ASEAN FDI outlook: Who benefits from what?

With an investment of USD18bn over the last two decades, half of Samsung’s global smartphone production is from Vietnam. 

>> ASEAN FDI outlook: Who invests in where?

Aside from Singapore’s favourable business climate, this is also due to its unique position as the world’s financial centre. Elsewhere, Vietnam and Malaysia have stood out as main beneficiaries since the start of US-China trade tensions. A large part of the story is thanks to their increasingly important positions along the global tech supply chain, as tech giants have been seeking to diversify their presence. On the other hand, Thailand, who is an overseas direct investment (ODI) provider in ASEAN, has been facing diminishing attractiveness for FDI. Indonesia and the Philippines, the two countries which altogether account for over half of the region’s population, have been lagging peers. That said, this might be changing for some of them, as the EV supply chain has brought new opportunities in recent years.

Singapore

Defying global uncertainty, Singapore continues to attract world-class investment commitments, reaching a record high of USD17bn in 2022. Around a quarter has poured into its leading financial services while close to 80% of FDI is concentrated in its electronics industry. In fact, despite its sheer size, Singapore has long benefitted from well-diversified, capital-intensive and high-end manufacturing, encompassing advanced chips, pharmaceuticals and precision machinery. Indeed, advanced manufacturing is a priority for the government, as it strives to push Singapore’s manufacturing growth by 50%, from a high base, by 2030.

Vietnam

When thinking of FDI and the benefits it can deliver, Vietnam naturally stands out. Since Vietnam’s Doi Moi reforms in 1986, the country has received substantial FDI inflows, turning itself into a rising star in the global manufacturing supply chain. While much of the investment initially entered the lower value-add textile and footwear space, Vietnam has quickly climbed up the value chain, growing into a key hub for electronics assembly. Much of the success in tech is thanks to Samsung’s multi-year FDI roadmap in Vietnam: with an investment of USD18bn over the last two decades, half of Samsung’s global smartphone production is from Vietnam. This has also incentivised other tech giants, particularly Apple, to expand their operations.

Despite severe trade challenges, Vietnam continues to be on the frontline to absorb quality FDI. Greenfield FDI rose 40% y-o-y in the first eight months of 2023, with manufacturing alone accounting for 85% of new FDI. In particular, new FDI into manufacturing YTD has surprisingly exceeded those for the whole year in each of the past three years. Despite a trade downturn, the trend provides hopes for Vietnam to see a strong rebound when the cycle turns.

Malaysia

The other notable beneficiary is Malaysia, whose semiconductor industry remains at the heart of Malaysia’s manufacturing might. Alas, its tech production remains labour-intensive compared to advanced players like Korea, Taiwan, and Singapore. However, it has gained substantial market share in certain semiconductors over the years, thanks to consistent tech inflows, mostly from the US and Europe. This is most evidently reflected in parts of the integrated circuits (IC) subsector, with a surprising spike in its market share, approaching 45% in just a year’s time. Each of processor chip and amplifier chip also accounts for 10% of the world’s share. Indeed, a continued attraction of high-quality FDI is one of PM Anwar’s priorities, a key to revive Malaysia’s manufacturing sector, as outlined in an ambitious 10-year economic plan (see: Decoding Malaysia’s 10-year economic roadmap, 17 August).

>> ASEAN FDI outlook: It’s a long story

But Malaysia has more than just electronics. Investors are not only interested in its traditional energy space (e.g. oil and gas), but increasingly so in its renewable energy, given the importance of energy transition. Risen Energy, China’s solar energy firm, announced its first facility investment in ASEAN at the end of 2021, with a plan to pour more than USD10bn over 15 years, to manufacture high-efficiency photovoltaic modules.

Indonesia

Those looking closely at the economic developments in Indonesia may complain that some parts of the economy look weak. FDI inflows seem to be stuck at USD21bn per year over the last few years. However, we are not too worried. The country has just come out of the pandemic shock, and it will take time for all the different parts to revive. FDI inflows may seem unchanged in USD terms, but Indonesia is gaining market share in global FDI. Another indicator of foreign inflows – realised foreign investment – has risen quickly, and that too, in the more value-added sectors. In the last five years, over USD30bn (0.9% of GDP) of foreign investment in metals and metal goods production has already been realised, and China has played an important role in the rise of Indonesia’s processed metals exports. Based on our estimates, an additional USD30bn of investment intentions in processed metals over the next five years can raise Indonesia’s growth potential by 2028.

Thailand

With an ageing population and rising domestic labour costs, Thailand has found it difficult to attract FDI over the past decade. However, this is not to say that Thailand isn’t throwing its punches. Authorities are trying to reinvigorate FDI flows via the Eastern Economic Corridor (EEC), a special economic zone that encompasses three provinces, with an aim to develop its S-curve industries – industries with intensive innovation and technology -– particularly high-value-added activities such as cars, smart electronics, as well as medical and wellness tourism.

In particular, the authorities have been pushing for their campaigns to develop Thailand’s EV industry. Known as the “Detroit of Asia” back in 1990-2000s, as automobilerelated FDI flooded into Thailand from Japan, Thai authorities intend to capitalise on its comparative advantage in car production and transition to making EVs. For example, Thailand has laid out generous incentives for EV manufacturers, such as a THB24bn (USD0.7bn) subsidy scheme for battery producers, as well as a 40% duty cut for imported EVs and THB70- 150k discounts for buyers. As a result, this has reaped some fruits, with FDI momentum picking up fast in 1H23 alone.

Philippines

Although not necessarily the first choice for investors in ASEAN, the Philippines is in the middle of the pack to attract FDI, measured as a % of GDP. Much of the FDI flows bank on the economy’s favourable demographics. The archipelago is currently in the midst of a demographic dividend, with a median age of just 25 years old. This suggests that consumer demand will likely be more robust in the next five years or so, in turn attracting a good number of consumer brands. The authorities have also enacted big-ticket reforms to attract FDI in key infrastructure and public services.

In 2022, the Marcos administration reformed the Public Service Act, which now allows 100% foreign ownership for railways, airports, expressways, and telecommunications. Legislators are also working to amend the PPP law to streamline the process. Last but not the least, the government clarified last 4Q that foreigners are allowed to hold full ownership in renewable energy projects. All these reforms point to future dividends.

Attracting FDI therefore remains a mixed picture for ASEAN. Aside from Singapore, Vietnam and Malaysia, with their favourable positions in the global tech supply chain, continue to be the outperformers, with FDI approvals hovering around 3% of their respective GDP. This points to green shoots for manufacturing, though the recovery pace in the current trade cycle appears to be a gradual one. Thailand, after years of subdued inward investments, appears to be catching up, given its advantage in the auto industry that can be applied in the emerging EV supply chain. Indonesia has a positive structural story in the EV supply chain, though FDI has not yet picked up meaningfully while the Philippines is also seeing positive momentum in overseas investments.