How manufacturing and clean energy can power Asean’s economic future

Southeast Asia, at the heart of two major free-trade areas, is becoming a vital alternative to Chinese supply chains and manufacturing
Its massive need for renewable energy, coupled with huge reserves of critical minerals and resources, also means huge opportunities

Ecaterina Bigos

Published: 12:30am, 18 May 2023

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Leaders of the Association of Southeast Asian Nations gathered in Indonesia last week for the 42nd Asean Summit. In the chairman’s statement, the 10-country political and economic bloc said it was “determined to make Southeast Asia the centre of regional economic growth and an engine for global growth through robust cooperation, including in the food, energy, health and finance sectors”.

Despite macroeconomic headwinds, including persistent inflation in some countries, a likely global economic slowdown and weaker demand, there are indeed strong fundamentals driving long-term growth in this potential powerhouse – Southeast Asia’s proximity to China, its land mass and access to considerable natural resources. In particular, the manufacturing and renewable energy sectors could represent key growth engines for the region and may benefit more broadly as the region develops.

Manufacturing is an approximately US$14 trillion industry and accounts for around 15 per cent of the global economy. There are multiple steps to making any product, from aeroplanes and refrigerators to a pair of trainers. Sub-components are sourced from just about everywhere, and manufacturing trade flows are deeply interconnected. They depend on just-in-time schedules.

Greater connectivity in manufacturing has been facilitated by decades of globalisation. However, protectionism, disagreements over critical technologies and the abrupt dislocation of supply chains caused by the Covid-19 pandemic have raised questions over whether the business model for global manufacturing is still fit for purpose.

For decades, foreign companies have used low-cost-country sourcing strategies with a strong focus on China. But companies are increasingly looking towards Southeast Asia as an alternative to Chinese supply chains and manufacturing. With decoupling gathering pace, Apple, for example, has encouraged its suppliers to move production out of China and now a significant proportion of AirPods are made in Vietnam.

Another electronics giant, Samsung, stopped its smartphone, television and personal computer factories in China in 2019 and 2020. Its global production is now based in Vietnam. Sportswear brands such as Nike and Adidas have also shifted a significant part of their production from China to various Southeast Asian countries such as Vietnam, Thailand and Indonesia.

Samsung’s Thai Nguyen manufacturing complex in Vietnam. The South Korean electronics conglomerate has made Vietnam its production base. Photo: Handout

Factors driving this shift include China’s rising labour costs, which have doubled between 2013 and last year. Meanwhile, broader geopolitical pressures, including sustained US-China trade tensions, are helping to reconfigure global supply chains in the region’s favour – one estimate suggests new trade volumes for Southeast Asia could amount to US$1 trillion by the end of 2031.

The region is set to benefit as companies increasingly seek to expand their operations away from a wholesale reliance on China, in a “China-plus-one” strategy. Southeast Asia offers strong manufacturing capabilities, global trade connectivity, low-cost structures and sits at the heart of two major free trade areas.

China’s loss is Southeast Asia’s gain as supply chains shift

The region does not yet rival China’s supplier networks or production capabilities. While it may be a long way from fully realising its manufacturing potential – needing more efficient regional supply chains and infrastructure – efforts have begun in countries such as Singapore, Malaysia and Vietnam, with industry road maps and strategic plans.

Providing the region continues or increases its uptake of advanced manufacturing and Industry 4.0 systems to remain competitive, this could help drive meaningful investments in robotics and automation, particularly next-generation robotics, cloud computing and advanced logistics services.

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Besides manufacturing, renewable energy is another area that could be the potential growth engine in Southeast Asia.

Renewable energy generation in Southeast Asia has more than doubled between 2000 and 2020. Southeast Asia’s growing energy consumption, driven by its rapid economic growth and expanding population, offers much potential in the renewable energy industry. As the world’s fourth-largest energy consumer, and against the backdrop of rising global temperatures and energy costs, the region has a strong impetus to ramp up renewable energy use, backed by a supportive policy environment and wider global momentum.

Despite the massive increase in renewable energy generation, fossil fuels still constitute most of Southeast Asia’s energy mix. To accelerate the region’s energy transition, supporting technological innovation and the scaling up of related infrastructure is essential.

G20: Indonesia signs US$20 billion deal for ‘promising path’ to clean energy

Southeast Asia is rich in the critical minerals needed to produce clean energy technologies and sits on vast untapped geothermal, wind, solar and hydropower resources. For instance, Indonesia and the Philippines together produce about half the world’s nickel and sit on almost one-fourth of its geothermal generation capacity.

With the necessary value chains, revenues from the region’s production of critical minerals could grow by two-and-a-half times by 2050, while solar and wind energy projects could represent a US$30 billion opportunity by 2030. Sustainably harnessing these resources could bring opportunities within new domestic value chains and industries, with potential long-term rewards for investors and Southeast Asia’s economies.

Ecaterina Bigos is chief investment officer of core investments (Asia ex Japan) at AXA Investment Managers

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