Malaysia

Southeast Asia is a major producer of agriculture products and plays an increasingly important role for the US and the EU. Increased exports also result in the need for new technologies, opening for investment, and sales opportunities for foreign companies.

In this article, we review the agriculture industry in Southeast Asia with a focus on the most important markets. We explain what products are exported by country, what challenges the countries face, and how foreign companies can profit from this growing market.

The Agriculture Industry in Southeast Asia

The agriculture sector in Southeast Asia includes three main categories: farming and planting, fishing, and forestry. Most countries are developing the three simultaneously due to the geographical advantages that can be found, including long coastal lines, large and diverse ocean ecosystems, and tropical weather.

Even if the proportion of total GDP is decreasing due to industrialization, agriculture remains a significantly important economic pillar. In frontier markets like Cambodia and Myanmar, the agriculture sector is even more important to the local economies.

Southeast Asia is a top exporter of certain commodities globally, where the following five stand out: Malaysia, Indonesia, Vietnam, the Philippines, and Thailand.

Apart from the food industry, agricultural products from Southeast Asian countries also serve many other industries, especially wooden furniture production. Indonesia, Malaysia, and Vietnam are some of the major exporters of wooden products globally, accounting for more than 15% of the global export volume.

What agriculture products can be imported from Southeast Asia?

We have already covered the three main categories, including farming and planting, fishing, and forestry. Let’s review the categories in greater detail and what specific products the countries export.

Planting and farming

Vegetable oils, coffee, and rice are exported in large volumes from Southeast Asia. For instance, Malaysia and Indonesia account for more than 90% of the world’s palm oil exports during the period 2019-2021, at the same time as Vietnam is the second-biggest exporter of coffee, after Brazil.

Palm oil has various applications, apart from being an ingredient for direct cooking. It could also be used for the production of lipsticks or detergents. The conflict between Russia and Ukraine pushed the prices for vegetable oils to record levels, as the Black Sea countries are key suppliers of vegetable oils.

Global importers have turned their focus to other major producers, especially in Southeast Asia. Indonesia even banned all palm oil export for three weeks, due to soaring prices domestically. Still, Indonesian producers are required to ensure a sufficient domestic supply before selling such products overseas.

Rice and coffee beans are also major exporting commodities in Southeast Asia, particularly from Vietnam and Indonesia.

Among ten countries that have the largest exports of rice, four are from Southeast Asia. More than 40% of the rice imported to the EU comes from Southeast Asia, such as Vietnam, Thailand, Myanmar, or Cambodia.

The import of rice from Pakistan and India to the EU has been increasing over time thanks to the duty-free policy of such products to the EU. We can also expect the same movement for rice imported from Vietnam when the free trade agreement between it and the EU came into effect in 2020.

Forestry and wood manufacturing

Southeast Asia has large forestry and wood manufacturing industries with exports of products like wood pellets, veneer sheets, wood-based panels, and wooden furniture.

Vietnam is the leading exporter of furniture globally and has even surpassed China, which is a major achievement. Southeast Asia exports around 20% of all wooden furniture products globally and where Vietnam accounts for more than 50%. The biggest export markets are the UK, the US, and Japan.

Wood pellets are also vastly produced in Southeast Asia and which has suffered from a supply shortage globally. Key drivers of the shortage are the growing demand for renewable energy in Europe and nonrenewable energy production in Asia.

Europe is the main consumer of wood pellets, mostly for home heating and power generation. The ongoing tensions in Ukraine, which affected the supply of wood pellets, have made Malaysia and Vietnam alternative sourcing destinations.

Fishing

Southeast Asia is rich in marine resources with Indonesia, Vietnam, Thailand, and the Philippines being top seafood exporters globally.

Over the last decade, the US has significantly increased its seafood imports from Southeast Asia. Typical products are tuna and shrimp, which are exported primarily from Vietnam and Thailand.

The trade tensions between the US and China have made Southeast Asia increasingly important as an alternative supply market. Import tariffs are now as high as 25% and the rising wages make China less attractive to US-based importers.

The implementation of the European Union–Vietnam Free Trade Agreement (EVFTA) has resulted in tax exemptions for the majority of over 200 tariff lines for seafood imported from Vietnam. Key exports from Vietnam include fish, shrimps, oysters, and scallops.

To summarize, the five countries covered primarily export the following agriculture products:

• Malaysia – Palm oil, rubber, cocoa and wood products
• Indonesia – Palm oil, coffee, vegetables, and fruits
• Vietnam – Rice, seafood, coffee, cashew nuts, tea, and fruits
• The Philippines – Coconut oil, fruits, seafood, and tuna
• Thailand – Rice, sugar, fruits, processed tuna, and seafood

Investment Opportunities in the Agriculture Sector

Key challenges for most Southeast Asian countries are to cope with increasing export volumes, outdated techniques used, and weak quality control systems. However, with the adaption of new technology and collaboration with foreign companies, the industry is catching up to meet global standards.

