The Crisis Plus Ten (Part One): Asia's Competitiveness Landscape

When South-East Asian economies were laid low by the financial crisis of 1997-8, their vulnerability to the swift movement of short-term capital and the weakness of their banking and corporate sectors were exposed. Investors fled. Then came a surge of China fever as investors discovered the mainland’s second and third-tier cities and the impressive cost-competitive power of Chinese manufacturing fully flowered. The China machine would produce everything, relegating ASEAN to the role of purveyor of commodities and agricultural products to feed the hungry dragon, said some analysts. China would suck away FDI and South-East Asia’s factories would close, its manufacturing shifting to its giant neighbour. Recently, India’s rise has grabbed the attention of investors and raised questions about East Asia’s competitiveness in the low-cost services sector.

But South-East Asia held its own. ASEAN exports grew along with China’s, though raw material and natural resources demand from China was in no small measure responsible. Vietnam has emerged as a low-cost manufacturing platform with a skilled workforce, an attractive alternative for Japanese investors concerned about their country’s tense relationship with Beijing. According to Nguyen Sinh Hung, First Deputy Prime Minister of Vietnam, speaking at the recent World Economic Forum on East Asia held in Singapore, FDI into his country this year could increase by up to US$ 20 billion, doubling the inflow in 2006. The Philippines, meanwhile, has managed to carve out a niche in electronics, software programming, back-office and call-centre operations. Thailand has continued to be a key automobile assembly hub, while Malaysia’s electronics and semiconductor industries have thrived. Singapore has pushed itself further up the value chain, developing new industries such as biotechnology and strengthening its position as South-East Asia’s premier financial hub. Even in Indonesia, shunned by investors for years after the crisis, FDI has started to rebound. “We have seen companies that left after the crisis come back,” said Muhammad Lufti, Chairman of Indonesia’s Investment Coordinating Board. Indeed, while investment levels in crisis-hit countries may not yet have recovered to pre-1997 levels, not all of the FDI heading to developing Asia is going to China.

The scenario of an overwhelming China juggernaut has not happened. And now, among business strategists, the talk is of a “China Plus One” approach – don’t put all your eggs in one basket, even if it is a Chinese basket. “China Plus One” makes sense for three reasons, said Ko Kheng-Hwa, Managing Director, Singapore Economic Development Board, Singapore. First, there is the logical need to diversify operational risk. SARS, the tsunami, and earthquakes that have hit the region underscore how a sudden crisis could disrupt supply chains. If China’s is knocked out, manufacturers will need reliable alternatives where production can be ramped up quickly. This is especially true in these days of just-in-time production, delivery and inventory management. Second, there is the business optimization motive. Many companies including Chinese enterprises know they have to be global in scale to compete even in their home markets. And third, China and India’s rise is forcing other economies in East Asia and elsewhere to find ways to be more competitive and more attractive to investors. “Everybody is trying to replace red tape with red carpets,” said Koh.

Marketing an economy to investors has become a global game. If an economy cannot beat China on labour costs, then it must try to do so in other ways – the availability of skills, the strength of the intellectual property regime, and a workforce’s capacity for innovation could be key drawing cards. Investors setting up offshore operations do not necessarily flock to the lowest-cost market, said Joseph L. Rice III, Chairman of US direct investment group Clayton, Dubilier & Rice. Reliability and quality are important considerations since these companies keenly want to maintain or even increase the quality of their products, not just make them more cheaply.

There are many other factors for success that countries have to keep on their planning boards. China, for example, has already found that as labour costs go up in parts of the country due in part to the shortage of skilled managers and the growing affluence of the workforce, it must adjust. Affected businesses have moved to hinterland regions. Others have moved up the value chain. Indeed, China has surprised competitors by how quickly it has moved from low-end manufacturing where it dominates to more sophisticated mid-range and even high-end products where it is beginning to have an impact in the market. The Chinese leadership also understands that as energy and environmental costs mount, the country’s industries must become more efficient and innovative.

To be competitive, every economy has to take up the innovation mantra. Singapore, which regularly performs well on global competitiveness rankings, has put the cause at the forefront of government policy. “If we leave out education and skills training, then we will be stuck with the old ways of growing the economy,” explained Goh Chok Tong, Senior Minister of Singapore and Chairman of the Monetary Authority of Singapore. “For the future, you have to create wealth. To create wealth, you have to innovate.” Concluded meeting Co-Chair Carlos Ghosn, President and Chief Executive Officer of both French carmaker Renault and Japanese automobile manufacturer Nissan: “Because of the increasing weight of Asia, the number of industries and sectors where Asia is leading in innovation has got to increase.”

The winners in the globalization age will be those economies and regions that put their competitive advantages package together right and make the right policy choices. The challenge for a region such as ASEAN is that the going is only going to get tougher. South-East Asia will have to make good on its regionalization commitments and go beyond the superficial lowering of tariffs to achieve much deeper integration that truly makes the area a single, seamless market. In this respect, quality leadership and governance – actually implementing ambitious plans – could be the essential ingredient of a globally competitive economy or region. As Goh said, “if you don’t have a government that understands the importance of macroeconomic policies, investment in education, and how to manage socioeconomic divisions in a country, it would be difficult for an economy to thrive.” This plain truth applies as much to the giants of Asia – China and India – as it does to their smaller neighbours who may be scrambling to keep up.