacturing from China to Southeast Asian nations include Apple, Samsung, Nike, and Adidas.
ASEAN countries have a lot going for them, including youthful populations, rapid economic expansion, and affordable labor. Foreign investors nevertheless encounter challenges because of political unrest that has long plagued Southeast Asia’s top investment locations, poor working conditions, the dominance of long-standing native companies, and widespread corruption.
Thailand has recently seen violent public demonstrations calling for political changes. Following the election on May 14, two opposition parties that include many of these protestors, Move Forward and Pheu Thai, are poised to win the most seats in Thailand’s House of Representatives and have agreed to create a coalition administration. But whether the progressives can get through powerful senatorial interests and end almost a decade of military and military-backed governance remains to be seen. Similar to Malaysia, where a political crisis that started in 2020 may have ended with Prime Minister Anwar Ibrahim’s election in November of last year, the stability of the government now depends on a group of unlikely allies, and it is far from clear that Anwar has the political clout to put an end to the unrest of the previous few years. Some worry that President Joko Widodo may find a way to postpone the voting, inflicting a significant damage to democracy in Southeast Asia’s most populous nation as Indonesia prepares for its presidential election in June 2024.
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President Nguyen Xuan Phuc of Vietnam, who was forced to quit in January as part of a campaign against corruption, was the most well-known person to be affected by the crackdown that had already resulted in the resignation of two deputy prime ministers a few weeks before. Analysts have voiced fears that Vietnam’s crackdown has been used by prominent party leaders to eliminate political opponents, similar to Chinese President Xi Jinping’s long-running anti-graft drive. This would undoubtedly dissuade international investment.
While working circumstances may not be as bad as the forced labor that occurs in Xinjiang, there are many places in Southeast Asia where there are limited legal safeguards for employees in the manufacturing and commodities industries. Activist organizations have provided evidence of dangerous chemical exposure, wages below the minimum wage, and the suppression of labor unions in Indonesia’s burgeoning palm oil industry. The Department of Labor under the Biden administration has condemned the Communist Party’s ban on independent labor unions in Vietnam. As part of COVID-19 control attempts, hundreds of thousands of Vietnamese employees were forced to remain in their workplaces for extended periods of time due to a lack of proper safeguards.
Foreign investors must also compete with established local companies that control the market if they want to make a successful debut into Southeast Asia. Three important corporations in Thailand, Charoen Pokphand Group, TCC Group, and Central Group, have enormous influence over vital industries including banking, telecommunications, and retail. The Salim Group, Sinar Mas, and Djarum are a trio of significant companies with close ties to the government that call Indonesia home. These conglomerates often obtain favorable treatment from authorities and are able to outwit international companies that would be constrained by local content rules and limitations on foreign ownership. Despite the fact that the two biggest countries in ASEAN, Indonesia and Thailand, have enacted the Omnibus Law on Job Creation and created special economic zones along the Eastern Economic Corridor, there are still significant obstacles to overcome.
The ranks of the major ASEAN countries in Transparency International’s Corruption Perceptions Index have remained essentially constant for years, demonstrating that corruption is one of the most pervasive obstacles to entrance in Southeast Asia. Inversely, it’s possible that attempts to stop systemic corruption have made matters worse. The renowned anti-corruption investigator and prosecutor in Indonesia, the Corruption Eradication Commission, has lost some of its independence and some of its efficacy due to reforms. Bureaucrats in Vietnam are hamstrung by an extensive anti-corruption drive because they are afraid of being singled out for accepting license and permission requests made by foreign firms.
Given these potential dangers, international investors considering Southeast Asia would be wise to make sure they have a solid market entrance strategy that includes a comprehensive evaluation of the current regulatory environment, supply chain mapping, risk mitigation techniques, and local partner identification. First, ensuring compliance with local regulations and maybe seeing opportunities would need a thorough study of the legislation controlling any specific industry, as well as awareness of how these restrictions may alter with elections or cabinet realignments.
Second, by identifying and investigating each supply chain link, international investors may avoid partners involved in illicit activities, such as money laundering and human rights violations, which pose a severe legal and reputational risk. Third, in order to fulfill corporate objectives, investors must recognize current dangers to those objectives and implement mitigating solutions, such as risk diversification or transfer to third parties.
Finally, working with a local company that is familiar with the market is not just a wise business decision in Southeast Asia; it is sometimes a must. The success of the enterprise depends heavily on choosing and thoroughly verifying such a partner, as well as making sure that common goals and values are there. Foreign investors would be wise to use a company that has a specialized political risk and strategic intelligence business that is run by experts with extensive local public policy knowledge. It’s difficult to navigate Southeast Asia’s investment risks. You don’t have to do it alone.
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