Below you can find some of the primary reasons why there will be increased investment opportunities in Southeast Asia’s agriculture sector.

Demand for agriculture machinery

Modernization of the agriculture industry allows local producers to increase effectiveness and product quality. Most Southeast Asian countries rely on imported agriculture machinery from China, South Korea, Japan, and the EU with only a small percentage supplied within the region, with most coming from Malaysia.

Let us take Vietnam as an example, which is a large exporter of different types of crops such as rice, coffee beans, and pepper. However, 70% of the agricultural machinery used is imported. This has created opportunities for reputable machinery brands to enter the market.

Worth mentioning is also that there’s a strong demand for machinery brands from developed countries thanks to the high quality offered.

The growing market for Agri-tech startups

Apart from innovating dated techniques, modernization also boosts the performance and productivity of well-established companies or individuals. Two major drivers for this are the push for the digital transformation from governments, as well as the growth in internet usage.

Thailand, for example, has been rewarding farmers and enterprises who introduced technology in agriculture production. As a result, drones are getting more popular to plant seeds, spray pesticides, or map crop fields. Poladrone, a Malaysian startup, also provides pest control services by drones to local palm oil farmers.

Local startups that embed the Internet of Things (IoT) into agriculture production have also started to receive attention from foreign investors, both within the region, from the EU, or the US. Agribuddy, a Cambodia-based startup, has successfully raised funds from The Index Project (Denmark) or KSK Angle Fund (the US). MimosaTek (Vietnam-based) also receives investments from Seedstars (Switzerland) and Captii Ventures (Malaysia).

The increase in the middle-class population is one of the main factors driving the growth of Agri-tech startups. Consumers are now demanding products of higher quality (organic, transparent, healthy, etc). Meanwhile, new technologies and advanced farming methods are getting more accessible to the producers, allowing them to improve the output quality and meet consumers’ rising demand.

Conclusion

Southeast Asia is a large exporter of agricultural products, particularly crops, fish, and seafood. Crops include rice, coffee, fruits, and vegetables, for example. While the agriculture industry contributes less to GDP as countries develop, agriculture exports are crucial for countries like Vietnam, Thailand, and the Philippines.

The ongoing trade war between the US and China has resulted in increased demand for the Southeast Asia region, further enticing companies to invest in local production. Recently introduced trade agreements, like the EVFTA between the EU and Vietnam, further increase demand for products from the region.

The Agri-tech industry also sees great growth as governments push for digitalization and the introduction of new technology, to make production more effective and for higher product quality. This attracts more investors and companies with goals to profit from growing companies or through B2B sales.

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Southeast Asia gains increasingly more attention as foreign companies try to diversify manufacturing activities from China. Increasing wages, disruptions, increased shipping lead times, and costs are just some of the reasons. In this article, we review the underlying causes behind the rise of Southeast Asia, but also the challenges of entering the region.

Why are companies moving to Southeast Asia?

China has long been referred to as the World’s Factory, thanks to its strong manufacturing capabilities and low labor costs. In recent years, a multitude of issues has started to emerge in China, making companies more aware of the importance to diversify their supply chains.

Southeast Asia has therefore sprung up as the most interesting alternative sourcing market outside of China, due to the benefits we will review in this section.

The US-China trade war

The US-China trade war has urged companies to find new supply markets and where Southeast Asia gains much attention. Import tariffs have almost tripled for products from China, putting other supply markets in a favorable position. Being one of the fastest-growing regions in the world with low labor costs, openness for trade, and strategic proximity to China, Southeast Asian countries also have favorable trade agreements with many developed countries.

Increasing wages in China

China’s large labor pool and its low labor costs were the main reason why companies started to relocate manufacturing to the country. Yet, this has changed drastically in recent years. From 2009 to 2014, minimum wages nearly doubled, significantly decreasing profits for foreign investors.

Supply chain disruptions

The pandemic resulted in stalled production in China and has significantly increased shipping lead times and costs, leading to global supply chain disruptions. Near sourcing activities and manufacturing relocations to neighboring countries in Southeast Asia have accelerated greatly since.

Enhanced manufacturing capabilities

While countries like Vietnam have primarily been active in less advanced industries like textiles and furniture production, it is now a major producer of different electronics products, machinery, and telecom equipment. This trend is not only evident in Vietnam, but also in countries like the Philippines and Indonesia.

The countries are still highly active in the midstream segment and assembly operations, relying on imports from overseas. Yet, this is also changing as their manufacturing capabilities become more advanced, including the designing and manufacturing of previously imported sub-components (upstream activities). Distribution and sales of final products grow (downstream activities) at the same time, as manufacturing companies and private consumers demand more products.

Lucrative trade agreements

Singapore, Thailand, Vietnam, and Malaysia are open to international trade, having multiple free trade agreements signed. Free trade partners include the EU, Australia, Japan, and South Korea, for example. These countries are also part of ASEAN, which in turn has various trade agreements, making the region even more attractive to investors and businesses.

