Economist

Thriving in ASEAN
Corporate strategy in 2015 and beyond
A summary paper sponsored by

Thriving in ASEAN
1© The Economist Corporate Network 2014
1. Preface
In October, the Economist Corporate Network (ECN), part of The Economist Group, staged a gathering
of business leaders in Kuala Lumpur to discuss strategy in South-east Asia. The 10 countries that make
up the region are among the most exciting and fastest-growing economies in the world. They are also
gradually integrating into a more unified economic community under the auspices of the Association of
South-east Asian Nations (ASEAN). This integration is changing the landscape. But many other factors
are also feeding into new strategic thinking, such as rapidly changing cost structures and rapidly
deepening technology penetration.
A total of 50 companies took part in the discussion. This paper is a summary of some of the themes
and ideas that emerged from the discussion.
The meeting, and this post-event write-up, was sponsored by Hewlett-Packard. However, the
conclusions and findings presented here were compiled by the ECN and do not necessarily reflect the
views of the sponsor.
October 2014

Thriving in ASEAN
2 © The Economist Corporate Network 2014
2. South-east Asia is both exciting and
challenging
For multinationals searching the globe for business opportunities, South-east Asia stands out as
being especially exciting. A young population, rapidly rising incomes, a growing middle class, ongoing
urbanisation, and deepening industrialisation are just some of the factors driving structurally high
rates of economic growth.
Importantly, the region is also becoming much more integrated, which is adding to the region’s
attractiveness. South-east Asia has 10 economies, many of which are small on their own. But these
10 are growing ever closer and becoming a more coherent economic entity, thereby offering size and
scale.
From a bottom-up perspective, companies are stitching the region together through cross-border
trade and investment. The people of ASEAN are contributing too, through greater regional travel and
financial flows. Technology and infrastructure linkages are spreading.
From a top-down perspective, South-east Asia is becoming more integrated through the actions of
ASEAN. The ASEAN Organisation has been bringing the region ever closer since it began life in 1967.
But 2015 sees the boldest step yet: the unveiling of the ASEAN Economic Community (AEC). The vision
is to establish a single market and production base in which goods, investment, skilled labour and
capital can flow freely without barriers, thereby integrating the bloc’s 10 economies into a uniform
whole. The year 2015 is therefore of critical significance for companies investing in South-east Asia.
But, while the economic backdrop in ASEAN looks exciting on almost all dimensions, capturing this
opportunity is becoming ever tougher. For one thing, the integration process itself carries threats as
well as opportunities: as market barriers fall away, companies will be exposed to new competitors.
Just as important, the integration process is proceeding at different speeds in different countries and
different industries. Companies cannot expect a perfect market across 10 ASEAN nations as of 2015. So
coping with different levels of market access and varying speeds of opening up will continue to present
problems.
Equally challenging, the ASEAN region is witnessing sharp changes in cost structures, especially
labour costs as incomes rise. Rising incomes are also spurring technology adoption, especially cloud
and mobile services. Market data is exploding. And all of these trends are giving rise to new business
models, new relationships with ASEAN’s exciting consumer base, and new products and services. The
speed at which businesses grow and change is accelerating. The growing presence of foreign firms,
coupled with the rising sophistication of local firms, is generating cut-throat competition.
So how should companies operating in South-east Asia think about the future?

Thriving in ASEAN
3. The unfolding economic backdrop to ASEAN
l Rising foreign direct investment. In 2013, ASEAN overtook China to become the top destination
for foreign direct investment (FDI) in Asia. (See chart 1.) In 2013, the region also attracted four
times more FDI than India. According to the United Nations Conference on Trade & Development,
the returns on FDI in ASEAN are among the highest in the world.1
l Structurally high growth rates. Over the next five years, ASEAN is poised to enjoy trend growth
rates of 5.6%. This is significantly higher than many other parts of the world: for instance, it is
triple the growth rate in the European Union, and more than double that in the US or Brazil. It
is also not far behind the growth rate of the other two Asian giants, China and India, which are
expected to grow at an average rate of about 6.5% over the next five years. (See chart 2.)
Chart 1: Value of foreign direct investment flows
(US$m)
-30,000
0
30,000
60,000
90,000
120,000
150,000
20132012201120102009200820072006200520042003
Source: UNCTAD
JapanASEAN IndiaChina
Chart 2: Trend rate of annual real economic growth from 2013 to 2018
(%)
0
1
2
3
4
5
6
7
8
ChinaIndiaASEANUSABrazilEuropean UnionJapanRussia
Source: Economist Intelligence Unit
1.4 1.6 1.8
2.2
2.6
5.6
6.4
6.8
1
United Nations Conference
on Trade and Development
(UNCTAD). World Investment
Report 2013. http://unctad.
org/en/publicationslibrary/
wir2013_en.pdf

