Malaysia

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FDI in Malaysia recovered remarkably from years of contraction

Construction in Malaysia

 

Foreign Direct Investment (FDI) has long been a key driver in the development of the Malaysian economy. Thanks to the government’s continuous efforts in making Malaysia an attractive FDI destination, the country witnessed an impressive growth of FDI inflows in 2021, breaking the downward trend from the last 4 consecutive years. The country has successfully regained foreign investors’ interest, a positive signal of economic growth and competitive edge recovery after the COVID-19 pandemic.

In the past four years prior to 2021, Malaysia’s FDI attractiveness had been declining substantially, which was only further worsened during the COVID-19 pandemic. It was pointed out by the Malaysian Investment Development Authority (MIDA) that the severe drop in net FDI inflows was the result of unstable politics, non-transparent and inconsistent policies, causing the foreign investors’ confidence to diminish. Moreover, uncertainties caused by the pandemic and the global political situation created a gloomy investment landscape worldwide, including for Malaysia. Fortunately, those days might now be left behind, as Malaysia experienced a strong positive increase of FDI inflows in 2021.

Malaysia’s net FDI inflows reached 10.9 billion USD in 2021, increasing 2.6 times from the 2020 figure. This is a new record compared to the previous record of 10.7 billion USD in 2016. Investment from countries in Asia are the biggest contributor to this growth, with a total of 5.1 billion USD invested, making up 46.7% of total investments. Among the Asian countries, Singapore, Japan, Korea, Hong Kong, and Mainland are the top five investors. It was followed by the U.S, which invested 4.2 billion USD. Europe ranked third with 1.3 billion USD, with the UK, Netherlands and Austria as the largest investing countries.

Malaysia FDI inflows

The sector receiving the most investments and that contributed to the growth in 2021 was manufacturing, with a total increasing from which had been severely impacted by the COVID-19 outbreak. E, transport equipment, and other equipment, followed by mineral and metal products, saw particular popularity, with 60% of the manufacturing investment going into these sectors. Manufacturing is gaining increasing interest from FDI investors, as its contribution to total FDI has become dominant since 2020, making up 53% and 61% of total net FDI inflows in 2020 and 2021 respectively. Meanwhile, it only accounted for 24% in 2019. The second biggest FDI sector was services, mostly in financial and insurance activities, which also rose significantly to reach 2.7 billion USD in 2021. However, services comprised only 25% of total net FDI inflows in 2021, a significant down from 54% and 40% in 2019 and 2020. This is different from the previous years when FDI poured the most into the service sector, with focus now clearly shifting towards manufacturing.

Malaysia FDI inflows by sector

Moreover, investment globally has also been rising substantially, with the number of newly approved FDI investments in 2021 rising above pre-pandemic levels, to a new all-time high of 47.5 billion USD. The Netherlands, Singapore, China, Austria, and Japan accounted for 88.9% of total FDI approved. As of December 2021, Malaysia recorded 352 high-profile FDI projects, including Fortune 500 companies with a total potential investment value of 8.9 billion USD. Overall, technologically advanced are the key focus sectors in Malaysia attracting FDI.

For example, Intel Corporation (the U.S.) announced its investment of 7 billion USD in building a new semiconductor packaging and testing factory in Malaysia, which will begin production in 2024. This new investment is expected to create more than. In addition, Infineon Technologies (Germany) made Malaysia one of its regional manufacturing hubs by investing 4.5 billion USD in its integrated semiconductor manufacturing operation in 1999. Now the company announced that it will expand its semiconductors manufacturing base in Malaysia with a 2.27 billion USD investment. Further, Risen Energy, a Chinese solar energy company, chose Malaysia to be the location for building its first mega factory of photovoltaic modules in Southeast Asia, putting down 9.6 billion USD for 15 years.

Malaysia’s impressive achievement in reattracting foreign investment has stemmed from several factors. Malaysia has benefitted from the recovery of global FDI flows as countries started to reopen borders after months of lockdown. The Malaysian government’s relief from pandemic containment measures at the beginning of 2021 also helped to bring FDI flow into the country. Furthermore, the strong governmental support with clear investment promotion policies and implementations plays a vital role in FDI attraction. In the 2021 budget, extensions of tax incentives were proposed, including tax exemption for new companies or a 100% tax allowance for five years for manufacturing companies that relocate to Malaysia. In April 2021, the government announced the National Investment Aspirations framework that is aimed to reform Malaysia’s investment policies, enhance regional and global supply chain linkages, and develop economic clusters tied to key sectors such as electrical and electronic industry with advanced manufacturing technology.

