ASEAN Keeps Growing in the Post-COVID-19 Era, Chinese Companies to Adopt

It is important to have a comprehensive strategy to take advantage of ASEAN’s integration as well as the strength of each member market to optimize resources and develop their overall ASEAN business.

Article reposted from 21CBN
Wechat account

As a result of the anti-globalization wave in recent years, the global value chain is becoming increasingly regional-ized. Despite negative impacts from the COVID-19 pandemic, investment and trade between China and ASEAN have been booming this year.

According to customs statistics, in the first five months of this year, China's import and export with ASEAN amounted to 1.7 trillion yuan, up 4.2% yoy. Among that, China's export to ASEAN was 936.62 billion yuan, up 2.8% yoy, while its imports from ASEAN was 759.86 billion yuan, up 6% yoy, both higher than the overall growth rate of China's foreign trade during the same period. Against the backdrop of the ravaging pandemic, trade be-tween China and ASEAN has highlighted its enormous resilience and great potential.

For Chinese companies seeking to expand globally, ASEAN is usually their first stop and an important market for their overseas development." said Eddie Ching, EVP and Deputy CEO, HSBC China, on 18 June during the session themed "Making the most out of ASEAN" as part of 2020 HSBC China ASEAN Corridor Webinar Series.

A combination of "local + regional" strategies

On 29 May, China and ASEAN issued "ASEAN-China Economic Ministers’ Joint Statement on Combating the Coronavirus Disease (COVID-19) and Enhancing ACFTA Cooperation", fully acknowledging the important role of ACFTA in promoting trade and investment between the two sides. The statement also pledges to maintain mar-ket openness, eliminate unnecessary trade-restrictive measures and create a favorable trade and investment en-vironment. In doing so, the statement has laid a solid foundation for promoting regional trade and investment growth and rapid economic recovery in the aftermath of the pandemic.

According to IMF’s forecast, ASEAN is expected to be one of the first regions to come out of the economic conse-quences of the pandemic.

From January to April this year, China's overall ODI fell by 3.1%, but its ODI in ASEAN grew by 43.31% yoy. "There is now a global focus on whether China and ASEAN will recover soon, as this bears on the global economic recov-ery. At the same time, against the backdrop of anti-globalization, regional economy has become even more im-portant and will prompt Chinese companies to invest and expand in ASEAN at a faster pace." said Loletta Chow, Global Leader of Chinese Overseas Investment Network, EY; Belt and Road Task Force Leader, EY China; Asia Pacif-ic Growth Markets Leader, EY on the forum.

However, for aspiring Chinese companies, the ASEAN market presents both opportunities and challenges. Each country in the region has a different profile of development and offers a unique set of advantages in resources, sectors, services and consumer market. When discussing the issue of regional strategy, Jackson Phang, Regional VP, Greater China, Singapore Economic Development Board said "So companies usually have a dual strategy in the ASEAN market. One is for specific markets, such as Malaysia, Indonesia, Thailand and Vietnam. And the other is a regional strategy so that they can coordinate local resources for purposes such as financing, talent develop-ment and innovation."

Jackson also said, "Many companies have set up ASEAN regional hubs in Malaysia and Singapore. In Singapore in particular, we see companies like Ali-cloud, Google, Envison, IBM and Bytedance setting up their regional head-quarters in Singapore, which allows them to coordinate strategic planning and execution in the region. 60% of companies entering Singapore use it as a regional hub for the entire ASEAN, or even as headquarters for their global operations."

Given the diversity and complexity of the regulatory mechanisms in ASEAN countries and the wide variation in development and infrastructure levels across the region, it is essential to develop a regional strategy for long-term success. So it is not advisable to adopt an undifferentiated strategy for ASEAN as one region.

Sandeep Uppal, Global Co-head of International Subsidiary Banking CMB, HSBC said, "Chinese companies are generally less likely to enter all ten ASEAN markets and countries at once. A more logical strategy is to start with one market or two similar markets, and then further expand to other countries with the experience and knowledge gained in the first market. This can then be followed by setting up regional offices coupled with coun-try-specific experience in a hub-and-spoke model that covers more countries in the region."

It is worth noting that ASEAN already has a regional ecosystem in terms of supply chain, "with many suppliers that have operations in the region. With that, Chinese companies no longer have to start afresh in every market they enter." added Sandeep.

Needless to say, when expanding in ASEAN, Chinese companies would also face challenges in terms of access to finance, currency fluctuations, policy changes, liquidity management, operating cost control, development of regional strategies and integration of regional resources and opportunities. On that note, Eddie said, "For com-panies, it is all the more important to have a comprehensive plan to take advantage of ASEAN’s integration as well as the strength of each member market to optimize resources and develop their overall ASEAN business. This will better enable them to enter new markets, explore business opportunities in the region and prevent risks."

