For investors, Southeast Asia touts alternatives to China's workshop

The Philippines, Vietnam, and Indonesia are building infrastructure and dangling tax breaks for foreign investors at a time when the cost of doing business in China is rising. 

Global electronics giant Seiko Epson is opening a giant factory south of here that will make film projectors and inkjet printers. For the Philippines, a laggard in Asia's rapid industrialization, such investments could help ease the unemployment that manifests itself in shantytowns along trash-filled rivers. 

The Philippines is starting to divert foreign investors like Seiko Epson away from China, where they have long had a presence. 

As China grapples with a steady rise in labor costs and a slump in consumer demand, Southeast Asian countries are scrambling to upgrade their infrastructure and sweeten investment policies to lure foreign firms.

Companies from Japan, Taiwan, and the United States have been expanding in Southeast Asia over the past five years, giving the region what officials say is added economic clout as an alternative to China.

“This is something like additional icing or a bonus for companies that are seeking to get out of China and look for another production hub,” said Benedict Uy, a Philippine trade representative in Taipei. “Given the uncertainties in China, sometimes they have to have a backup facility.”

Creating momentum 

To be sure, Southeast Asia faces shortages of talent and infrastructure as well as rules that may discourage foreign capital. 

But factory expansions are expected to boost jobs and spending in Vietnam, Thailand, the Philippines, Cambodia and other regions that have been relatively impoverished – and begin to create economic momentum. Meanwhile, China’s economic growth last year slowed to 7.4 percent, its lowest in nearly a quarter century.

“There is an opportunity for the rest of Asia to say ‘hey there is room for investment in the region and not just China,” says Song Seng Wun, regional economist with CIMB Research in Singapore. “Even little Laos and Cambodia are considered alternatives.”

The shift dates roughly to 2011 and is partly about cutting costs. Until then, a fast-growing China seemed the obvious locale in Asia for reasons of cost, skilled workers, and a massive domestic market, analysts say.

But today Southeast Asian nations have begun to accentuate their own positive qualities, and are engaging in what can be as much a competition with each other, as with China’s “workshop of the world.”

Vietnamese factory workers, for example, are paid 20-23 percent less than Chinese peers, says Ralf Matthaes, a partner at Infocus Consultants in Ho Chi Minh City. Vietnam, which had struggled to tame inflation and stabilize its currency, is seeing a surge in foreign investment, including a 60 percent year-on-year jump in the fourth quarter of 2014. 

Indonesia is also targeting investors, including Taiwanese electronics contractor Hon Hai Precision, with a large and increasingly wealthy consumer base and government support. Hon Hai, which assembles iPhones in China, plans to build a $1 billion plant in Indonesia. 

The Philippines touts its English proficiency. Fluency in the country’s national language is ideal for writing product manuals for overseas customers. It also offers wages that are 40 percent lower than China’s minimum, and signed an agreement last year with the European Union that mandates cuts in import tariffs on more than 6,000 Philippine products.

Upgrading infrastructure spending

It is also beginning to spend more on its creaky infrastructure. The government has earmarked 5 percent of GDP next year for roads, ports, and commuter rail. 

In Manila, a nearly mile-long elevated expressway is now under construction that will funnel cars from its international airport over jammed surface roads and grey crumbling buildings to a toll highway. The road zips south to industrial sites in Batangas province, two hours away.

And the Philippine campaign is paying off. Taiwan-based Kinpo Electronics spent $30 million to expand in the Philippines last year and will lay out the same amount this year. Japanese bike parts maker Shimano Inc. has set up a $29 million, 32-acre factory complex in the Philippines. 

Along with Seiko Epson, firms such as Brother International, Canon, and Lexmark Corp have all bypassed China expansions for sites on Luzon, Mr. Uy says.

The $103 million Seiko Epson factory will open in early 2017 alongside the company’s existing plant in Batangas and add 7,500 jobs.

“We were fortunate in that there was a lot of available land adjacent to the current plant,” Seiko Epson spokesman Alastair Bourne says. “Of course we value factors such as the support of the local authorities and the quality of the workforce.”

As the Monitor reported March 9, Microsoft is planning to relocate its China-based Nokia cell phone division factories to Vietnam, with the siphoning off of at least 9,000 jobs. 

The Philippines is also promoting its food and beverages industry, as well as trying to lure more bicycle makers in the wake of Shimano's move. 

“In the past couple years manufacturing has picked up, and we see that as a positive development because that is one of the engines of growth and jobs,” Asian Development Bank’s Manila-based principal country economist Sona Shrestha says. “That sector had not been performing well.”

Foreign direct investment in the country rose from $3.9 billion in 2004 to $6.1 billion in 2013, government statistics show. To put that in context, China reported foreign investment of $119.6 billion last year alone, and expects a similar commitment in 2015. 

The Philippine government has set a goal of creating one million jobs per year, largely through new industry, as unemployment hovers above 6 percent. About a quarter of the Filipino population lives in poverty.

But further effort required

To become a true alternative to China will require further effort. The Philippines must make good on its infrastructure budget, which has lagged Asian peers until now, while cutting the high cost of energy and transportation, analysts caution. Some offshore investors are deterred by laws that require equity-sharing partnerships with local companies.

“It’s very important that people realize we need to liberalize our constitution to allow 100 percent foreign,” says Jose Mari Lacson, head of research at Campos Lanuza & Co., a Manila stock brokerage. Investors can run into problems, “if they meet the wrong Filipino partner.”

Indonesia is trying to overcome congestion on roads and in seaports while expanding access to power and drinking water. Vietnam faces talent shortages and infrastructure constraints as it seeks to bring in more high-tech manufacturing following billions of dollars in investments by Intel and Samsung Electronics since 2010.

Beijing is unlikely to fight the outflow. It wants to be less reliant on exports as part of its “new normal” of slower, more sustainable economic growth. China hopes to rely less on foreign-invested export manufacturing, instead leaning on consumer spending and growth in non-polluting, high-value industries.

“China will probably not stand in the way, given that it is trying to steer its manufacturing sector towards more knowledge intensive activity,” says Wai Ho Leong, regional economist with Barclays in Singapore.