To further promote new FDI projects, a new application method and procedure was implemented to simplify the process. The InvestMalaysia portal was launched in March 2021 as an online portal for investors to apply and manage their applications, from license approval status to granted incentives. This digitalization of investment applications is expected to speed up the approval process, which also contributes to the substantially increased number of approved projects in 2021.

In summary, Malaysia has seen a vibrant success with an impressive rebound in FDI attraction after the pandemic. The country broke its own records of net FDI inflows and approved FDI investments within the manufacturing sector, This achievement closely aligns with the government’s strategic goal in the long term. Through several promotion policies and investment environment improvements, the country has proved its increasing competitiveness in the regional FDI landscape, gaining trust and confidence from foreign investors.


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    The Cement Industry in Asia: Major Producers & Trends

    Cement factory in Thailand

     

    The cement industry plays a vital role in infrastructure development and urbanization drives the demand for cement greatly. Concrete is currently the second-most used substance on the planet after water, which explains its importance.

    In this article, we review the cement industry in Asia and what countries account for much of the exports and the consumption. We will also explain current issues that governments work actively trying to resolve, and how these affect the markets.

    The Cement Industry in Asia

    Production and consumption of cement are largely concentrated in Asia, accounting for 73% of the output globally and a consumption of 81%. Yet, the cement production industry is also facing a capacity surplus due to lower demand from the construction industries.

    The largest producers of cement include China, Vietnam, India, and Indonesia where China produces and consumes the most by a big margin. In Southeast Asia, there is a large gap between Vietnam and the second-largest cement-producing country, Indonesia, which has 15 integrated plants and 66 million metric tons of production per year.

    Thailand, the Philippines, and Malaysia all also possess large cement markets, despite not being as big as the above-mentioned countries.

    The EU imports the most cement from China, Thailand, and the Philippines, while Vietnam is in the top 5 exporters of cement and clinker to the US. Having said that, both the EU and the US aren’t dependent on cement from Asia as most of their cement producers operate on a global scale and can provide enough for the domestic markets.

    Worth highlighting is also the close ties between the US, Mexico, and Brazil, where the latter have large-scale cement manufacturing.

    In recent years, China has tried to cut down on cement production due to environmental issues. It’s said that if the cement industry was a country, it would be the third-biggest polluter in the world, after the US and China. The governments of Vietnam and Indonesia have also implemented measures to counter the surplus of cement capacity with new regulations that limit new cement investment projects. The new regulations and limits will also help to reduce the cement output, preventing oversupply and increased competition among suppliers.

    What countries are the biggest cement producers in Asia?

    Four of the ten biggest producers of cement globally can be found in Asia, as well as the world’s biggest exporter of cement. Keep in mind that we must make a distinction between “producers” and “exporters” as countries like China consume much of their locally produced cement.

    Vietnam

    Vietnam is the biggest exporter of cement globally with an export value of 1.4 billion USD in 2020, equaling 12.5% of the global cement exports. Clinker is a nodular material used as a binder in cement products, and Vietnam also exports this product in large quantities.

    Vietnam exports around 10% to 15% of its cement, having China, the Philippines, and Bangladesh as its biggest trading partners. China doesn’t have a shortage of cement, yet the cost for Chinese producers to transport products to the coastal region is higher than importing from Vietnam. This explains why China remains the biggest importer of Vietnam’s cement and clinker for many years, accounting for 57% of the total export volume.

    At the moment, Vietnam faces an oversupply of cement. While the current domestic demand is around 65 million tons, the industry’s capacity has reached nearly 107 million tons. The situation is particularly serious in the North of Vietnam, which will increase its dependence on the export market.

    China

    China is the biggest cement producer, consumer, and importer in the world. It produces almost 60% of the world’s cement and accounts for most of the colossal carbon footprint of the industry. In 2020, the production volume reached almost 2.4 billion metric tons. To match China’s urbanization need, the domestic production of cement grew rapidly between 2002 and 2014.

    However, the demand for cement is expected to decline due to the shift from mass urbanization to more sustainable infrastructure, along with the slowdown in the Chinese real estate market. Therefore, the country is reportedly trying to limit cement imports.

    In addition to restricting imports, China has a plan to cut down on cement production as the manufacturing process requires much coal, which emits CO2 and dust. This causes a negative and long-lasting impact on the environment. This is part of its five-year plan to reach the CO2 emission reduction goal.

    India

    Being the second-largest cement producer with 7% of the global installed capacity, India has a positive outlook on its cement industry. Until February 2021, India’s overall cement production reached 262 million metric tons in 2021, which is around 10% of China’s.

    The demand for housing in rural areas and the Indian government’s strong focus on infrastructure development will drive the cement production to double-digit growth. Examples of infrastructure development projects include the goal of creating 100 smart cities, expanding the capacity of railways, and adding 125,000 km of roads in the coming five years. We will also see an increase in storage and handling facilities to reduce transportation costs. The demand for cement will remain high for at least until 2030.

