Are you ready for Asia, the world’s largest consumer market?
By Chris Devonshire-Ellis
Asia, home to more than four billion people, accounts for about 56%of the world’s population. Long considered a source of cheap labour, Asian demographics are changing, especially in China, India and the Association of Southeast Asian Nations (ASEAN). The expectations for 2015 are that significant changes will occur as wealth grows and important free-trade agreements kick in, thereby making the region an economic powerhouse that will drive the global economy.
In particular, ASEAN is gaining in importance as a trade bloc. It is now the third largest in the world after the European Union (EU) and the North American Free Trade Agreement. Comprised of Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam (the ASEAN 6) – with smaller players such as Brunei, Cambodia, Laos and Myanmar – it has a combined gross domestic product (GDP) of USD2.31 trillion (2012) and is home to some 600 million people.
The ASEAN bloc has largely cancelled all import and export duty taxes on items traded within itself, with the exception of Cambodia, Laos, Myanmar and Vietnam, who continue to impose nominal duties on certain items. However, these duties will be completely lifted as of 31 Dec. 2015, and then the entire region will be duty free.
This has significant implications for the global oil and gas industry, in addition to the downstream industries that trade products manufactured from these raw materials. The ASEAN free-trade bloc has additional significance because it has entered into a number of free-trade agreements with other Asian nations, thereby radically altering the global sourcing and manufacturing landscape. It has a treaty with China, for example, that has effectively eliminated tariffs on nearly 8,000 product categories, or 90% of imported goods.
These favourable terms have taken effect in China and in the original ASEAN members. Cambodia, Laos, Myanmar and Vietnam will also implement these terms by December 2015. This free trade – the abolition of tariffs – includes products and services of specific interest to the industry. Accordingly, it specifically impacts sales capacity as well as where the oil, gas and related manufacturing industries are heading in the future.
At the heart of this change is China, which, for the past 20 years, has enjoyed a “worker dividend” of cheap, young labour, making it into the world’s manufacturing hub. China’s economy has grown strong and continues to grow. Cheap labour is a thing of the past because China is now emerging as a vast consumer market. The middle class population was estimated to be at 250 million in 2013, and this number is set to explode to 600 million by 2020.
As a result, the current 6% of non-crude oil products out of the total ASEAN sales to China – at an estimated USD400 billion in 2014 – can be expected to sharply increase. China is energy commodity poor, and it imports far more non-crude products than it exports.
Therefore, the manufacturing trend is to continue to develop products destined for this huge consumer market yet place the manufacturing capacity required to do so in a cheaper location. ASEAN’s free-trade agreement with China allows regional companies and multinational corporations (MNCs) involved in Asia to do just that. For instance, Foxconn, manufacturer of many of the components that end up in Apple’s products, is currently in the process of shifting its 1.3 million-strong workforce out of China to Indonesia, where wages are lower and a large and available workforce exists. It is a sound strategy and one that is being increasingly adopted by many manufacturers across a range of industries.
When Vietnam comes into full play with the ASEAN treaty in just under a year’s time, it will particularly increase its manufacturing capacity for the Chinese market. Vietnam has also deliberately positioned itself to take advantage of the treaty with China by reducing its corporate income tax (CIT) rate to 22% – three percent lower than in China – with an additional lowering of the CIT rate to just 20% in early 2016.
Vietnam, Indonesia and other ASEAN countries are benefiting from the China FTA by being able to offer lower wages. Therefore, they are attracting foreign investment for the Chinese market from global destinations such as the EU and the U.S. There has been some resistance to this, not least where the subject of China’s superior infrastructure is raised. However, countries across ASEAN have been upgrading their infrastructure, especially the ASEAN 6.
As a general rule of thumb, despite the production capability being reduced in some ASEAN nations when compared to China, it makes economic sense to place manufacturing capacity into the ASEAN 6 if production levels can reach 70% of that achievable in China.
ASEAN has a similar FTA with India, which is being phased in and is in the process of reducing tariffs on 90% of all traded goods between ASEAN and India. Come 2016, import/export duties on more than 4,000 products will be abolished. This will have a similar effect to the China FTA in that it opens up the Indian consumer market to ASEAN manufactured goods. Again, this includes a significant portion of non-crude products as well as implications within the service industry.
India, in fact, has a sizeable middle class consumer market of some 250 million, although it is not expected to grow as fast as China’s in the short term. ASEAN-India trade is increasing by about 16% per annum and is currently about USD100 billion. To put that into context, that is about the same volume of trade as the U.S. sells to China every year. Yet, India is a high profile supplier to ASEAN – a whopping 37% of that figure is in the form of crude oil products with 6% going the other way.
These two agreements have the collective impact of making ASEAN the strategic hub for global sourcing and manufacturing with services close behind. With ASEAN’s own middle class consumer base of 150 million, this market coupled with China’s and India’s represents a total middle class consumer market with complete free trade of some 650 million people. By 2030, given Asia’s increasing wealth and dynamics, some 64% of the global middle class population will be based in Asia, accounting for 40% of all global middle class consumption.
In addition to the China and India FTA, ASEAN has a combined FTA with Australia and New Zealand, known as the AANZFTA. The deal has so far eliminated tariffs on 67% of all traded products between the regions and will expand to 96% of all products by 2020. It is the first time ASEAN has embarked on FTA negotiations that cover all sectors, including goods, services, investment and intellectual property rights, making it the most comprehensive trade agreement that ASEAN has ever negotiated.
Further ASEAN treaties are in the process of negotiation, not the least with Japan, which already has a series of Comprehensive Economic Partnerships while South Korea already has an FTA. Both of these are along similar lines to those mentioned above – the reduction of more than 90% of tariffs on all traded goods between ASEAN and these countries.
For international businesses, the ability to take advantage of ASEAN status and the FTA benefits is simple: All that is required is for the foreign investor to establish a subsidiary in one of the ASEAN nations. It is a geographical qualification only. Because the region, including China and India, is huge, it is Singapore that has developed as a regional Asian hub to reach out across ASEAN and beyond and provide management, financial and other support services to subsidiaries throughout the area.
Incorporation in Singapore is quick and easy. It is regularly positioned as first in the World Bank Global Ease of Doing Business Rankings because the city-state employs a high degree of international standards in law and compliance. Singapore also offers a low tax base of 17% CIT and provides tax incentives for all small and medium enterprises (SMEs) – including foreign investors. As a result, some 7,000 multinational corporations have already established operations in Singapore for the sole purpose of looking at what ASEAN has to offer: the suitability of its various member states for establishing subsidiary manufacturing facilities and the emergence of ASEAN as a production base from which to reach out to the domestic markets of China, India and beyond.
Both manufacturers of products and those involved in the oil and gas service industry should take a strategic assessment of ASEAN and its free-trade impacts upon China and India. Asia awaits, and CEOs and CFOs looking to get some serious growth into their corporate bottom line performances would be well advised to keep abreast of the Asian developments and opportunities that are arising in this fast-evolving global dynamo.