Trade tensions between the US and China, the COVID-19 pandemic and increasing concern about the way China uses its growing economic and military might are encouraging a rethink about global supply chains, to Southeast Asia’s advantage.
When the concept of ‘emerging markets’ first took off back in the early 1980s, the Southeast Asia region was the key focus of attention. Fast-growing ‘tiger’ economies such as Malaysia, Singapore and Thailand offered cheap labour costs, investor-friendly legislation, and rapidly-improving infrastructure. Competition for foreign direct investment (FDI), however, increased dramatically in the 1990s as newly democratic countries in Eastern Europe, Latin America and other parts of the world vied for investors’ attention.
A number of trends have now combined to recast the spotlight on Southeast Asia, with foreign companies and investors increasingly drawn by the region’s favourable geographic position, demographic profile and fast-developing technology scene.
Sino-US trade war boosts region
Trump tariff hikes, for example, hit Chinese exports to the US, encouraging companies in the engineering, textiles and technology industries to bring “forward plans to move production out of China to neighbouring countries to avoid getting caught in the crossfire”, according to the UK fund manager Aviva Investors.
Indonesian Vice-President Jusuf Kalla told Bloomberg in early 2019 that the trade war between Washington and Beijing had been “quite good” for his country, while Vietnamese Prime Minister Nguyen Xuan Phuc urged his compatriots to “grab the opportunity” to win more FDI., 
The figures indicate the trade war did indeed benefit Southeast Asia, with FDI into the region rising by 5% to a record level of $156 billion in 2019, led by strong investment in Singapore, Indonesia and Vietnam. These three countries received more than 80% of inflows into Southeast Asia in 2019. By contrast, overall FDI into Asia declined by 5% during the year, to $474 billion. The figures for 2020 were disrupted by COVID-19, but the appeal of Southeast Asia remained evident. The region registered over $70 billion in new greenfield investment projects, the largest volume among developing regions in 2020.
The race for global leadership
While President Joe Biden is likely to adopt a less confrontational approach to China than his predecessor, economic competition between China and the US is likely to intensify in the coming years as China’s relative economic strength grows and undermines the US’s position as the global hegemon. So, the US will continue to try to restrict the flow of technology to China, restructure global supply chains, and invest in emerging technologies at home. Meanwhile, China will remain focused on developing semiconductors and other core technologies to reduce its vulnerability to US suppliers.
Moreover, the COVID-19 pandemic can only hasten the restructuring of global supply chains. The “supply shock that started in China in February and the demand shock that followed as the global economy shut down exposed vulnerabilities in the production strategies and supply chains of firms just about everywhere”, according to the Harvard Business Review. The magazine argues that those developments, combined with the US–China trade war, triggered a rise in economic nationalism. Consequently, manufacturers worldwide “are going to be under greater political and competitive pressures to increase their domestic production, grow employment in their home countries, reduce or even eliminate their dependence on sources that are perceived as risky, and rethink their use of lean manufacturing strategies that involve minimizing the amount of inventory held in their global supply chains”. Again, this is likely to benefit Southeast Asia as global manufacturers move production away from China and towards countries such as Indonesia and Vietnam.
According to Aviva Investors, Southeast Asian economies are working together as a bloc, through the Association of Southeast Asian Nations (ASEAN), to facilitate greater intra-regional migration and investment. Southeast Asia is also home to a large cohort of young, increasingly affluent citizens whose spending power should help propel more domestic growth over the coming years. As this trend develops, argues Aviva Investors, large global companies are likely to see the region as a lucrative consumer market, not simply a source of cheap labour.
A number of large electronics companies have already shifted production to the region. They include Foxconn, Intel and Samsung, which have moved production bases from China to Vietnam. The latter country benefits from political stability, proximity to major supply chains, robust infrastructure and a workforce skilled in high-tech manufacturing, thanks to government investment in education and training.
Indonesia is also performing well. It attracted $7.7 billion in FDI last year, down only slightly from the previous year despite the COVID-19 pandemic, which hit FDI flows globally. Last October, Indonesia passed the so-called ‘omnibus law’, which promised to eliminate red tape and streamline the country’s investment process.
The region is also emerging as a technology centre in its own right. Growing numbers of so-called SEA Turtles – Southeast Asians who worked or studied overseas – are returning to the region to found tech start-ups and exploit the region’s growing online economy. Southeast Asia’s internet economy, as measured by gross merchandise value (a measure of online retailing), hit an estimated $100 billion in 2019, according to a joint report by Google and the Singaporean state-owned investment company Temasek.
Southeast Asia, a home to 580 million people, should benefit from increased FDI as Western manufacturers rethink their supply chains and seek to reduce their dependence on China. Large global companies are also likely to view the region as a lucrative consumer market, not simply a source of cheap and well-educated labour. A fast-growing internet economy and the fact that these countries are largely democratic, with all that that entails for accountability and the rule of law and order, also adds to their appeal over China.
This article is one of a series outlining key business trends in Southeast Asia identified by Worldbox Business Intelligence,
Worldbox Business Intelligence is a global solution provider of business intelligence and data analytics, headquartered in Zurich, Switzerland with research operations around the world.
Worldbox Business Intelligence, Zurich , Switzerland
 Trading places: Southeast Asia seizes opportunities amid US-China spat, Aviva Investors, March 2019
 Trade war is a good thing for Indonesia, vice president says, Bloomberg, January 2019
 US-China trade war boosts fast-growing southeast Asia, Forbes, February 2019