    South India is the main hub for cement production that has several big producers, accounting for 33% of India’s total output. On the international trade aspect, India exports mostly to Bangladesh, Sri Lanka, and Nepal, while it imports much clinker from Vietnam.

    Indonesia

    Indonesia is an emerging exporter of cement, having a production volume of around 66 million metric tons of cement in 2021. It’s rapidly increasing exports of cement and clinker where Bangladesh and the Philippines are major importers of clinker, and Mauritius and the Maldives are the biggest importers of its cement.

    The cement industry is dominated by four major producers, including the state-owned Semen Indonesia, which has a 44% market share. The other major producers include Indocement Tunggal Prakarsa, Holcim Indonesia, and Semen Baturaja.

    Like Vietnam, Indonesia also struggles with an oversupply as domestic consumption only accounts for 60% of its production capability. Despite the massive infrastructure projects across the country, the low utilization rate results in inefficiencies that have hurt many cement producers.

    Summary

    Asia has four of the ten biggest cement producers globally, including China, Vietnam, India, and Indonesia. While Vietnam exports much of its cement, China consumes much of its locally produced cement and where most of the supply is allocated to the construction industry. Worth highlighting is also the overcapacity that countries struggle with, including Vietnam, which will result in the need for more exports.

    At the same time, Europe is facing a crisis due to a shortage of building materials, which is partly related to the increased energy costs. Turkey and China have traditionally been interesting supply markets for such products, but we might well see Southeast Asian countries becoming new options for foreign companies.


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      Sourcing of Agricultural Products in Southeast Asia: An Introduction

      Rice farmers in Thailand

       

      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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        Manufacturing & Sourcing in Southeast Asia: Industries, Trends, and Benefits

        Factory workers, Thailand

         

        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.

         


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          Rubber Manufacturing in Southeast Asia, an Introduction Part 2: Vietnam and Malaysia

          Drying sheets of rubber

           

          Southeast Asia is widely known as the world’s largest region for rubber plantations, with Thailand, Indonesia, Vietnam, and Malaysia accounting for nearly 80% of the global natural rubber output.

          This article is part two of our two-part series and will cover some important information for companies to consider when thinking about sourcing rubber products in Vietnam and Malaysia, the two fastest-growing markets in the rubber industry worldwide.

          Overview of the rubber industry in Vietnam and Malaysia

          Thanks to Vietnam and Malaysia’s natural resources and the global soaring rubber demand, both markets have the potential to grow further in upcoming years, Yet there are distinctive characteristics between the two nations. While Vietnam’s major advantage is in raw materials sales (natural rubber), Malaysia stands out in the production of synthetic rubber and medical glove production.

          In 2021, the Vietnamese rubber yield surpassed major manufacturing countries such as India, Thailand, and Malaysia. Vietnam’s estimated rubber output was at 1.2 million tons in the year, accounting for 8.7% of the world’s market share. The industry remains export-oriented, with China, India, Taiwan, South Korea, and the United States being the main export destinations. Despite the global COVID-19 pandemic, Vietnam’s rubber export turnover in 2021 was up about 36.2% compared to a year earlier. Furthermore, Vietnam is also the 5th largest importer of rubber with a total value of 648 million USD in 2020, and imports mainly from Cambodia, Laos, and Thailand.

          Malaysia ranked seventh in natural rubber production worldwide. In 2021, the total production volume reached 690.4 thousand tons, of which natural rubber and synthetic rubber made up 68% and 32% respectively. The output decreased by 4% compared to 2020. Although the plantation hectarage for natural rubber plantations has been decreasing gradually over the last decade, the rubber industry continues to be significant for Malaysia due to its importance as an export product. In 2021, Malaysia’s export of rubber products soared 50.5% (YoY) to reach approximately 14 billion USD, with latex goods as the biggest contributor. The main export markets are the US and the EU which together take up more than 50% of the country’s export value.

          Products that can be sourced in Vietnam and Malaysia

          Vietnam’s rubber industry development has mainly relied on the export of raw materials. There are three main product groups in the industry, including natural rubber, rubber products, and raw rubberwood/rubberwood products. Specifically, tire production consumes approximately 70% of the total amount of natural rubber, making it one of the fastest-growing rubber products, together with automobile spare parts, mattresses, and shoe soles. As sustainable materials have been rising in recent years, raw rubberwood, which is considered environmentally friendly, has become an important source of raw materials in Vietnam’s timber industry.