Since 1992, when ASEAN’s six founding members agreed to form a regional trade bloc, governments have made significant progress in lowering barriers to regional trade and capital flows. Initiatives like the Southeast Asia Manufacturing Alliance connect businesses with a network of trusted partners, allowing them to confidently navigate and grow in this diverse region.

The Regional Comprehensive Economic Partnership (RCEP), which was signed by all ASEAN members and Australia, China, Japan, New Zealand, and South Korea in 2020, will boost the region’s competitiveness as a manufacturing base and in global trade.

Major Manufacturing Sectors in Southeast Asia

While you can find manufacturers of any kind of product in China, Southeast Asian countries are specialized in certain industries. Major industries include:

• Electronics (Vietnam, Malaysia, Singapore)
• Textiles/apparel (Vietnam, Philippines)
• Automotive (Thailand, Indonesia)
• Petrochemical products (Thailand, Indonesia, Malaysia)
• Agricultural products (Vietnam, the Philippines, Indonesia, Thailand)

Let’s review the largest industries one by one, explaining where they are most prevalent and the history.

Electronics

The electronics industry accounts for around 20% to 50% of the total export value of most South Asian countries. Southeast Asia now produces much of the world’s consumer electronics, including televisions, computers, and smartphones. For example, more than 80% of the world’s hard drives are produced here. As mentioned above, Vietnam, the Philippines, Malaysia and Singapore are the biggest producers of electronics products in Southeast Asia.

Much of Vietnam’s export growth has been driven by investments from companies such as Samsung, LG, Canon, and Nokia. These foreign enterprises have become the essence of Vietnam’s exports, captivated by tax breaks and some of the largest export processing zones in Southeast Asia.

As of 2014, Samsung accounted for roughly 20% of the total Vietnamese exports of electronics. As multinationals relocate production here, many smaller electronics companies follow. Some Northern provinces of Vietnam have expanded into manufacturing hubs for electronics products, where you can find plenty of suppliers for electronics components and phone accessories.

At the same time, Malaysia has grown to become a major global manufacturing hub for electrical and electronics (E&E) products. Malaysia’s electronics industry has invested much in R&D and explored domestic outsourcing of non-core activities over the years. Penang represents 80% of the nation’s contribution to the global semiconductor output.

Singapore has a more developed E&E manufacturing industry than the rest of ASEAN. This includes R&D and manufacturing, supply chain management services, logistics, and regional and global headquarters functions.

Textiles and apparel

Vietnam has a long history of producing textiles and garments, dating back several decades. It’s currently one of the biggest exporters globally and continues to attract many investments from foreign companies. Many of the world’s most well-known companies source products from Vietnam or set up their own manufacturing facilities locally. Examples include the high-end brand Prada, The North Face, Fjällräven, Adidas, Nike, Sketchers, and Decathlon.

The Philippines is another big name in Southeast Asia for textile and garment production, yet smaller than in Vietnam. When companies don’t meet the minimum order quantity requirements (MOQs) of factories in China, Bangladesh, Vietnam, and India, they sometimes turn to the Philippines instead.

Around 80% of the country’s textiles and garments are exported to the United States, with the rest going to the EU, Australia, Canada, and other ASEAN countries.

Automotive

Established over 50 years ago, Thailand’s automotive manufacturing sector has developed into one of the biggest in the world. Almost all leading automakers and component manufacturers have established a presence locally. Toyota, Isuzu, Honda, Mitsubishi, Nissan, and BMW account for most of the two million vehicles being produced in Thailand every year.

As electric vehicles (EV) are on the rise, Thailand also faces competition from Indonesia in this sector. Indonesia holds the world’s largest nickel reserve and can offer competitive labor costs and prices for EV batteries. EV batteries are even 8% lower than in China.

Machinery

Malaysia is the leading manufacturer of specialized process machinery for the E&E industry and automation equipment. Yet, the industry has not evolved into making complete products but only work on components, or as OEM manufacturers.

Some sub-sectors are on the rise, particularly metalworking machinery and power generating machinery. Companies with established manufacturing in Malaysia include Advantest, Pentamaster, Vitrox, Muehlbauer, SRM, and UMS.

Challenges when Relocating Manufacturing to Southeast Asia

Even if Southeast Asia becomes more promising for manufacturing, there are a handful of challenges you should be aware of. Below you can find the most notable ones.

Reliance on imports from China

Manufacturers still rely heavily on imports of raw materials and sub-components from China. In the textiles industry, companies often must import Velcro and buttons, for example. As much as 80% of all textile raw materials are imported from China to Vietnam. The Chinese market is also a major export market for countries in the region.

When the pandemic hit, Southeast Asian manufacturers were strongly affected due to increased costs of raw materials and increased shipping lead times, due to port congestions and lack of workers in China during lockdowns.

Specialized manufacturing

As mentioned above, most Southeast Asian countries are specialized in specific manufacturing industries. In Malaysia and Vietnam, you can find many electronic suppliers, but the products are slightly different. 60% of Malaysia’s exported electrical and electronics products include semiconductor­ devices, ICs,­ transistors, and valves. In Vietnam, we mainly see the exports of transmission apparatus, mobile phones, TVs, cameras, electrical apparatus, and integrated circuits.