Thriving in ASEAN
l Attractive demographics. With its 625m citizens, ASEAN is the third largest “country” in the
world. And with a young, growing population, it has a distinct advantage compared to other
emerging markets. Most ASEAN countries have more than half of their population under the age of
30. Between 2015 and 2030, ASEAN’s workforce will grow by 62m people. Compare this to China,
where less than a third of the population is under the age of 30, and the workforce will shrink by
27m workers between now and 2030. As South-east Asia’s demographic dividend unfolds, this
will support consumption growth for decades to come. For companies, it also means an abundant
supply of workers that will help to keep wages competitive relative to other places.
l Rapid urbanisation. The percentage of ASEAN’s population that lives in urban areas crossed the
50% threshold only in 2013. Almost half of the population still lives in rural areas that are hard to
reach, with weak transport infrastructure and unorganised retail networks. However, this is rapidly
changing. Across the region, people are moving from the countryside to cities in great numbers,
and this growth is set to continue. For example, McKinsey & Co, a consultancy, estimates that 72%
of Indonesia’s population will live in urban areas by 2030, up from 56% today. Urbanisation drives
heavy investment in housing and infrastructure. Equally, urban workers are around four times more
productive than rural workers, so urbanisation acts as a giant engine for lifting incomes in the
region. As people earn higher incomes, they consume more, which presents exciting opportunities
for companies, especially consumer goods firms. Importantly, rapid urbanisation is supporting the
growth of organised retail, allowing firms to reach consumers more efficiently, with better control
over brand image, pricing and promotional activities.
l Strengthening fixed asset investment. ASEAN is experiencing strong growth in its fixed asset
investment activity. (See chart 3.) Fixed asset investment—the building of infrastructure, houses,
factories, and so on—is a powerful engine of growth because it not only shows up as economic
activity today through construction and orders for machinery and industrial goods, but also
because it builds out the foundations for future growth. The region’s investment in infrastructure
had been lagging since the Asian Financial Crisis of 1997-98, and the past decade has witnessed a
substantial investment deficit. However, this is now being addressed, and investment is likely to
rise significantly in the next five years.
Chart 3: ASEAN fixed asset investment in US$ bn (left-hand scale) and as a % of GDP (right-hand scale)
0
200
400
600
800
1,000
1,200
18171615141312111009080706050403020120009998979695949392911990
20
25
30
35
Source: Economist Intelligence Unit
Nominal gross fixed investment (US$), left-hand scale Gross fixed investment (% of GDP), right-hand sacle

Thriving in ASEAN
l Expanding middle class, with rising access to credit. Huge swathes of ASEAN’s population stand
on the threshold of middle class status. As they cross the threshold, consumers no longer buy only
necessary items such as food, but start to buy discretionary items such as motorbikes and smart
phones. Just take the number of ASEAN households with disposable income of above US$10,000:
this is set to more than double over the next five years. Moreover, rising access to credit and the
potential for greater financial deepening will further support consumer spending growth. Large
segments of ASEAN’s population remain under-banked: only about 20% of Indonesia’s adult
population and 25% of the Filipino adult population have a bank account. As more of them get
access to formal credit and loan facilities, this will support their spending.
Putting all of this together, it is clear that the region’s economic fundamentals are solid and poised
for attractive growth. “ASEAN is enjoying a golden period, and will remain as one of the world’s
most exciting investment destinations in the coming decade,” says Justin Wood, director and chief
economist, South-east Asia, at the Economist Corporate Network.