          Malaysia focuses on manufacturing and exporting products from rubber instead of raw and semi-processed rubber. The biggest and most popular export product is rubber gloves, which accounted for 89% total export value of rubber products in 2021. Glove export already doubled in 2020 and continued to increase by 55.4% in 2021. Other rubber export products that can be sourced from Malaysia include new pneumatic tires, latex thread, tubes, pipes, hoses, insulated wire and cables.

          Governmental supports

          The natural rubber industry is one of Vietnam’s most important agricultural and forestry industries. The Vietnamese government has focused on promoting the industry as a national brand to further push its growth. Ministries and localities have coordinated to implement supply-demand strategies to ensure the rubber supply matches demand. Rubber manufacturers are encouraged to produce natural latex and improve processing technologies to stay competitive in the market. The National Vietnam Value Programme allowed rubber companies to assess business performance and branding strategies, in which quality, innovation, and pioneering capacity are the main criteria taken into account for rubber businesses to be qualified as national brands.

          The Malaysian government consistently grants support policies to upstream rubber production companies as the industry is considered a key pillar in the economy. The policies range from subsidized gas prices and subsidy packages for high-technology companies, to tax exemption for up to 15 years for foreign companies investing in glove manufacturing. Big local players in the industry have taken advantage of the government policies and invested heavily in this sector.

          Import duties for rubber products from Thailand and Indonesia

          Import duties to the US

          Malaysia and Vietnam have not signed any Free Trade Agreements with the US, thus there is no tax preference for such countries when exporting rubber products to the US. Nevertheless, raw rubber and medical gloves fall in the categories that enjoy 0% import tax, while new tires may be subject to up to 4% tariff depending on the types and purposes.

          Table of US tariffs for rubber products

          The trade war between the US and China has undoubtedly had a direct impact on Vietnam’s rubber industry as China is the leading import market for Vietnam. Raising the import tax on Chinese imported rubber products reduced the demand for natural rubber from the Chinese market, subsequently affecting the Vietnamese market. Additionally, Vietnamese tire manufacturers’ capacity is too feeble to fill the gap in the US market, as such, it is currently almost impossible to compensate for the damage the trade war has caused.

          Since the end of 2019, US Customs and Border Protection has banned glove imports from several Malaysian-based manufacturers over allegations of forced labour practice. Therefore, imported products from Malaysia, including rubber gloves, are under strict scrutiny by the US. Thus, banned Malaysian glove companies that are large players in the industry, are urged to address the issues so the ban can be lifted and exports can resume in the future.

          Import duties to the EU

          The EU-Vietnam Free Trade Agreement (EVFTA) is expected to fuel Vietnam’s rubber exports to the EU. European countries’ demand for rubber and rubber products is very large, especially for high-grade rubber (SVR CV – Standard Vietnamese Rubber, Constant Viscosity), SVR 10, and SVR 20 categories, which are widely used in technical industries or manufacturing of everyday products manufacturing. With EVFTA, rubber couplers and rubber hoses are exempt from tax immediately, compared to the previous 3% – 4.5% rate. For rubber conveyor belts, taxes will be gradually reduced from 6.5% within 5 years. Most of the key rubber products, such as tires and medical gloves, enjoy a 0% imported tariff from the EU.

          Malaysia and the EU formally started negotiation for a Free Trade Agreement in 2010, but it was put on hold in 2012 after several discussions. Recently, after the pandemic, the Malaysian government is considering restarting the trade talks. Currently, raw rubber imported from Malaysia to the EU bears a 0% tariff while main rubber products, including tires and medical gloves, are subject to 4.5% and 2% import tax respectively.

          Table of EU tariffs for rubber products

          Conclusion

          Vietnam and Malaysia are two of the fastest-growing nations when it comes to rubber production. Vietnam’s rubber industry development has majorly relied on the export of raw materials, while Malaysia is globally recognized for medical gloves production.

          Although the COVID-19 pandemic has had a strong impact on the entire production and processing process, both Vietnam and Malaysia have made efforts to overcome the challenges. Malaysian companies specializing in upstream rubber production have been financially funded by the government, while Vietnam’s government is focusing on promoting the national brand of the rubber industry to gain a competitive advantage in the global market.

          In addition, thanks to the EVFTA, Vietnam enjoys an extensive tariff exemption and reduction for its rubber products that are imported from the EU. Malaysia is also catching up with its neighbour by re-initiating discussions about free trade agreements, aiming for a more competitive costing position for rubber export.

           


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            Market Entry & Expansion in Southeast Asia: An introduction

            Southeast Asia business meeting

             

            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.

             


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              Sourcing & Manufacturing in Malaysia: An Introduction

              Kuala Lumpur city center

              Since its independence in 1963, Malaysia has been one of Southeast Asia’s best-performing economies. In the 1970s, it shifted from primarily relying on agriculture and mining to becoming a manufacturing nation.