Vietnam does have suppliers of fitness and sports products, but it’s mainly limited to footwear, gym clothes, and weights, for example. Treadmills and skipping ropes are harder to find on the other hand. They must compete with Chinese suppliers on price, which is so difficult as Chinese factories are built for economies of scale. Unless the market receives foreign investments to manufacture on-demand, they cannot begin to produce these products for exports.

Comparatively underdeveloped supply chains

China Plus One strategies are clearly here to stay, but Southeast Asian manufacturers can still not meet the developed levels of Chinese supply chains.

Products must pass many layers of suppliers to reach end customers, while information flows are not transparent and consistent. Together, it’s difficult to build a solid supply chain network. Moreover, the infrastructure to support the logistics and supply chain is still underdeveloped to handle the growing complexity of products and consumer demands.

Although some of the industries are within the specialty of Southeast Asian nations, these nations are still relatively young in terms of supply chain knowledge and lack experienced professionals in manufacturing, distribution, planning, and supply chain management.

Summary

Southeast Asia gains much attention as foreign companies look for alternative supply markets to China. Lower labor costs, enhanced manufacturing capabilities, diversification, and the many trade agreements speak for Southeast Asia as a primary sourcing market.

Countries of interest for manufacturing most often include Vietnam, Indonesia, Thailand, the Philippines, Malaysia, and Singapore. We have also highlighted how countries specialize in certain industries where Vietnam, Malaysia, the Philippines, and Singapore export many electronics products, for example. Thailand and Indonesia, on the other hand, are major producers of automobiles and related parts.

While Southeast Asia gains more attention, there are some disadvantages that foreign companies should beware of. Countries still rely heavily on imports from China, which is also a major importer of the final products. The supply chains are comparatively underdeveloped and with infrastructure that doesn’t meet the level of China.

Southeast Asia will remain attractive for foreign investors but will also have to become less reliant on imports, at the same time as the countries provide more value-added activities for companies.

Read more about our market entry services or other consulting capabilities.

Southeast Asia is one of the fastest-growing regions in the world, having a population of around 600 million people. Increasingly more companies, both in the B2C and B2B sphere, target the market to capitalize on its expanding manufacturing activities and booming middle class.

Yet, the region is also comparatively complex, comprising eleven countries with different languages and levels of development. Each market also has different demands in terms of product categories and price levels.

In this article, we review the most interesting countries for market entries in Southeast Asia and what sets them apart.

The Most Interesting Countries for Market Entries in Southeast Asia

Southeast Asia comprises eleven countries with different levels of development, languages, ease of doing business, and import regulations. This makes the region comparatively difficult to enter as pre-assessments are required to find the most suitable markets.

Compare this to China which is a single market and where the same language is spoken nationwide. Once you’ve managed to register your products locally, you have no obstacles to selling your products to local businesses or consumers.

Besides, not only do we have to consider country-specific characteristics when choosing a Southeast Asian market, but also your products. Selling machines and equipment for the wood industry is undoubtedly more suitable for Vietnam, considering its large exports of furniture and wooden raw materials.

At the same time, Singapore might be more suitable for exclusive skincare brands, as the market is more developed, and citizens have a stronger purchasing power.

Luckily, not all eleven countries are interesting for market entries in Southeast Asia, which makes the assessment easier. The countries we will review in this article include Singapore, Vietnam, Thailand, Malaysia, and Indonesia.

Singapore

Despite its small size and population of just 5.8 million, Singapore has built a robust and diverse manufacturing base in industries like electronics, aerospace, precision engineering, and biomedical sciences.

It’s also renowned for its manufacturing capabilities in chemical manufacturing, having more than 100 global petroleum, petrochemical, and specialty chemical companies present.

Manufacturing contributes to a whopping 20% of the country’s GDP, totaling SGD 372.4 billion (USD 270 billion) in 2020. That’s considerably high and on par with many of its developing neighbors.

In Hong Kong, for instance, the manufacturing output is less than USD 4 billion and 1.5% of Singapore’s.

What attracts businesses is the skilled and educated labor pool, English-speaking population, transparent juridical system, and ease of doing business. Singapore has continuously been ranked on top of the World Bank’s yearly reports on ease of doing business.

Moreover, it’s a tax haven with a flat corporate income tax rate of just 17% (with part of the first 300 000 SGD exempted) and no capital gain tax.

With that said, what makes Singapore a less attractive country for B2B sales is the small population, developed economy, and its focus on advanced manufacturing. Even if its neighboring countries are less developed and harder to navigate, the large populations, booming manufacturing industries, and developing economies make them more interesting for market entries.

Malaysia

Malaysia shares many advantages with Singapore such as the close distance to global shipping lines, its ease of doing business, and the English-speaking population. Disposable incomes are also higher on average here compared to other Southeast Asian countries.