Thriving in ASEAN
4. Regional integration across ASEAN and the
impact on business
The individual economies in South-east Asia are attractive investment bets in their own right.
Together, however, they become much more attractive because they represent a significant pool of
both labour and purchasing power into which companies can invest at scale. Building one factory
to serve 625m people, for example, makes more sense that building 10 factories to serve 10 smaller
markets. Hence the ongoing efforts of the ASEAN organisation to establish an integrated ASEAN
Economic Community.
Achieving such a vision is fraught with difficulty, not least because it means countries must sacrifice
sovereignty to a degree and instead submit to regional rules. Vested interests within certain countries
naturally oppose opening up to competition. Cultural differences and historical animosities can get in
the way. And different levels of economic development between ASEAN nations mean that the sort of
integration achieved in the European Union will remain a distant dream for some time.
Nonetheless, despite the challenges, ASEAN is making progress on its integration project. For
example, the tariffs on intra-regional trade are now zero for almost all goods (even though non-tariff
barriers, such as product standards, remain high in many cases). Companies doing business in ASEAN
are certainly buying into the ASEAN dream. In a recent survey2
by the Economist Corporate Network
(ECN), some 31% of the 171 multinationals surveyed said that the integration policies of the ASEAN
Secretariat were “extremely important” to their strategy in South-east Asia. (See chart 4.) Only 12%
felt that they were not important at all.
One implication of regional integration in
South-east Asia is that companies are crafting
strategies that are designed and managed at
a regional level across ASEAN, rather than at a
country level for individual markets. A majority of
large companies (those with global revenues of
US$500m or more) are now taking this approach.
In the same survey by the ECN, some 76% of large
firms said that they organise themselves around
the ASEAN bloc, with a distinct strategy focusing
on the region.
Interestingly, non-ASEAN firms are more likely
to have a pan-ASEAN strategy (81%) compared to
local ASEAN firms (55%). One reason why some
local firms have not specifically crafted a regional
Chart 4: How important are the integration policies of
the ASEAN Secretariat to your strategy in South-east
Asia?
(% of respondents)
31
57
12
Not important at all
Somewhat important
Extremely important
Source: Economist Corporate Network survey of 171 multinational firms
2
This is part of an ongoing
research project of which the
full results will be released in
December 2014.

Thriving in ASEAN
strategy could simply be because of their lack of resources. Local firms tend to be smaller than global
multinationals, and therefore may lack the in-house legal, regulatory, and management expertise to
make full use of the integration policies that the ASEAN Secretariat is pushing for.
Indeed, Munir Abdul Majib, chairman of Bank Muamalat, a Malaysian-based bank, worries that
small and medium enterprises (SMEs) in ASEAN are not prepared for the AEC. “All the benefits and
opportunities that come with the AEC will not be seized by SMEs but by the bigger firms and global
multinationals,” he notes.
The lack of preparedness of the ASEAN SMEs is of great concern, not just at the firm level, but at the
macro level. “In terms of total number of establishments, between 92% and 95% of all commercial
enterprises in ASEAN are SMEs, and they employ between 58% and 97% of the domestic workforce
depending on the country,” notes Mr Munir. “These SMEs are a vital pillar of the ASEAN economy, yet
studies have shown that many of them are not even aware of the AEC, and up to 70% of them do not use
the free trade agreements.”
However, companies that do respond to regional integration face potentially large benefits. For
a start, clustering the 10 ASEAN markets together yields economies of scale, thereby generating
efficiency and competitiveness. Equally, explains Mr Wood from the ECN, clustering ASEAN countries
together enables companies to attract a higher calibre of managerial talent. “Jobs with regional
responsibility are more sought after than those with only national responsibility,” he says. What’s
more, adds Mr Wood, “ASEAN markets are high-growth markets, which require a very different set of
capabilities and approaches to those deployed in mature or low-growth markets. So it makes sense to
have a single team managing this set of markets to ensure that strategy is appropriate to the economic
landscape.”
Historically, ASEAN’s 10 markets have been highly diverse, be it in income levels, language, religion,
political systems and cultural characteristics. However, says Mr Wood, this diversity is starting to
recede. As more and more of the region’s population joins the middle class, their exposure to global
media, to travel, to international brands, and to technology is leading to greater homogenisation.
“Customers across ASEAN are becoming more similar,” argues Mr Wood. “Of course, huge differences
remain in terms of preferences and tastes, but those differences are becoming smaller as time goes by,
and that means that companies are increasingly able to adopt pan-regional approaches to things like
product range and marketing campaigns.”

