Winning in ASEAN: How Companies Are Preparing for Economic Integration

Winning in ASEAN: How Companies Are Preparing for Economic Integration

          
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Winning in ASEAN: How Companies Are Preparing for Economic Integration

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  • When six members of the Association of Southeast Asian Nations (ASEAN) decided to form a trade bloc in 1992, hopes were high that the region was poised to move to the forefront of the global economy and form one of the world’s greatest emerging markets. The global free-trade movement was at its height, and Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand were at the epicenter of a great Asian economic boom. Then came the 1997 financial crisis, which plunged the region into a deep recession. Southeast Asia recovered but was soon overshadowed by the economic upsurge of Asia’s two giants: China and India.

    Yet Southeast Asia is back in the sights of global corporations once again. Local companies generated rapid growth in the region during its years out of the global limelight; it is one of the world’s best-kept secrets, as we have maintained since 2012. The combined GDP of ASEAN—which has since grown to ten countries with the addition of Cambodia, Laos, Myanmar, and Vietnam—is projected to nearly double by 2020 as an estimated 120 million people join the middle and affluent classes. Progress toward regional integration, meanwhile, has continued quietly but steadily. Indeed, ASEAN governments have set a goal of achieving the free flow of goods, capital, and labor by the end of 2015.

    Whether ASEAN will achieve this ambitious target on schedule is uncertain. Even so, rising international trade and investment are steadily binding together the highly diverse economies of Southeast Asia and creating enormous new opportunities for globally minded companies. Our research found that companies both within and outside the region are remarkably bullish about what integration will mean for their businesses and industries, as well as for Southeast Asian economies. In fact, most of them are actively preparing for integration.

    To assess how businesses view ASEAN integration, The Boston Consulting Group undertook an extensive study of companies’ sentiments in 2014. We surveyed several hundred top executives of companies of all sizes, based both within and outside the region, and also gauged the opinions of senior government officials. The companies in our study represented a wide range of industries, including energy, consumer products, industrial goods, financial services, and telecommunications. The sample also included a mix of companies with strong footprints across Southeast Asia as well as those with a more moderate or limited regional presence.

    The key findings include the following:

    • Optimism is high. Roughly 80 percent of the companies we surveyed regard ASEAN integration as an opportunity for their businesses and believe that it will accelerate economic growth in their industries—even though only 25 percent are confident that the region’s governments will continue to push the integration agenda forward. Large, internationally minded Southeast Asian companies and multinationals are particularly bullish.
    • Companies intend to expand regionally. Around half the companies we surveyed expect to have a strong presence in at least five Southeast Asian economies within the next five years, compared with one-quarter that have such a presence now.
    • Competition is expected to intensify. Eighty percent of companies are bracing for tougher competition in their industries as a result of integration, and around 70 percent predict that this will encourage companies based in Southeast Asia to become more international and more globally competitive.
    • Companies are already mobilizing. Whether they regard integration mainly as an opportunity or a threat, the vast majority of companies are taking a range of actions to improve their competitiveness. More than 70 percent are working to increase penetration in their current Southeast Asian markets and to expand across the region. More than half are adjusting their product and services offerings, while around two-thirds are internationalizing their organizations, investing in foreign talent, improving their M&A and joint-venture capabilities, and upgrading their regional supply chains.
    • Some countries are gaining competitive advantage. Around 90 percent of companies based in Malaysia and Singapore expect to expand their regional footprints over the next five years. Perhaps not coincidentally, the governments of both nations have also implemented the greatest number of measures to boost the competitiveness of domestic companies. The measures include helping small and midsize enterprises (SMEs) prepare for integration and tightening protection for intellectual property rights.

    Yet even with more integration, companies won’t be able to operate across Southeast Asia as seamlessly as they do in, say, Western Europe. Few strong regional institutions link this highly diverse group of nations, which are all at different stages of development and have their own languages, cultures, and political systems. They also face varying business risks.

    The winners of ASEAN integration—in terms of both companies and economies—will therefore likely be determined by how successfully the private and public sectors work together now and over the medium term to improve competitiveness. Companies will have to build international, culturally diverse organizations and learn how to tailor their product and services offerings and business models to local conditions. Governments should ensure that their economies are competitive and attractive to foreign enterprises by improving the ease of doing business, investing in talent and innovation, and helping domestic companies—both big and small—prepare for integration.

    Companies should not wait until ASEAN governments finish fulfilling their 2015 goals. Southeast Asia has become a region that few global companies can afford to ignore. Through trade and investment, private companies will continue to bind the region together, even without significant new government action. The chief challenge for Southeast Asian companies and multinationals alike is to get into position to capitalize on the growing opportunities.

    Projections are based on data from the Economist Intelligence Unit and Trading Economics.
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