Electrical products, electronics, machinery, and related equipment contribute to much of the country’s manufacturing industry. Chemicals and petrochemical production also accounts for around 10% of the output.

Just keep in mind that its population of just 33 million and lower economic growth is a disadvantage. Upcoming markets, like Vietnam, have a highly active manufacturing sector, including electronics, furniture, machinery, agriculture, and more.

This allows for market entry opportunities as local companies seek to buy foreign products.

Another challenge for Malaysia-based businesses is its taxation system. The corporate income tax is currently 24% and makes Malaysia one of the countries that have the highest tax rates in the region. By comparison, Vietnam has a corporate income tax of 15% to 20%, Singapore 17%, and Thailand 20%.

Indonesia

Indonesia is the second-largest beneficiary of foreign direct investments in Southeast Asia, accounting for around 14%. The manufacturing industry is a large contributor to the economy with a focus on the production of textiles, electronics, automotive, palm oil, petroleum, minerals, and coal.

Contrary to Malaysia, Indonesia also has a major benefit thanks to its big population and future growth prospects. This allows companies to access the wide and well-diversified pool of consumers.

As a result, market entries with a focus on selling products related to the above industries should be a priority. Besides, worth highlighting is the growth of Indonesia’s digital economy, which offers opportunities for FinTech companies, digital banking, and SaaS solutions.

Looking at consumer goods and B2C sales, companies now also seek to target Indonesia’s growing upper and middle-class, especially high-end goods and services.

Indonesia also has the highest number of Unicorns in Southeast Asia, including GoJek, J&T Express, and Traveloka. The ease of doing business has been improved in recent years, the corporate income tax reduced, and we’ve also seen an introduction of a single submission system for business registrations.

As explained in our separate article about manufacturing in Indonesia, one of the most challenging issues when doing business is bureaucratic inefficiency and red tape. Regardless of the attempts to simplify business procedures, companies still struggle with different regulations and required clearances.

Vietnam

Vietnam is the third-largest FDI recipient in Southeast Asia and benefits much from the recent trade tensions globally.

Various multinationals in the electronics and technology industries have relocated manufacturing facilities here, including TCL, Foxconn, and Sharp. Its growing trade relationship with the EU, especially after the execution of the EVFTA in 2019.

As a result, companies that sell machinery for production tend to have many benefits from these factory relocations. Apart from industrial production, the agriculture sector relies heavily on imported machinery, particularly from the EU, Japan, and South Korea. It’s estimated that 70% of the agriculture machinery used in Vietnam is imported.

Some companies also face challenges when entering the Vietnamese market. Foreign ownership is strictly limited in some industries, like logistics and banking. This impacts inbound merger and acquisition (M&A) activities.

The government’s attempt to introduce simpler and clearer regulations has also failed at some stages. Current regulations still overlap and are often opaque, as these are regulated by different governmental agencies.

Thailand

Sharing the same geographic advantages as other Southeast Asian countries, Thailand has been attracting foreign companies thanks to the continuous improvement of its business environment.

Thailand is now among the top three countries in Southeast Asia in terms of ease of doing business. Different advantages allow foreign businesses to reach their expansion targets by selling consumer goods or investing in local businesses.

Products with the highest growth rate are medical goods and F&B products. This is boosted by the increased middle class and as citizens become more health-conscious and more willing to pay for high-quality international brands.

However, companies expanding to Thailand should be aware of the political uncertainties within the country. Its politics has been volatile over the last two decades, with the involvement of many military coups.

In addition, imported products typically face strong competition from domestic Thai products. Thai consumers are relatively price-sensitive and mainly served by local suppliers. Hence, companies might face issues to remain competitive and profit-making at the same time.

The Philippines

The Philippines is known for its strong reliance on the service sector, which accounts for more than 50% of the GDP. Business process outsourcing (BPO) is one of the key drivers of the service sector.

Hence, foreign companies are strongly recommended to take the advantage of this foundation in the Philippines. This, firstly, provides foreign players access to a well-established BPO market. Also, international experience is a competitive advantage over the local businesses when it comes to providing services to multi-national companies (MNC).

Tourism is also another strength of the Philippines. This has opened the door for businesses in the hospitality industry, such as F&B, traveling, and more. With a long history as an agricultural country, the Philippines allows global F&B manufacturers to have cheap and locally sourced ingredients to lower the cost while taking advantage of its original international brand name.

However, companies expanding to the Philippines also need to consider some common foreseeable challenges there. Infrastructure inefficiency is at the top. Regardless of the Government’s growing spending on infrastructure, it’s common with overcapacities in the international airports, port congestion in many major seaports, and slow and costly internet services.

The Philippines is usually ranked below its neighbors in terms of basic infrastructures, such as roads, railroads, ports, and more.

Market Entry Strategy in Southeast Asia

You have several options if you intend to enter Southeast Asian markets. Here, we must consider whether you sell B2C and/or B2B, offline and/or online, whether you have limited knowledge and presence in markets, and financing capabilities. Let’s review the different sales channels and market entry strategies available.