Thriving in ASEAN
5. New approaches to the ASEAN market
So what sort of strategies should companies consider in this ASEAN landscape of high-growth,
deepening integration, intensifying competition and rising costs? The answers naturally vary
depending on different industry sectors and different types of firms. However, a number of broad
trends stand out.
l Build a pan-regional sales platform. In order to capture a bigger share of the regional market,
companies are increasing their sales presence across ASEAN. Results from the ECN survey reveal
that the percentage of companies that have their own sales team on the ground in each ASEAN
market has increased sharply over the past 18 months. (See chart 5.) Naturally, companies can also
sell into markets using distributors and channel partners. However, setting up a proprietary sales
team is a measure of commitment, and companies clearly feel that more and more of the ASEAN
region is becoming attractive enough to justify the investment. While companies have increased
their sales presence in every ASEAN country, two countries stand out: Indonesia and Myanmar.
Clearly, these two markets are high on companies’ list of investment priorities.
l Organise on a pan-regional basis. As the ASEAN region comes together, the possibilities for
achieving scale benefits are growing. These benefits will be greater for some companies than
others, but for all firms the possibilities to organise regionally are increasing. For some businesses,
front office sales and marketing activities can now be organised on a regional basis, with a
harmonised approach. For other companies, the diversity of local market conditions may prevent
such an approach, but other types of consolidation are still possible, notably back office operations
such as human resources, payroll, and accounting.
Chart 5: Percentage of companies with their own sales team on the ground
(%)
0
20
40
60
80
100
SingaporeMalaysiaIndonesiaThailandVietnamPhilippinesMyanmarCambodiaBruneiLaos
Source: Economist Corporate Network survey of 171 multinational firms
Dec-12 Jul-14

Thriving in ASEAN
l Explore the possibilities for a pan-regional sales and marketing approach. As discussed earlier,
the markets across ASEAN are extremely diverse. However, despite this diversity, more and more
companies believe they can take a uniform approach to their sales and marketing activities, with
plans crafted at a regional level rather than on a country-by-country basis. As ever, the degree to
which this can be achieved varies widely. Business-to-business companies are more likely to have a
regional approach than consumer firms. And within consumer firms, luxury goods are more likely to
have a regional plan than food companies, where local tastes still differ widely.
l Manufacturing firms face big opportunities for strategic reorganisation. As trade barriers
fall across ASEAN, as infrastructure linkages improve, and as product standards and regulations
become more harmonised, manufacturing firms have the opportunity both to seek greater
economies of scale (through consolidation) and greater specialisation (by fragmenting their
value chains). Rather than setting up lots of factories serving individual markets (as has been
done historically), companies can consolidate their manufacturing footprint into just one or two
factories that serve the entire region. Equally, however, ASEAN integration also offers possibilities
for a fragmentation of supply chains. Companies can break down their manufacturing activities into
component parts, and put different bits in the places that have the most appropriate costs, skills
and resources. Fragmentation such as this has been happening across Asia for several decades,
notably with China as the low-cost labour-intensive part of the chain. Now the possibilities for
building out fragmented value chains across ASEAN are rising, especially as China becomes more
expensive.
Srirangam Srirangarajan, managing director, ASEAN and ANZ, at Altair Engineering, a US
engineering group, sees both trends at play. “Companies are adopting both approaches. They are
consolidating some activities and fragmenting others,” he says. “Manufacturing firms are moving all of
their labour intensive operations to countries like Vietnam to take advantage of the lower labour costs.
At the same time, they are housing the higher-value parts of their supply chain in places like Malaysia,
and putting R&D activities in Singapore, which is developing as the region’s R&D hub,” he notes.
l Leverage on technology to consolidate services. Consolidating the delivery of services is harder to
achieve compared to manufacturing, because industries such as healthcare, finance and law often
require extensive face-to-face contact. However, with technology, this is rapidly changing. As Scott
Cassin, chief technologist and strategist in Asia Pacific at Hewlett-Packard (HP), a US IT services
giant, says, “The way services are delivered is set to change. For instance, healthcare services
traditionally had to be delivered physically, on site. But now, through videos and telepresence,
doctors can treat patients virtually or online, in a comprehensive way. In addition, the emergence—
and now ubiquitous use—of personal, wearable devices as well as smartphone apps that can
monitor heart rate and provide a great wealth of personal health information allows for all sorts of
illnesses to be diagnosed online. Many smartphones today can help detect problems and diseases
faster and more cheaply, by using high-definition built-in cameras and the connectivity of the
device to send feedback to professionals for diagnosis.”

