Will an Integrated ASEAN Region Challenge China?

ASEAN-1024x440China’s status as the global darling for foreign investment and trade is facing some competition these days from Southeast Asian nations that, while small, are forming an increasingly important economic bloc. Though the 10-member Association of Southeast Asian Nations, or ASEAN, comprises a market of 610 million people — less than half the size of China’s — the bloc’s more affluent consumers are looking increasingly attractive, especially to Japanese companies wary of risks stemming from escalating territorial disputes with Beijing.

While most Japanese companies remain committed to their investments in China, the proposed formation of the ASEAN Economic Community — an economic integration of the 10 member countries, similar to the European Union — by 2015 is especially tantalizing. From a demographic and production cost point of view, the ASEAN bloc – which includes Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Burma (Myanmar), Cambodia, Laos and Vietnam — is nudging China aside as the Chinese labor force begins to shrink and wages rise. Thailand, Indonesia and Malaysia are attracting foreign manufacturers as well as financial and other service companies drawn by the region’s quickly growing, and relatively big spending, middle class.

Japan’s investment expansion into ASEAN is expected to persist for at least the next few years, as other countries, including China and the U.S., also pour resources into the region. For the time being, however, China remains ahead in terms of FDI: China’s incoming foreign investment from the world in 2012, totaling US$121.08 billion, was still bigger than ASEAN’s US$111.29 billion, according to the United Nations Conference on Trade and Development.

Japan’s direct investment in ASEAN from January through June 2013 increased sharply, up 88.7% at 998.6 billion yen, while its FDI into China fell 18% from a year earlier to 470.1billion yen, according to the Japan External Trade Organization (JETRO). “It’s not just because of the deterioration of China-Japan relations; there are other important factors,” notes Koichi Ishikawa, an ASEAN economy specialist at Asia University in Tokyo. “ASEAN is becoming a bigger consumer market, as its middle class is growing rapidly and consumption was very strong in 2011 and 2012 in Thailand, Indonesia, the Philippines and Vietnam.” Affluent consumers are crowding into newly built shopping malls, and car and motorcycle sales hit new records in Indonesia in 2011 and 2012.

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Originally Published January 14th, 2014 by Knowledge@Wharton.