              Today, it’s developed by Southeast Asian standards and receives less attention than neighboring countries when discussing manufacturing and relocation opportunities. This is something you will understand in greater detail in this article, and the underlying reasons.

              This article will give you a clear overview of both the benefits and disadvantages of manufacturing in Malaysia. We also review what products are produced in Malaysia, and the most interesting cities and regions for manufacturing. Finally, Malaysia’s free trade agreements will be covered.

              Malaysia Overview:

              • Population: Around 33 million
              • Capital: Kuala Lumpur
              • Bordering countries: Brunei, Indonesia, Singapore, and Thailand
              • Major cities: Kuala Lumpur, Kota Kinabalu, Johor Bahru, Malacca, Ipoh, Georgetown

              Benefits of Manufacturing in Malaysia

              There are many benefits of setting up manufacturing in Malaysia, particularly as it’s more developed than other Southeast Asian countries. Let’s start and review the major benefits of setting up manufacturing in the country.

              Skilled and English-speaking workforce

              Malaysia is ranked third in Southeast Asia when it comes to English proficiency. Only Singapore and the Philippines rank higher, according to EF Education First – an international educational institution. It’s estimated that around 50% of the Malaysian population is literate in English, especially among the younger population and urban citizens.

              The workforce is not only skilled by Southeast Asian standards but global standards. According to the World Economic Forum, Malaysia ranked in the top 10 from 2017 to 2019, which speaks for itself.

              Business-friendly environment

              Malaysia is continuously ranked as one of the best countries in terms of ease of doing business, according to reports released annually by the World Economic Forum. In 2020, it ranked 12th globally, only behind Singapore in Southeast Asia.

              Over the years, the country has simplified many of its “old-fashioned” legal procedures to support foreign businesses. Local authorities have introduced several projects to simplify manufacturing operations, including e-Manufacturing Licenses (e-ML) to speed up the approval processes.

              Other examples include a One-Stop Center to ease the traveling for business travelers and tax exemptions for manufacturing businesses that have invested at least 70 MUSD and over 10 to 15 years.

              Developed infrastructure

              One of the major perks of investing in Malaysia is the developed infrastructure. There are currently more than 500 industrial parks and zones present, well-connected by a road network of more than 140,000 km, covering both Peninsular (West) Malaysia and East Malaysia.

              The longest expressway has a length of more than 800 km, reaching the border with Thailand (in the North) and the border with Singapore (in the South).

              Apart from road infrastructure, the country also enjoys a comprehensive air and sea transport network, with 60+ airports (6 international ones) and 7 key seaports. Among the 7 key seaports, Port Klang and Port of Tanjung Pelepas are the top 20 busiest seaports globally.

              In addition to its physical infrastructure, the digital infrastructure is of equal importance. This is an area where Malaysia excels, having a wide nationwide coverage of mobile connectivity.

              Internet penetration rate reached 88% by end of 2020, while average national 4G availability reached 88.8% in Q4 of 2021.

              Strategic location

              Malaysia shares borders with Singapore, Thailand, and Indonesia and much of the region’s maritime transports pass through the area. Thanks to its location, you can reach other major Southeast Asian cities in less than 4 hours by flight, and major cities in East Asia in less than 8 hours.

              The Strait of Malacca is known as the key shipping channel between the Indian and Pacific oceans and one of the most important shipping lanes in the world.

              Two key Malaysian ports, Klang and Tanjung Pelepas, play significant roles in the global supply chain.

              Advanced manufacturing

              The three longstanding economic pillars of Malaysia’s manufacturing sector are Electrical and Electronics (E&E), Machinery and Equipment (M&E), and Chemicals.

              E&E products have made up the largest portion of Malaysia’s exports recently, accounting for 37.5%, 39.4% and 34.4% of the country’s total export in 2019, 2020, and 2021 respectively.

              What are the disadvantages?

              There are a few disadvantages to choosing Malaysia for manufacturing. Yet, the disadvantages do impact foreign companies’ decisions to set up manufacturing in neighboring countries.

              Labor costs

              The labor costs in Malaysia are on par with that of China, which we covered in our separate article. By comparison, labor costs are only around 1/3 in the Philippines and Vietnam. In Indonesia, labor costs are only around 1/5, making it a more attractive manufacturing destination from a cost perspective.

              Despite the higher wages, it’s worth mentioning that the country has higher productivity than most of its neighboring peers.

              Small labor pool

              Given the small population (~33 million), Malaysia has a limited labor pool compared to other neighboring countries. The total labor force was roughly 16 million in 2020, approximately 40% of that for Thailand and the Philippines, and 30% of Vietnam’s.

              Moreover, the reliance on migrant labor has also been challenging, especially during the pandemic period, when travel restrictions were introduced. The Department of Statistics Malaysia reported that more than a third of the workforce was foreigners in 2020.