Thriving in ASEAN
This new model of delivering services online also applies to education and retail services. “Retailers
are realising that they don’t need such a big footprint or shopping mall presence anymore. For
example, Adidas, the global sporting goods firm, is in a number of countries experimenting with stores
that don’t carry any in-store stock. Customers go into the Adidas store to see the product. If they
wish to purchase a product, the store orders it online, and it will be delivered to the customer within
hours. This will have an impact on retail real estate. Although there is still a need for a physical point of
presence, the online channel is becoming more important,” says Mr Cassin.
Technology will also play a significant role in accelerating the implementation and integration of
regulatory, commercial, and operating models across the ASEAN region. Defining and implementing
data and business process integration standards, such as XBRL (eXtensible Business Reporting
Language) will be essential in enabling consistent and efficient cross-border trade and commerce.

Thriving in ASEAN
6. Technology as the great leveller
One important trend in ASEAN is the deepening penetration of technology. Many countries, such as
Indonesia, Vietnam, Singapore and Malaysia now have mobile phone penetration rates well in excess
of 100% of the population. Internet access is deepening rapidly, much of it via mobile devices. And
social media is rising at staggering speed: across ASEAN, 36% of all adults have a Facebook account—in
many countries, Facebook penetration is significantly higher than the penetration of bank accounts.
“The demographic profile in ASEAN is very young,” says Mr Cassin at HP, “and younger populations
tend to be more open to new technologies.” As such, he says, the ASEAN region has huge potential,
not only to leapfrog old technologies, but to harness new ones for exciting new business models.
“Corporates need to be more aggressive in their digital transformation or e-strategies, including
how to use technology to engage in new markets and improve customer experience at the front end,
and how to reap efficiencies at the back end. There is a huge risk in not seizing the opportunities that
technology offers because the new entrants in the marketplace—the hungry entrepreneurs and start-
ups—are aggressively leveraging on technology to gain market share.”
Technology is also helping to improve productivity in the face of rising operational costs across
ASEAN. “The scalability and efficiency gained from using technology and software is much greater than
you would get from using cheap labour. The start-ups are not using cheap labour to expand into new
markets, they are using technology—tools like cognitive computing, artificial intelligence, automatic
business processing, and cloud-based services,” says Mr Cassin.
He points to the possibilities of delivering services online using avatars, especially as graphics
technology becomes ever more sophisticated. “The young are much more comfortable dealing with
virtual entities than the older generation of workers. Using virtual entities can help companies to build
scale and efficiency,” notes Mr Cassin.
In fact, Mr Cassin argues that technology is a great leveller, making it easier for smaller companies
to compete head-to-head with the major corporations. For example, SMEs or start-ups that have been
constrained by a lack of manpower or expertise to deliver their business strategy can now very easily
buy back-end online enterprise services, online financial and legal services, and other support services
to help them to bring their ideas to market quickly. In other words, SMEs can leverage external online
service providers to fill the skills and capability gaps in their organisation.
“ASEAN’s youth are avid consumers of anything that is technology-enabled. Keeping a deeply
vibrant technology-based front-end—what we call platforms of engagement—is absolutely critical to
capture this new market that is rapidly developing,” says Mr Cassin.
But technology comes in many forms, and it isn’t only internet-enabled services that have the
potential to transform businesses in ASEAN. Another exciting technology that could be a game-
changer is 3D printing. (See sidebar.)

