The emergence of an integrated market with a population of 600 million — third largest in Asia following China and India — is expected to encourage Japanese companies to accelerate direct investment into the countries that make up the Association of South East Asian Nations (ASEAN).

Upon formation of the ASEAN Economic Community (AEC) and the expected further integration of the ASEAN economies, Japanese companies are likely to expedite development of markets there and realign production bases, according to researchers.

Under the AEC, formed at the end of last year, ASEAN member counties — Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam — are to proceed with further integration of their economies, aimed at the creation of a single market and production base by securing a free flow of goods, services, investment and workers.

When this economic community is finalized, member countries will guarantee liberalization of the flow of people, products and money within the organization, much like the European Union, albeit without a unified currency.

The population of ASEAN countries stood at 604.8 million in 2010 and is forecast to grow to 706 million by 2030, according to U.N. estimates. That compares with the 1.34 billion population of China in 2013 and India’s 1.24 billion.

“A growing market offers business opportunities not only to large companies, but also to medium and small-sized companies as well,” said, Ryo Ikebe, director, the Asia and Oceania Division of the Japan External Trade Organization (JETRO). “In addition to automotive-related companies, those engaged in processed food have shown strong interest in either starting businesses or expanding current operations in the region.”

Immediate beneficiaries

The beneficiaries of the integrated economies and the unified market are not only manufacturers, but also those engaged in service sectors, regardless of industry. Ikebe said a wide variety of service industries such as restaurants, beauty salons, wedding coordinators and specialty retailers of private label apparel are moving into the region.

While opening service sector markets in the region is somewhat lagging, researchers say the most immediate near-term beneficiaries of the integrated economies are manufacturers thanks to faster administrative process and reduced tariffs on trade. The thing Japanese companies engaged in business in ASEAN want is simpler administrative and customs processes.

In a JETRO survey for the fiscal year ended March 2015, 71.3 percent of Japanese manufacturers doing businesses in the region said they expect the AEC to simplify customs procedures, in particular those in Indonesia and Laos.

The final phase of the plan — complete free flow of goods, money and people — will be achieved through several steps, a preliminary one being the elimination of tariffs by member countries. ASEAN had already abolished many tariffs and other barriers between member states, and as for trade between them, 96 percent of the products are already tariff free.

This would encourage Japanese manufacturers to realign their existing production facilities, or concentrate them in one specific country to make the best use of geographical or infrastructural advantages of each of the member countries, researchers said.

Reshuffling production facilities

One example of such moves can be seen in Vietnam’s auto market, where there are high tariffs on imported cars.

After Vietnam abolishes the tariff in 2018 as planned, Japanese carmakers may shift their car production and assembly bases in the country to Thailand, where the Japanese auto industry has already built up an advanced industry cluster. This is because the elimination of high tariffs in Vietnam would make Thai-made cars cheaper than those made in Vietnam.

The auto industry cluster in Thailand is a typical example of Japanese companies’ years-long investment in the country. According to the balance of payment statistics released by the Bank of Japan, Japan’s accumulated direct investment in Thailand alone totaled ¥3.92 trillion at the end of 2014, compared with ¥8.46 trillion in China.

In fact, Japanese companies have been building up similar industry clusters in other ASEAN countries for years, Koji Sako, a senior researcher at Mizuho Research Institute Ltd., pointed out in a report released in October.

There are transport machinery clusters in Indonesia, which sustain robust domestic demand, clusters of chemical and pharmaceutical industries in Malaysia where relatively advanced infrastructure is available, and electric machinery clusters in the Philippines and Vietnam that have direct geographic access to southern China, a region regarded as a source of electronics parts and components, according to Sako’s report.

“After the formation of the AEC, Thailand is likely to raise its presence as a core factory site in the ASEAN region,” Sako said. “At the same time, further investment increases are expected in business fields where industry clusters progresses.”

Frontline of exports

Some researchers insist those existing integrated facilities should be used as the frontline of Japanese companies to manufacture products for export to developing nations outside the ASEAN region.

“Japan’s sustainable growth in the future requires development of new markets in emerging and developing countries, but it’s expensive to export from Japan to those markets,” Keiichiro Oizumi, a senior researcher at The Japan Research Institute Ltd., said in a report issued in November. “Japanese companies should consider utilizing the production bases in ASEAN to export to those markets.”

For that goal, Japanese companies need to make further investment to build new, or improve existing, infrastructure and product supply chains in cooperation with local companies and governments.

“As represented by high-speed trains, the type of infrastructure needed in the region is changing, in accordance with the improving economic level,” JETRO’s Ikebe said. “Further infrastructure upgrading is needed in the region, along with Japanese companies’ technology.”

Emergence of new market

The AEC brings the emergence of a new market with cheaper supply and distribution networks to reach the large population, in particular to wealthier consumers in major cities in the region such as Bangkok, Jakarta and Kuala Lumpur, researchers said.

“Wealthy consumers in those areas are able to buy products in the same price ranges as those Japan,” The Japan Research Institute’s Oizumi said in his report. “Additionally, the number of such wealthy consumers is expanding faster than we expected.”

Even so, Japanese companies should not regard the ASEAN region as “a single” market, because there remain many differences in religion, race, culture and language. This requires Japanese companies to follow a strategy of segmentation in marketing their products, as well as the need to select the right target in the right place with the right price, researchers said.

“The size of economies and business practices vary from country to country, and Japanese companies should remember that each of those countries and areas has its own unique market,” JETRO’s Ikebe said.

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