As a financial services partner in ASEAN, HSBC is uniquely positioned to offer a strong regional presence, a one-stop-shop for banking services and global connectivity that can help companies grow in the region and beyond. At the same time, HSBC has established China Desks in key ASEAN markets to help its corporate customers trying to enter the regional market quickly identify local business opportunities and build local business partnerships.

Opportunities of ASEAN’s Integration and Diversity

China and ASEAN countries enjoy close ties and are each other’s major tourist destinations with more than 65 million people travelling to and from ASEAN each year. China is ASEAN’s largest trading partner while ASEAN is China's second largest trading partner.

In recent years, China and ASEAN have signed a number of trade agreements, providing institutional dividends to the growing bilateral trade. For example, in October 2019, the China-ASEAN FTA Upgrading Protocol took full effect as the outcome document of the two economies’ negotiations on FTA upgrading. Within the framework of the China-ASEAN FTA, more than 90% of goods from China and ASEAN are subject to zero tariffs.

For many Chinese companies, ASEAN is becoming a hotspot for investment that offers both the convenience of integration and diverse opportunities. As China and the ten ASEAN countries have achieved positive results in co-building "the Belt and Road", a large number of connectivity and capacity cooperation projects have been steadi-ly advanced. This has brought huge opportunities and space for Chinese companies to participate in ASEAN’s infrastructure development and related areas of cooperation.

Take the Philippines as an example. As the third largest economy in ASEAN, the country’s government launched its "Build, Build, Build" project in infrastructure development in 2017. When referring to this project, Graham FitzGerald, President and CEO of HSBC Philippines said, "Chinese companies are becoming more and more inter-ested in this and a lot of them are involved in different infrastructure projects not only as investors but also as contractors."

According to market observers, although both China and ASEAN are currently facing challenges in terms of sup-ply chain stability, their mutual willingness and motive to seek win-win cooperation have been on the rise. In the long run, Chinese corporate investments in the region are expected to maintain fast growth and cover a variety of sectors: from traditional manufacturing, real estate, mining, and public utilities to the emerging and rapidly growing sectors of e-commerce and logistics.

On 16 June, China Road and Bridge Corporation and the Bridge Bureau of the Philippine Ministry of Public Works signed a business contract for the Manila North-South Port Bridge Project. This project is the flagship project of the Philippine government's implementation of the large-scale special construction plan. The project is the flag-ship project of the Philippine government's "Build, Build, Build" program, which when completed is expected to significantly mitigate traffic congestion in the port area of Manila.

This year is also the year of China-ASEAN cooperation in digital economy. Both sides will co-host a series of events on themes including smart cities, big data, and artificial intelligence. Loletta Chow believes that in the post-COVID-19 era, the opportunities for investment in ASEAN are mainly present in digital technology, cross-border e-commerce, infrastructure and supply chain optimization.

At the same time, each ASEAN country has its own strengths, which provides a wide range of market opportuni-ties for Chinese companies "going out". For example, Singapore is strategically located in Southeast Asia and is the gateway to Southeast Asia for businesses. As one of Asia's financial centers, Singapore has an excellent busi-ness environment and a vibrant innovation ecosystem. Malaysia is a multicultural and multilingual hub with very good digital infrastructure and a pro-business environment. The Philippines has, among others, a rich and vibrant talent pool. While there are different regulations and languages across different markets, there are also com-monalities that enable companies to replicate experience gained in any one of the ASEAN markets.

According to a report by The Economist, during the Sino-US trade frictions, Malaysia was one of the biggest ben-eficiaries in sectors including IT, auto making and repair.

According to the Malaysian Investment Development Authority (MIDA), Mainland China's investment in Malaysia in 2019 was MYR15.7 billion, only after the US and ahead of Japan. Mainland China, the US and Japan together account for 66.3% of the total FDI in the country. And in the manufacturing sector, China invested MYR15.3 bil-lion in Malaysia in 2019, making it the largest source of investment in the sector for four years in a row.

Feilo, a Shanghai-based company, is a classic example. The company not only set up its regional headquarters in Malaysia but also partnered with a Malaysian company to establish a regional manufacturing hub serving neigh-boring countries and territories. When referring to the case, Muhammad Azmi Zulkifli, CEO of InvestKL Corpora-tion said, "Chinese companies can tap into the full potential of Malaysia, either through a corporate joint venture approach or through public-private partnerships. Chinese companies can not only cooperate at the federal level, but also with the states, in infrastructure projects, industrial parks and other projects."