Distributor channel development

One of the most common and time-saving options is to find a local distributor with extensive knowledge and experience in local sales and marketing. Here it’s important to have clear assessment criteria to choose the right partner. Examples include:

• The scope of business (general or industry-specific)
• Geographical coverage (certain cities/provinces, national or international)
• Focused channels (general trade, modern trade, or eCommerce)
• The scope of work (custom clearance, tax and duty payment, warehousing, required local certificates, and more)

A good distributor does not only have access to existing sales channels, but also a network with relevant authorities. This is important in emerging markets, where regulations are not as effective and transparent.

A partner who is familiar with normal business practices and relevant legal requirements can save massive time in bringing the products to the market.

However, this method of expansion also has its cons. Firstly, the company will lose control over the sales activities and mostly rely on the sales and marketing capabilities of the local partner. Besides, the sales commissions will also affect your profitability, making it harder for the manufacturer to build a competitive price advantage while maintaining a solid and profitable pricing strategy.

Mergers & Acquisitions (M&A)

M&A is another common way to enter new Southeast Asian markets. Businesses doing inbound M&A transactions have different motivations rather than just expanding sales. A typical one is the acquisition of an experienced company with established operations.

Singapore is undoubtedly the leader in terms of both the number of deals and deal value made. Setting up a new business from scratch often requires significant investments, both in capital and time. Acquiring a local business can therefore be a preferable choice if you have the finances required and want to enter a market quickly.

However, managing M&As in developing countries is indeed complicated, especially for companies that have limited experience in the field. The challenges can come from local legal requirements, assessing the value of target companies, differences in management style post-acquisitions, and more.

Deal structure is also crucial, making sure that a suitable buying strategy is applied. Buyers need to decide whether they want to proceed with a complete buy-out or acquire a minority or majority share. This will determine whether you spend enough while meeting your expectations (veto right, financial consolidation, control over the business).

Joint Venture (JV) with a local partner

M&A activities allow foreign businesses to get control over existing businesses. JVs, on the other hand, allows for collaboration with local business to create synergies.

While companies in emerging markets have established sales channels and networks, foreign companies can bring expertise, technological knowledge, and brand reputation. If well-facilitated, the joint venture can utilize the strengths of both sides.

Let’s take agriculture as an example. A local partner will then have experience in farming and fishing, with great knowledge of the local geography and ecosystem. Meanwhile, the foreign partner can help to modernize the production exporting to international markets.

Like any other type of partnership, founding members of a JV, especially those from different cultures, should be aware of the conflict of interest. This is likely to happen when the JV grows and the founding members have their own visions and strategies for future development, either for their own company or for the JV.

Domestic eCommerce sales

Given the recent eCommerce boom in Southeast Asia, many foreign companies see online sales as the most promising sales channel. You have two options, either to import and have the products available locally or ship the products from a warehouse overseas.

Importing products and selling on local eCommerce websites is referred to as domestic eCommerce sales. For companies that sell lighter products such as in the fashion categories, cross-border eCommerce might be a more suitable option.

The entry and registration requirements will then be significantly lower, but you must deal with higher and longer shipping costs. This is not optimal for some businesses as consumers require shorter delivery lead times and lower shipping costs.

A local warehouse assures effective fulfillment of the orders as international shipping normally takes 3 – 5 times longer than domestic dittos. The lead times can be even longer if the country is under lockdown or faces restrictions of movement.

It’s therefore recommended to have locally ready products to meet growing demands and to save logistics costs in the long run. Yet, domestic eCommerce also requires that you have a local legal entity that can import products and manage orders.

Foreign companies must either set up their own legal entity or work with local distributors. Although this might require more effort and capital, it could be used as a foundation for the company to penetrate offline sales channels.

Cross-border eCommerce sales

If you don’t have a physical presence or work with a distributor in Southeast Asia, you can also sell your products cross-border. Major platforms like Lazada and Shopee have developed cross-border eCommerce capabilities and where you ship the products from overseas.

This is considered an effective way to examine the market’s reaction to a certain group of products while keeping the budget low. Shopee and Lazada are among the pioneers to enable cross-border sales functions. Tiki, a Vietnamese-based eCommerce startup has also recently allowed international sales, to catch up with this globalization trend.

However, not all platforms are available for cross-border sales. Tokopedia, the third most visited marketplace in Southeast Asia is only available for trading activities in Indonesia. Besides, Tokopedia is only available for a limited number of product groups.

Each platform has its own restrictions on eligibility for cross-border sales. Typical products are household and fashion goods, which bear less risk of being defective and are relatively easy to deliver. Worth mentioning is also that foods and supplements are not allowed to sell cross-border on platforms like Lazada.

Another disadvantage to consider in the long run is that cross-border eCommerce limits you to online sales. This also shares a mutual disadvantage with domestic eCommerce, which is generally not suitable for B2B products such as machinery.