              What products are manufactured in Malaysia?

              Malaysia has an advanced manufacturing industry that is highly specialized. Below you can find the major manufacturing industries that account for most of the exports.

              Electrical Products and Electronics (E&E)

              Over the last decades, E&E has been the largest single contributor to the manufacturing sector of Malaysia, accounting for 34.4% of the total manufacturing output in terms of value in 2021.

              This includes a wide range of products, which can be classified into four main categories:

              • Electronic components: semiconductor, LED, wafer fabrication
              • Industrial electronics: computers, computer peripherals, office equipment
              • Consumer electronics: speaker, camera, media player, amplifier
              • Electrical products: solar cells, cables, wires, battery

              Machinery and Equipment (M&E)

              Although M&E products only account for 4% (11.6 billion USD) of total exports in terms of value, 85% of small and medium enterprises (SME) manufacture the products. Products in M&E are grouped into four major categories:

              • Specialized process machinery and equipment. This type of machinery is typically for a particular industry, such as E&E, oil & gas, automotive
              • Metalworking machinery. Typical products include laser cutting machine, machining center, milling machine
              • Power generating machinery and equipment. Malaysia stands as the largest boilers manufacturing hub in Southeast Asia. Apart from boilers, typical products include turbines and electricity generating sets
              • General industrial machinery and equipment. This is also considered the largest sub-sector of the M&E sector. Typical products include elevators, cranes, air conditioning plants

              Chemicals and Petrochemicals (C&P)

              Chemical and petrochemical products make up more than 10% of the total exports in Malaysia. The development of the industry is largely attributed to the rich oil & gas reserves and petrochemical feedstock.

              The broad connections with major markets in Asia, especially the Middle East, also affect the exports.

              The industry includes three major groups of products: chemical products, petroleum products, and plastic products.

              Industrial Regions & Cities

              Despite its relatively small population and land area, manufacturing and processing industries can be found in different parts of the country. Let’s review the most important ones.

              Selangor

              Selangor is the richest state in Malaysia and contributes the most to the GDP. Despite the impact of the COVID-19 pandemic, the state received roughly 9 billion USD in direct investment in 2020. Nearly 50% of that was for the manufacturing industry.

              The 5 core clusters of the state include E&E, transport equipment, life science, M&E, and food & beverage (F&B).

              Selangor also has a developed infrastructure system, with the air, sea, road, and rail networks connecting to other domestic regions. Its proximity to Kuala Lumpur – the capital, is also an advantage.

              Penang

              Located on the northwest coast of Peninsular Malaysia, Penang is known as one of the most urbanized among the 13 states. Also known as the “Silicon Valley of the East”, manufacturing and services contribute to more than 90% of the state’s GDP.

              Manufacturing is regarded as the backbone of the region, with a key focus on products such as electronics, machinery, and transport equipment.

              The total export value of Penang has been growing constantly at an annual rate of 11% from 2014 to 2020, accounting for about one-third of the country’s total export value. Penang itself was estimated to command 5% global semiconductor export in 2019.

              Johor

              Manufacturing is the second-largest contributor to Johor’s GDP, which accounts for around 30% of the state’s GDP.

              In 2021, there were 134 approved manufacturing projects in Johor, out of 702 for the whole country. This was the second-highest number of approved projects and just behind Selangor.

              The state features E&E and Petrochemical as the major manufacturing industries.

              Malaysia’s Free Trade Agreements

              Malaysia has country-specific trade agreements with Australia, Chile, New Zealand, Japan, Pakistan, Turkey, and India.

              It’s also a member of the Association of Southeast Asian Nations (ASEAN), including Brunei, Cambodia, Indonesia, Laos, Thailand, Myanmar, the Philippines, Singapore, and Vietnam as additional member countries.

              ASEAN currently has the following FTAs that are in effect:

              • ASEAN Free Trade Area
              • ASEAN-Australia and New Zealand
              • ASEAN-China
              • ASEAN-India
              • ASEAN-Japan
              • ASEAN-Korea
              • ASEAN-Hong Kong

              The Regional Comprehensive Economic Partnership (RCEP) is another trade agreement signed between 10 ASEAN countries and:

              • Australia
              • China
              • India
              • Korea
              • Japan
              • New Zealand

              Summary

              With the country’s strategic location, business-friendly environment, well-developed infrastructure, and skillful workforce, Malaysia has been strengthening its position as the manufacturing hub, not just in the region, but also globally.

              The country stands as an attractive destination for global corporations to place their manufacturing/sourcing sites, amidst the impact of the pandemic in the last three years, as well as the trade tension among other countries, such as the US, China, India, Russia.