Thriving in ASEAN
3D printing, or additive manufacturing, has come a long way from its early days in the 1980s
when the technology was only capable of producing simple plastic prototypes. Today, 3D printers
can make aviation and automotive parts, furniture, toys, food, and even human tissue. The rapid
advances in the technology of 3D printing mean that it may well soon become a viable alternative
to traditional manufacturing processes. This would shake up the conventional model of industrial
production and could have huge implications for manufacturing-footprint decisions.
Traditionally, manufacturers have sought to consolidate their factories in order to achieve
economies of scale. But 3D printing offers the potential to manufacture on a highly local basis,
with small production runs, even as low as one unit at a time, and with zero distribution costs. 3D
printing also makes customisation much easier, with each unit produced being highly tailored.
Which ASEAN countries in particular stand to gain from the adoption of 3D printing? “At the
moment, Singapore is adopting 3D printing much faster than the rest of ASEAN,” notes Mr
Srirangarajan from Altair Engineering. In recent years, Singapore has lost its attractiveness for
manufacturing and production, because its labour costs are now so high. But this may change if
3D printing takes off, as the city-state is likely to remain at the forefront of new developments
in the technology. The government has invested heavily into the industry: in 2013 it set aside
US$400m to support new and disruptive technologies including 3D printing. That same year, the
government also established a US$24m 3D printing research centre that will work closely with the
manufacturing industry on R&D projects to develop new materials, software and processes leading
to commercial applications.
SIDEBAR: Will 3D printing disrupt ASEAN’s
manufacturing footprint?

Thriving in ASEAN
7. Conclusion
Despite the opportunities for companies to build a consolidated ASEAN strategy, this is easier said than
done. Although the AEC is pushing forward, progress is slow, and it is unlikely that ASEAN will succeed
in achieving all its integration targets by 2015. Building the AEC is a multi-year journey. As such, in the
near- to medium-term, companies will continue to face obstacles and challenges.
One major challenge is ongoing inconsistency in regulations and policy across ASEAN markets.
As Mr Cassin says, “The opportunity to consolidate and aggregate across the ASEAN market is there,
and businesses want to take advantage of that. But one major issue is the regulatory constraints.
Companies can get excited about the opportunity, but they need to understand that ASEAN’s legal
environment is unpredictable, and there is little uniformity in regulations.” Indeed, in a survey of 147
multinationals by the ECN in 20133
, senior executives ranked the “unpredictable legal environment”
and “inconsistent regulations and policy across ASEAN” among their top five challenges to growing a
regional business in ASEAN.
Another issue that companies must contend with is persistent protectionism and nationalism.
Despite the stated goals of ASEAN member countries to open up their markets to integration, there is
strong pushback from local players in many countries. In particular, Indonesia, which represents 35%
of the ASEAN economy, is becoming increasingly protective of its local industry. “Indonesia is a critical
part of ASEAN, and unless it tones down its economic nationalism policies, the AEC will not live up to its
full potential,” notes Mr Wood.
But for all its challenges, the ASEAN region remains one of the most promising investment bets in
the world. It is building globally competitive industries and becoming a leading hub for many kinds of
goods and services. For example, of the top 100 business process outsourcing (BPO) cities globally,
14 of them are in ASEAN, more than any other “country”, according to Tholons, an outsourcing
consultancy.
ASEAN also has the potential to spearhead the development of industries such as the halal industry.
“People think halal is just about food, or finance. But it’s much more than that: there is a whole range
of products around the halal industry, such as halal cosmetics, drugs, animal feed, and so on. ASEAN,
home to the largest Muslim population in the world, could be the hub that leads developments in these
goods and services. Malaysia, in particular, could play a central role,” says Mr Munir.
An exciting future lies ahead for ASEAN. The journey towards deeper regional integration may not be
smooth-sailing, but the boat is moving in the right direction and it will open up more opportunities for
companies operating in the region.
3
The Economist Corporate
Network (2013). Riding the
ASEAN elephant: How business
is responding to an unusual
animal.

Beijing, Hong Kong, Kuala Lumpur, Seoul, Shanghai, Singapore, Tokyo
For enquiries, please contact us at ecn_asia@economist.com
Or follow us on Twitter @ecn_asia
About Economist Corporate Network Asia
Economist Corporate Network (ECN) is The Economist Group’s advisory, briefing and
networking service for Asia-based senior executives seeking insight into economic and
business trends in key growth markets. Through a tailored blend of interactive meetings,
high-calibre research, and private client briefings, ECN Asia delivers country-by-
country, regional, global and industry-focused analysis.

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