Summary

Southeast Asia boasts a population of around 600 million people and is one of the fastest-growing regions globally. Foreign investments and diversifications from the Chinese supply market will allow for growth, increased disposable incomes, and expanding manufacturing activities in the coming years.

As a result, increasingly more foreign companies seek to enter and expand in the markets, either for B2C or B2B sales. You must also consider whether your products are suitable to sell offline or online. For instance, bulkier products for B2B are often more suitable for B2B sales offline and with the help of distributors.

Smaller products such as fashion items can be more suitable to sell online, sometimes cross-border from overseas. The most popular eCommerce platforms, Lazada and Shopee, allow cross-border sales and is something they prioritize.

The most interesting countries that foreign companies should target for market entries in Southeast Asia include Vietnam, Indonesia, Malaysia, Thailand, and the Philippines.

Read more about our market entry services or other consulting capabilities.

The impact of the COVID pandemic has started to subside in Southeast Asia. Regional governments continue to ease restrictions and further open their borders in 2022, giving rise to the recovery of key tourism industries and cross-border businesses. Despite the recent uncertainties caused by the Russia-Ukraine conflict, the region’s overall economy is still set for robust growth.

This insight is part of Southeast Asia’s COVID update series by Asia Perspective. Read the previous insight here.

One quarter into 2022, Southeast Asia experienced another surge in daily COVID-19 cases. Vietnam’s daily cases escalated more than any part of the region, with more than 80% of its total recorded cases happening within this period. The country’s government stressed that extra efforts are needed to reduce the number of new cases, severe cases, and fatalities. At the end of February 2022, Thailand raised its COVID-19 alert level to level 4, the highest alert level which indicates very high health risk, as the number of severe cases and deaths continued to rise. However, the government stated that it would not impose new lockdowns. Its neighbor Malaysia has also not been able to lower their cases to less than 10,000 registered infections per day. Some of the key reasons behind the high infection rate in Southeast Asia are the spread of contagious Omicron variant as well as the less precautions amongst the population after the reopening of the societies.

Philippines, on the other hand, significantly improved infection control, successfully keeping the daily cases to less than 1000 cases per day since the start of March 2022. Philippines recorded a 24% decline in daily infections in the last week of March 2022, compared to a week earlier, while the total number of cases of Indonesia in March 2022 is 2.7 times lower than its February figure.

Despite the high daily cases, many countries are well on track with the vaccination timeline, such as Vietnam, Malaysia, Thailand, and have managed to stabilize the situation in some of the big cities and provinces.

More than 70% of the population in Vietnam, Malaysia, and Thailand have been fully vaccinated. Initially, all governments targeted to achieve herd immunity by fully vaccinating around 70-90% of the population. High vaccination coverage allows these countries to reach a ‘new normal’ state, where businesses can return to their pre-COVID level of operation and the people can resume normal movement, both domestically and internationally.

Vietnam, home of 98 million people, is currently among the world’s most highly vaccinated countries. As Vietnam recently finished vaccinations of people aged 12 and older, the country now aims to wrap up booster shots for adults within the first quarter of 2022, and start rolling out vaccination for children aged 5-11 starting April 2022. With new Omicron-fueled cases on the rise, Thailand’s government has recently stepped up a campaign to vaccinate the elderly and other vulnerable groups. Malaysia, the first country in Southeast Asia to reach its herd immunity target, is ramping up the booster shot rollout. As of March 23rd, over 15 million Malaysians, equivalent to more than 40% of the population, have received a booster shots for COVID-19. Overall, it is evident that these countries’ efforts to secure COVID-19 vaccine doses through robust multilateral relationships has already paid off.

In contrast, Indonesia and the Philippines are lagging behind their targets. As of March 2022, the share of fully vaccinated people in the two nations have not even reached 60% of their population, and there was little vaccination progress during the first quarter of 2022. Amidst the exponential increase in the region, Indonesia shortened the recommended interval between the second and third dose for individuals aged 60 and older from six months to three. The Philippines also announced its plan to accelerate the administration of booster shots and the vaccination of senior citizens, including improving the accessibility of vaccination sites, simplifying the process, and increasing engagement with localities.

Current Travel Regulations and Social Restrictions

As Southeast Asia moves past the worst of the omicron wave, the region will begin a transitioning toward an endemic phase starting in the second quarter of the year. Vietnam, Malaysia and the Philippines announced waived quarantines for vaccinated international travelers with negative tests upon arrival, while Indonesia and Thailand eased testing requirements to boost tourism.

Vietnam

Vietnam resumed flight routes with 20 international destinations in the Asia Pacific, Europe, and the United States. However, the flight frequency is still limited compared to pre-covid levels. Yet, it is expected to quickly increase. Effective from March 15th 2022, Vietnam’s government resumed its visa exemption policy for 13 countries for up to 15 days, which had been in place prior to the pandemic. The policy applies to citizens of Belarus, Denmark, Finland, France, Germany, Italy, Japan, Norway, Russia, South Korea, Spain, Sweden, and the UK.