              E&E, M&E, and chemical products remain as the main categories, while medical device and aerospace are seen as the rising stars, which offers huge potential for the country.

              Lastly, the settlement of the country into 5 economic corridors has enabled each of those regions to levy on their strengths, such as natural resource reserves, favorable location, governing bodies, and track record of the economic tradition.


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                Southeast Asia’s Plant-Based Food Market: New Consumer Behaviours Post-Pandemic

                The COVID-19 pandemic has increased consumers’ health consciousness globally, which has also greatly benefited the alternative protein market. Southeast Asia is no exception as the region recorded a great number of new companies entering the market to grasp market shares in this growing industry.

                 

                Thai farmer working in his fields

                 

                Almost two years of the pandemic has created a lot of changes in food consumption behaviours globally, including in Southeast Asia. A great number of consumers are now replacing red meat and sugar with vegetables, fruits, and healthy snacks in their diets, while also purposedly spending more money on foods that they perceive are good for their bodies and health. Southeast Asia’s consumer food spending, in general, is expected to skyrocket in the next decade. According to a study by PwC, Rabobank, and Temasek, consumer-driven growth in food spending in Southeast Asia will reach 1.1 trillion USD in 2030, an 83% increase compared to 2019, a growth rate that would outpace even China’s.

                These shifts have fueled the growth momentum of alternative proteins across the region. It has been extremely noticeable that despite the higher price for alternative protein products, consumers are willing to spend the extra money because of the health benefits. Moreover, a recent report by Boston Consulting Group and Blue Horizon Corporation indicates that although alternative proteins account for only 2% of the world protein market in 2020, it is predicted to reach 12% by 2035.

                Graph showing Southeast Asia meat consumption

                Graph showing Southeast Asia's willingness to spend more on healthy foods

                Furthermore, due to an increased fear of a connection between the consumption of animal products and communicable diseases, people are now actively trying to find alternative protein sources such as plant-based meat, cultivated meat, and fermented food. This has also been enhanced by the increased availability of plant-based meats and improvements in the taste and texture of alternative protein alternatives in the region.

                Plant-based alternatives such as soy-based mock meat, tofu, and tempeh have already been around for a long time in the local cuisine. It is believed that the familiarity with plant-based meat substitutes will accelerate the industry’s adoption and development in Southeast Asia much quicker than in many other regions around the world. Southeast Asian market size of plant-based meat is expected to increase by 25% to 1.7 billion USD by 2025, driven by consumers’ increased awareness of the importance of healthier options and sustainability.

                The increase in demand for plant-based meats among consumers is the primary contributor to the growing number of start-ups and legacy brands developing their range of plant-based meats across the region. In Thailand, for instance, the plant-based meat company, Let’s Plant Meat, developed its soy-based patty in just 12 months, which they now sell on the market for half the price of Beyond Meat, a leading western plant-based meat brand. Another example is the Malaysian-based Phuture Daging, which sells minced meat made of soy, rice, peas, and chickpea protein in Singapore and Malaysia.

                Of all Southeast Asian countries, Singapore emerges as the leading nation in facilitating the development and expansion of alternative proteins. The Singapore government has a 100-billion-USD plan to prepare for the effects of the climate crisis, which also includes the goal of producing 30% of Singapore’s own nutritional needs by 2030 to reduce the country’s overreliance on imported foods (currently 90%). This has resulted in a great number of homegrown Singapore start-ups venturing into this lucrative field; from NextGen Food’s Tindle brand of plant-based chicken to Karana’s jackfruit replacement meats. The country has also attracted numerous international brands and organizations looking to establish their presence in Asia, with Singapore as their home base.

                Moving forward, there will be significant opportunities for all players in the plant-based protein field in Southeast Asia. Companies will need to carefully consider consumers’ rapidly changing preferences to optimize their product portfolio, with new product development focusing on serving consumer needs over product attributes. Many experts also believe that capability-driven M&As or partnerships may increase in the coming years as it will allow businesses to satisfy changing preferences by repositioning themselves through acquiring new skills and venturing into untapped markets.


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                  by Asia Perspective Asia Perspective No Comments

                  Southeast Asian Governments’ Shift in COVID Polices Gives Way to Economic Revival

                  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.

                   

                  Commuters in Bangkok

                   

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

                  Graph showing COVID vaccination progress in Southeast Asia

                  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.

                  Graph showing COVID cases in Southeast Asia

                   

                  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.

                  Graph showing COVID vaccination timeline in Southeast Asia

                  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%).

                  Graph showing deal value in 2022 in Southeast Asia

                  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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                    by Asia Perspective Asia Perspective No Comments

                    The Regional Comprehensive Economic Partnership (RCEP) promotes connectivity among economies in the Asia-Pacific region

                    The Regional Comprehensive Economic Partnership (RCEP), the world’s largest trade deal, officially took effect on January 1, 2022, targeting a market of 2.2 billion consumers.

