FOR some years now, Asean has been identified as a growth axis in Asia, together with China and India. The statistics speak for themselves. Last year, Asean overtook China as the largest recipient of foreign direct investments (FDIs), with an inflow of US$128.4 billion (RM429.6 billion), compared with US$117.6 billion into long-time leader China. FDI inflow grew 9% year-on-year in 2013, while China saw a decline of 3%.

Asean has, in a way, “benefited” from the deterioration in bilateral ties between China and Japan, especially over territorial disputes, one of which is over the Senkaku-Diaoyu islands.

Japanese companies have increasingly been diverting more of their investments away from China and into Asean. In 2013, Japan invested US$23 billion in Asean, accounting for 19% of total FDI flows into the region. Year-on-year, Japanese FDI into Asean grew 7%.

According to a recent survey by the Mizuho Research Institute, Japanese companies see Asean as a key area in which to develop their global business. Additionally, the growing FDI flows into Asean away from China is due to China’s “ageing” population relative to Asean.

Japanese investors are not the only ones eyeing Asean. The European Union remains Asean’s top investor with US$26.8 billion in 2013, up from US$18 billion in 2012. There is also rising interest from companies in the US.

The latest Asean Business Outlook Survey 2015, undertaken by Ancham Singapore and the US Chamber of Commerce, showed that US companies generally view Asean as an important market in two years’ time.

It stated that 58% of the 588 executives representing US companies in the 10 Asean countries found that the region became more important in the past two years, while 66% opined that it will become more important in the next two years. About 89% expect trade and investment to grow in the next five years.

And as 2015 approaches, the survey found that regional economic integration was at the forefront of the key issues, with a large percentage of the companies (more than half) saying they place importance on the Asean Economic Community (AEC) and developing strategies to adapt to it.

Compelling story

The Asean region as a whole has recorded one of the more robust growth rates in Asia, growing at an average of 6% over the last five years. Although growth is expected to slow in the next couple of years, economists concur that the region will still be one of the fastest growing in the world, with estimates ranging between 5% and 6%. Maybank Investment Bank, for one, estimates a GDP growth rate of 5.5% in 2015.

Asean’s expanding market, with a huge population of 620 million, and growing pool of young workers are the key reasons the region is an attractive proposition for investors. Taken as a grouping, it is the third largest market in Asia after China and India, with a combined GDP of US$2.3 trillion.

According to Asean Briefing, the region is undergoing a period of demographic dividend, where the ratio of employable workers rises against the number of dependents. It notes that 60% of Asean’s population is below 35 years of age. By 2020, the population is expected to rise to 650 million, of which 50% will be under 30. And by 2030, 51% of the population will be in the middle class.

Another big catalyst is economic integration, which is being realised through the AEC, experts say. The AEC is targeted to come into being on Dec 31, 2015, but it effectively begins from Jan 1, 2016.

Bob Hekkelman, CEO of JWT Southeast Asia, has this to say. “The drivers for the positive outlook go beyond the AEC. Asean is home to a large, young, digitally savvy and upwardly mobile population. Half the population of the seven major markets will be in the middle class by 2030, and that’s going to have an impact on the kinds of brands, products and services they buy.”

Hekkelman’s enthusiasm is fuelled by the fact that consumer sentiment in key markets is high. “Our research shows there’s a sense among Asean citizens that ‘It’s our time’.”

He cites GFK Research, which opined that the Philippines and Indonesia are the most optimistic countries in the world. “The movement towards economic integration will only build on that momentum,” he says.

The rise in consumer spending, economists say, will spur greater intra-Asean trade and offer good incentives for companies well positioned to tap the opportunities. A useful statistic to note is that five out of the 10 Asean member states have a population of more than 50 million, with a growing middle-class segment.

Today, Asean consumer markets are among the most vibrant in the global economy, making them huge vehicles for consumer goods.

Understandably, Asean trade is on the rise. DBS Research notes in a recent report that Asean 5 (Singapore, Malaysia, Thailand, Indonesia and the Philippines) trade flows are likely to rise to US$1,500 billion over the coming decade, accounting for 21% of total trade flows in the 10 biggest economies of Asia.

“Within Asean, growth is fairly distributed between Indonesia, Malaysia, Thailand and Singapore, which account for 93% of the total flows,” according to the report.

Be that as it may, intra-Asean trade has not been up to the mark and this is where the AEC will play a role. Statistics show that intra-Asean trade has risen just 4.4% since 1998, stagnating around 25% of total trade between 2003 and 2011.

The “Asean Rising” story is not new. In March last year, Bank of America Merrill Lynch economist Chua Hak Bin wrote in a research report, “FDI into Asean has risen strongly in recent years, converging with FDIs to China. This is a sharp contrast to a decade ago, when there were widespread fears that Asean would be marginalised by China’s rise.”

