Will ASEAN countries be the ‘winners’ of Covid-19 recovery strategy?

Will ASEAN countries be the ‘winners’ of Covid-19 recovery strategy?

09 July 2020

  • Ho Chi Minh City

 

Adaptability, flexibility and responsiveness are some of the most important traits required by businesses. This was always the case but now more than ever, as countries across the world emerge from the Covid-19 pandemic and begin their long recovery process.  For many brand owners, manufacturers, distributors, retailers and wholesalers, this will involve sourcing new suppliers. Early on in the crisis, it was clear that the disruption to Chinese manufacturing meant that brands who relied solely on this nation for their products were in trouble, with stock shortfalls and bottlenecks affecting supply. Add into the mix the escalating US-China trade war and many multinational companies are now actively re-aligning their supply chains to mitigate future disruption and reduce their long-term costs.

This transition away from China was already underway before Coronavirus emerged in November 2019. According to research conducted by the American Chamber of Commerce in 2019, 40% of its members had either begun transferring outsourced manufacturing or were thinking of doing so – opting for suppliers in the ASEAN (Association of Southeast Asian Nations) countries. It means a significant boost to these economies, some of which offer a large range of attractive incentives to companies seeking outsourcing solutions for their supply chain.

All the countries in the ASEAN network have been quick to respond to these business opportunities, with attractive incentives on offer, including free trade agreements (FTAs), tax breaks including double taxation agreements and the formation of special enterprise zones.  A few nations in particular stand out for their especially promising potential as trade partners – Vietnam, the Philippines, Indonesia and Thailand.

 

Vietnam: Thanks to its fast-developing infrastructure, highly attractive trade agreements, low taxation rates and low employment costs across a well-educated and young labour force, Vietnam may become one of the biggest beneficiaries of supply chain realignment. In anticipation, it has been creating a number of Special Enterprise Zones and now has 18 coastal economic zones and 325 state supported industrial parks available to boost manufacturing and international trade opportunities.

One of the most significant benefits of working in Vietnam is the cost of labour. Workforce costs in Vietnam are around half of what manufacturers can expect to pay in China and at the same time, individual worker productivity rates have risen significantly to offer a high return on investment.

In addition, the Vietnamese government is offering extra financial incentives to companies investing in new technology to improve their operations - for instance, introducing a warehouse management software system to automate picking and putaway processes in the warehouse or distribution centre. This is an important benefit for multinationals and local companies considering an investment in a WMS solution. Even though labour costs to run a warehouse may be relatively low, a WMS is regarded as a pre-requisite for quality assurance, or track and trace purposes by international manufacturers who are seeking outsourcing partners. Many large brands have already started or expanded their manufacturing into Vietnam, accelerating a trend that began some years ago when Chinese inflation pushed manufacturers to seek cheaper locations. Electronics manufactures Dell, Kyocera, Sharp, Ricoh and other industrial brands are shifting some of their manufacturing into Vietnam.  Consumer brands are sourcing from Vietnam too, which is highly regarded for garment and footwear manufacturing. Nike were the first big brand to outsource from Vietnam in the ‘90s and by 2018, the country was responsible for 47% of all production.

In addition to Vietnam, other ASEAN countries that appear especially attractive for manufacturers looking for an outsourcing partner include Indonesia, Thailand and Philippines. They too have numerous government funded incentives to stimulate incoming investment.

 

Indonesia: Like Vietnam, Indonesia’s government has launched a range of tax incentives for businesses that invest in labour intensive industries, training programmes and local R&D. Most recently this has been expanded to include more industry sectors as the country works towards improving the skills of its workforce and advance local industries. Textile manufacturers and companies involved in the production and distribution of commodities are especially well supported.

Although Indonesia’s rate of corporation tax is already competitive at 25% of profits, this is set to be cut to 20% by 2021 to further encourage international investment. The level of GDP measured per worker in Indonesia is almost double that reported in Vietnam and the country has arguably the highest potential of all the nations in the ASEAN partnership. Currently, Indonesia has 13 SEZs (special economic zones) which are distributed across the archipelago to serve specialised industries including manufacturing, agriculture and natural resources. Special incentives including tax holidays exist for companies who want to utilise these SEZ facilities, as the country actively works to attract US $50billion in SEZ investment by 2030.

 

Philippines: In 2019 the Philippines government introduced a large-scale tax and incentives policy, reducing its levels of corporation tax from 30% to 20% over the next decade. This is intended to attract inwards investment, stimulate jobs and boost the local economy by making local SMEs more globally competitive. Other new policies coming to fruition which will be attractive to international investors include a relaxation to the existing policy of  having to employ a higher proportion of local talent and widespread infrastructure development outside of the Metro Manila areas.  The existing rule prohibiting foreign investors to 100% own local companies will be relaxed to further encourage investment.

Like Indonesia, the Philippines also reports a higher than average GDP per worker and according to a report by Deloitte that the country is expected to outperform the whole region over the next 20 years.  The Philippines also has 12 SEZ or free port areas and another 300 additional special economic zones spread throughout the country, with an emphasis on manufacturing and digital technology parks

 

Thailand: Thailand now operates a very attractive trade stimulus package, Thailand Plus, which launched in September 2019. This includes tax incentives and policy reforms designed to make it easier for foreign companies - and in particular those in the high value manufacturing sectors - to do business effectively. Although Thailand already offers corporation tax relief to international companies, they will be eligible for additional tax reductions as part of this new initiative, provided they invest US$32 million by the end of 2021.

The country is also offering a 150% CT reduction to companies who employ local highly skilled personnel in STEM fields if they reclaim training expenses in the 2019-2020 tax year and a 200% tax reduction for investments in robotic business automation. After Vietnam, Thailand has become the second biggest driver of regional productivity growth in the last decade and this is expected to be sustained thanks to ongoing positive initiatives being launched by a forward-thinking government. In terms of SEZ investments, Thailand has targeted 13 priority sectors to be developed, including automotive spares and defence manufacturing, plus the production of textiles and garments. In return for their investment, businesses are able to benefit from a range of tax incentives including a corporation tax exemption for eight years and a further 50% reduction for five years.

Potentially, the Covid-19 outbreak will stimulate a new era for multinational companies and European brands looking to create new manufacturing partnerships in the ASEAN region. In doing so, they will ensure the future protection of their supply chains and help to accelerate growth in some of the fastest growing economies in the world.