                     

                    RCEP 2022

                     

                    RCEP Overview

                    Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement (FTA) among 10 ASEAN member countries and an additional 5 countries: Australia, China, Japan, South Korea, and New Zealand. RCEP was signed in Hanoi, Vietnam on November 15, 2020, aiming to form the East Asia Free Trade Agreement (EAFTA) and the Comprehensive Economic Partnership in East Asia (CEPEA).

                    Map showing RCEP members

                    The 15 members of RCEP accounts for 30% of the world’s population (2.2 billion people) and 30% of the global GDP (26.2 trillion USD), forming the largest trade bloc in history. RCEP is the first free trade agreement between China, Japan, and South Korea, three of Asia’s four largest economies.

                    Table comparing RCEP with major FTAs

                    As of November 2, 2021, 6 ASEAN countries and 4 of the partner countries, including China, Japan, Australia, and New Zealand, sent their ratification of the RCEP Agreement to the General Secretary of ASEAN. On this basis, the RCEP Agreement officially took effect starting January 1, 2022. RCEP has two major changes compared to previous FTAs: consolidated Rules of Origin (ROO) and tariff reductions. Both will have positive impacts on trade within the region and will likely attract multinational corporations into the bloc.

                    Enhance Trade with Accumulative Rules of Origin

                    The agreement’s accumulative ROO is the RCEP agreement’s biggest accomplishment. A good will be considered to meet the ROO requirement if it meets just one of the following three conditions: the good is wholly obtained in a member country; the good is produced solely from materials originating in one or more member countries; the good is produced from non-originating materials that meet the requirements of the Item Specific Rules. For example, cotton from China processed in Vietnam, under the new cumulative ROO, will be deemed to have originated in Vietnam when Vietnam exports the final product to another RCEP country. In general, the RCEP brings together all the original rules of origin outlined in the ASEAN-Plus-one and other bilateral preferential trade arrangements (PTAs). Thus, businesses will only need one ROO when trading within the bloc.

                    Accordingly, the RCEP creates huge benefits to some key export industries of its members, for example, Vietnam’s textile and garment industry. The previous FTAs which Vietnam had signed with Japan: VJFTA and AJCEP, both required two-step rules of origin: the fabric had to be produced in the ASEAN country or in Japan to be eligible to receive tariff preferences. With the new RCEP Agreement, Vietnam manufacturers can import fabrics from anywhere; as long as the fabric is then cut and sewn in Vietnam, tax incentives will be implemented when exporting to Japan. Vietnamese exports to any of the member countries of the agreements will now be more time- and cost-efficient. Other industries such as footwear, automobiles, agriculture, fisheries, and telecommunications will also enjoy similar advantages with the new RCEP.

                    Overall, the relaxed, consolidated ROO will reduce costs and enhance global value chain activities for any company that has supply chains spanning in Asia. Multinational companies that would like to move parts of their production to Asia will also find it easier to establish supply chains in the region.

                    Benefits for China with Tariff Abolition and Reduction

                    The RCEP will eliminate tariffs and quotas on more than 65% of traded goods, improving market access. The member countries agree to reduce or eliminate customs duties imposed on goods by approximately 92% over 20 years. Some tariffs will be eliminated immediately, while others will be phased out gradually over 20 years. However, this does not necessarily imply extensive tariff abolition for all member countries, as more favourable trade agreements already exist between some of the member countries.

                    Among the countries, China is the one that will benefit greatly from this agreement. RCEP members are all important partners of China. In the first nine months of 2020, trade turnover between China and its member countries amounted to 1.055 billion USD, accounting for about one-third of the country’s total foreign trade turnover. With RCEP, 85% of Chinese goods will enjoy zero tariffs when exported to RCEP countries. Further on, a total of 98.2% of Chinese products will be granted zero Australian tariffs in the long run. Overall, the share of trade with free trade partners is expected to increase from 27% to 35%, and China will have a total of 19 free trade agreements with 26 partners.

                    Thanks to RCEP, China can also establish its first free trade agreement with Japan. During the first three decades after China’s reform and opening, Japanese investment in China was mainly in the form of “re-exports”, meaning that Japan invested in manufacturing in China, to then export those products to other countries. With RCEP, preferential tariffs will be immediately applied to 57% of Chinese goods exported to the Japanese market. Therefore, Japanese investors who are eager to switch from re-export investment to investment focused on the China market can promote this strategy further with RCEP.

                    In general, global partners and investors can benefit from a bigger market, more flexible supply chains, lower transaction costs in RCEP countries with this new partnership.


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