Back then, Chua was already optimistic that Asean FDIs would be robust. He explained, “Forces driving FDIs into Asean are not just functions of domestic factors, such as growing domestic markets and greater liberalisation. Asean’s efforts to form a single market and production base by 2015 will bring lower trade and investment barriers, and economies of scale.”

So far, Chua has been proven right. FDI has continued to flow in. The World Investment Report 2014, recently released by the United Nations Conference on Trade and Development, notes that in 2013, five of the top 10 recipients of FDI in Asia were Asean members — Singapore, Indonesia, Malaysia, Thailand and Vietnam.

The strong inflows are a result of rising cross-border corporate exercises, like mergers and acquisitions (M&A), an increase in intra-Asean investment and trade, as well as ongoing efforts in regional integration and free trade agreements.

Will the AEC become a reality in 2016?

There has been a great deal of expectations built around the AEC since the region’s economic integration was put on the fast track in 2007, shortening its implementation date to Dec 31, 2015, from 2020.

The Asean blueprint that details the road map to the AEC was unveiled in 2009. The AEC is based on four pillars:

• a single market and production base;

• a competitive economic region;

• integration into the global economy; and

• equitable economic development.

By 2016, the AEC is expected to become a single market with a free flow of goods, services, investments and skilled labour. AT Kearney says in a report that the AEC will be a game-changer, as companies will have unprecedented access to markets and at the same time, face unprecedented competition. “With limited growth opportunities elsewhere, Southeast Asia remains one of the world’s few unsullied growth stories,” it adds.

Certainly, the AEC’s raison dêtre is sound — it will help Asean be a more dynamic and competitive region. “Asean corporate and political leaders understand that if this region wants to capitalise on the growing interest in the region, then it needs to offer a compelling story. A free trade bloc of this size, and this stage of economic development, is very compelling indeed,” says JWT’s Hekkelman.

The AEC will eventually benefit consumers. “Tariffs have been falling under Asean’s staged approach for some years, and that’s already made goods, from motorcycles in Indonesia to cars in Thailand, more affordable. Consumers will not only enjoy more competitive prices but also the benefits of living in a market with more competition, which ultimately means better customer service, more choices and better quality. When more global and regional players enter the market, local players will up the game,” according to Hekkelman.

In fact, the private sector has been taking the initiative by positioning themselves in preparation for the AEC. Many companies, such as Maybank and AirAsia, are already Asean entities.

The lack of progress, market observers say, is more due to lethargy from the governments, mainly because national agendas have taken precedence over the AEC.

While there is good progress in lowering trade barriers, hurdles remain in the non-tariff barriers, especially in services and financial liberalisation. It is here that a stronger push and political will are sorely needed.

The question now is whether the AEC can be launched according to the timeline.

Only 4% of respondents in the Asean Business Outlook Survey 2015 believe the AEC will come into effect at end-2015, compared with 23% a year ago. About 52% think the AEC will likely happen after 2020.

Generally, the view is that the main stumbling blocks on the AEC road map are a mismatch between political agendas and the bigger Asean picture. Dr Nimnual Piewthongngam, deputy director of Asean Strategy at the E-Saan Centre for Business and Economic Research at Khon Kaen University, opines that the slow progress is understandable because the region is trying to integrate financial and banking systems and create freer movement of capital among the 10 member states, which have different backgrounds and varying levels of development.

“For instance, Singapore is an Asean financial hub and perhaps one of the financial hubs in the world, but Myanmar does not even have a stock exchange yet. In addition, we use different currencies and banking systems.

“Each country has its own laws and regulations, which add more difficulty to the tasks. We need to synchronise our laws and regulations to have the same standards and formats. [Imagine putting] a country that has a mature financial and banking system on the same table as Laos, Myanmar and Cambodia, which still need a lot of development and support. It will never be easy to integrate financial and banking systems and create freer movement of capital.”

Even so, Nimnual believes it is time to really push forward the action plans the member states have agreed to. “There will be many challenges and changes, but if we keep talking and not moving or taking any action, the freer movement of capital and financial and banking integration will be just a dream that never came true. In conclusion, the biggest stumbling block is the lack of a solid joint initiative to make it happen.”

JWT’s Hekkelman isn’t too worried about the AEC not meeting the schedule. “The AEC may not unfold exactly on time or fully to schedule, but there is no doubt that it will eventually reach its destination.”

One thing is certain, he adds. “Greater economic integration is inevitable. Our view is that companies and brands need to recognise what’s coming, and plan ahead if they want to emerge as market leaders.”

The good news is, the private sector in some Asean countries has taken the initiative by being more proactive in pushing the AEC agenda, and many of the companies are on their way to becoming regional forces.

This article first appeared in The Edge Malaysia Weekly, on November 17 - 23, 2014.

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