Indonesia

Following its fellow SEA neighbors, Indonesia started easing travel restriction since daily infections have dropped by 90% compared to the mid-February peak. After initially trying the program in Bali, Batam, and Bintan islands for two weeks, the government is now applying its quarantine-free travel policies for fully vaccinated individuals to the rest of the country, which would soon end the two-year border closure. The five-day quarantine will still be required for unvaccinated or partially vaccinated travelers.

Malaysia

On April 1st 2022, Malaysia began its transition toward the endemic phase, an exit strategy that would allow Malaysians to return to near-normal life after nearly two years of battling the COVID-19 pandemic. All restrictions on business operating hours have been removed and prayer activities are now allowed without physical distancing.

The Philippines

Following an initial lift of a nearly two-year ban on foreign travelers from a selected few countries, fully vaccinated travelers from everywhere are allowed to enter the Philippines and are no longer subject to facility-based quarantine upon arrival from April 1st. Travelers must present proof of vaccination and negative RT-PCR results from a test taken within 48 hours from their country of origin.

Thailand

As the tourism-reliant Southeast Asian nation seeks to boost economic recovery, foreign visitors are now only required to undergo an RT-PCR test on arrival and a self-administered antigen test on day five, instead prior pre-departure RT-PCR COVID Test, starting on April 1st. At the same time, the government announced the extension of a nationwide state of emergency which will remain until the end of May to keep the spread under control.

Economic Landscape: Tourism, Trade, Mergers and Acquisitions (M&A)

Asian Development Bank (ADB) forecasted Southeast Asia’s GDP growth to be 5.1% for the year 2022, with the worst-case scenario for GDP growth to be -0.8 percentage points from the baseline forecast, factoring in the impact of the Omicron wave. In comparison, the GDP growth in 2021 landed at 3%. The road to recovery, however, has been complicated by the recent Russia-Ukraine conflict. Given Southeast Asia’s dependence on exports, the economic expansion would likely suffer from supply chain uncertainties and soaring energy prices. In March 2022, S&P Global changed its growth forecast for emerging Southeast Asia to a still relatively robust 5 percent, lowered from the initial forecast of 5.6 percent.

4.7 million Southeast Asians fell into extreme poverty in 2021, according to a new ADB report. As many as 9.3 million jobs disappeared in comparison with a baseline no-COVID scenario. Economic output in 2022 is forecasted to remain more than 10% below the COVID-free scenario. Unskilled workers, retail, and non-regulated workers, as well as small businesses without a digital presence, are among the most affected.

However, a recovery was noted in Southeast Asia towards the end of 2021. The region witnessed a rise of 161% in visits to retail and recreational areas in February 2022, compared to the levels throughout 2020. Economies with high technology adoption (Singapore, Malaysia, Thailand), merchandise resilience (Malaysia, Singapore, Thailand, Vietnam), and rich natural resources (Brunei, Laos PDR, Indonesia) are likely set for a stronger return.

The continuing trend of this year for Southeast Asian countries would be to reopen their borders for international quarantine-free travel to recover the region’s key tourism industries, which nearly halved their GDP contribution from 2019 to 2020. Border reopening also gives ways for stronger cross-border business activities. Multiple sectors could expect the return of international investors and business operators wanting to expand their portfolios in the region.

“Revenge travel” from overseas tourists is highly anticipated. A surge of 268% in flight booking from South Korea to Southeast Asia between March 11th-22nd, 2022 has already been recorded. The region’s largest sporting event SEA Games, which will be hosted by Vietnam in 2022, is also expected to boost interregional travel.

M&A activities in the region remained positive up until February 2022, mainly driven by Singapore. Southeast Asian startups raised at least 1.96 billion USD in private equity and venture capital transactions in the month. Deal count dropped 23% compared to January, yet big-ticket transactions increase deal value by 15% month-on-month. Singapore leads Southeast Asia’s funding scene by both volume and value. Indonesia came second with 34 startups raising 198 million USD. Startups in the software and SaaS sector received most of the funding. Followed are fintech, e-commerce, data analytics, and AI. Powered by interregional megadeals, Southeast Asia’s M&A activities remain bullish as the world weathers recent changes and increasing uncertainties. Dealogic recorded a reduction of 29% in the number of global mergers in the first quarter of 2022 compared to the same period of the previous year. Asia-Pacific suffered a 33% drop in transaction value, the heaviest drag among the recorded regions (North America fell 28%, Europe fell 25%).

While the number of COVID cases has continued to rise, the pandemic’s impact on the economy has been subdued in 2022. The GDP growth in most SEA counties will likely surpass the previous year’s level. Border reopening in the region helps boost the recovery of the tourism industries and the return of overseas businesses, which will significantly facilitate Foreign Direct Investment (FDI) growth and M&A in the investment-fueled region. At the same time, governments must watch out for the progress of the Russia-Ukraine conflict and prepare immediate action plans to deal with its potential consequences, such as supply chain disruption and soaring commodity prices. All in all, the overall economic growth will only be guaranteed with recovery strategies across multi-sectors.

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