Is Southeast Asia
Ready for the AEC?
As the new Southeast Asian economic
community draws closer to launch, governments
and companies will need to join forces to promote
a successful integration for the region.
Is Southeast Asia Ready for the AEC?
1
The 10 member nations of the Association of Southeast Asian Nations (ASEAN) boast a population
of more than 600 million people, a combined 2013 GDP of more than $2.4 trillion, and the world’s
third-largest workforce.1 The ASEAN Economic Community (AEC) will come into effect by the end
of 2015, with the target of creating a single market and production base with a free flow of goods,
services, investment, and skilled labor. The AEC is expected to have profound implications for
the region given Southeast Asia’s growth potential and burgeoning middle classes. Already
multinationals are jockeying for position and forward-looking Southeast Asian companies are
laying the groundwork for expansion by acquiring others at home and across the region.
When A.T. Kearney and J. Walter Thompson jointly published a study of the AEC in late 2013,
Countdown to 2015: Creating ASEAN Champions, we received an enthusiastic response from
company executives and government representatives who felt the paper was timely, and that
it helped them understand the primary challenges and opportunities of AEC 2015. Since that
time, we have hosted or spoken at AEC-focused seminars and conferences held around the
region, including Kuala Lumpur, Bangkok, Singapore, Jakarta, and Manila. We also partnered
with the CIMB ASEAN Research Institute as part of the Lifting-the-Barriers Initiative (LTBI),
which is an integrated year-long research exercise designed in conjunction with the ASEAN
Business Club (ABC) Forum. Our work, which focused on the retail sector, culminated in a
“Lifting-the-Barriers” forum and a paper about the role of e-commerce in ASEAN.
During the course of these activities, we have been able to gather a diversity of views on what
AEC means for individual corporations and countries. We have seen progress toward AEC
readiness, but also identified new challenges and further crystalized our views on the main
imperatives for companies and government as the AEC 2015 moves toward reality.
Taking the Pulse of the ASEAN Community
As the region prepares for AEC 2015, sentiments run the gamut from trepidation to euphoria.
Based on our discussions with representatives from both businesses and governments, we have
found three divergent responses that are most prevalent:
Concern that the AEC may have a negative impact on individuals and corporations due to
foreign competition. This sentiment has tended to be most common among executives of
small- and medium-sized enterprises (SMEs), as well as some government representatives, from
countries that have been more protected from competition (for example, the Philippines). This
perspective stems in part from a lack of awareness of what the AEC entails and the benefits it
can bring to the region.
Skepticism that AEC reforms can be implemented by the deadline. There is a perception
that ASEAN reforms typically proceed at a glacial pace, making the December 2015 launch
date seem unlikely. However, there is also a strong belief that the AEC will eventually become
a reality, so it’s a matter of when, not if. On the other hand, some individuals we spoke with
expressed a certain level of indifference about the impending reforms, and a sense that the
impact will be limited.
Enthusiasm for the myriad opportunities that the AEC is expected to offer. Representatives
from some of the more business-focused governments, such as Malaysia, Thailand, and
Singapore, have had a more optimistic perspective, as have executives from larger corporations
The 10 nations are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. Data source:
http://www.voxeu.org/article/asean-economic-community-2015.
1
Is Southeast Asia Ready for the AEC?
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that are already making plans to take advantage of AEC reforms to expand their footprint in
Southeast Asia. These individuals expressed the belief that the potential opportunities are
significant. There is also a broad recognition of the economic rationale for the AEC, backed by a
conviction that the region must act more seamlessly in order to present itself as an attractive
investment and business destination compared with other large economic regions in the world.
Background Trends to Keep in Mind
During 2014, many important regional political events unfolded that were of particular
relevance to the AEC. Indonesia elected a new president, there is a new military government in
Thailand, and the ASEAN chairmanship transitioned from Myanmar to Malaysia. We see these
events as mostly neutral or positive to the implementation of AEC 2015, since most of the new
administrations are still receptive to structural and policy initiatives that are investment friendly.
While economic indicators continue to show that investment and consumption will be the twin
drivers of ASEAN growth, there is also a risk that investor attention will be diverted back to
developed countries. Indeed, according to A.T. Kearney’s 2014 Foreign Direct Investment (FDI)
Confidence Index, ASEAN countries have seen their FDI confidence ratings slip in the past two
years (see figure 1). Most developing countries, including China and India, have been affected
Figure 1
Investment and consumption trends in ASEAN
Private consumption
Real value at 2005 prices
US$ billion
FDI Confidence
Index rankings
2013
+5%
+6%
268
+5%
350
108
Indonesia
150
Malaysia
110
145
Philippines
Inward FDI
US$ billion
68
86
Singapore
China
7
Singapore
1
United States
9
Singapore
2018F
+3%
+4%
1
+5%
122 144
Thailand
61
84
9 Indonesia
10 Malaysia
Vietnam
14 Vietnam
15 Malaysia
+2%
16 Thailand
+11%
+4%
+0%
34
18
Indonesia
11
14
Malaysia
4
57
65
13
4
Philippines
+3%
Singapore
15
Thailand
+7%
11
16
Vietnam
25 Indonesia
2012
2014
Note: FDI is foreign direct investment.
Sources: Economist Intelligence Unit, A.T. Kearney FDI Confidence Index, 2012, 2014; A.T. Kearney analysis
Is Southeast Asia Ready for the AEC?
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by the global investment shift. This trend could continue for ASEAN if it does not fully
implement AEC 2015 initiatives and make itself attractive to investors as a region.
Preparing for AEC 2015
So what do the recent economic and political changes mean for ASEAN governments and
corporations? How should they be readying themselves for the new order that AEC 2015
will bring?
The following are our recommendations for governments and companies large and small.
Governments
Stay the course and move forward with implementation of AEC 2015 reforms and initiatives.
It is important for governments to follow through on prior commitments, including removing
non-trade barriers, harmonizing regulations, and opening up markets by lowering foreign
investment limits. They should also consider new ideas from groups such as the ASEAN
Business Community (ABC) and the CIMB ASEAN Research Institute (CARI). These groups can
contribute practical solutions that will help businesses and ultimately workers and consumers
integrate better in the region. If the region moves too slowly toward an integrated AEC, it runs
the risk of losing out to more established economic powerhouses.
A branding exercise focused on AEC 2015, or
even ASEAN as a whole, would help foster a
more distinct ASEAN identity and closer
integration across the community.
Invest in the necessary changes. Governments need to establish new platforms that facilitate
cross-border transactions, whether these are in finance, trade, logistics, communications, or
e-commerce. In addition, companies (especially SMEs) are likely to need government support in
adapting to the coming changes, as well as in taking advantage of new market opportunities.
For example, overseas trade missions for SMEs are one way for governments to help smaller
companies network regionally. Offering grants can help them develop a regional game plan,
create effective branding, or extend local successes regionally through franchising.
Educate regional players and citizens on the benefits of the AEC. Both ignorance and indifference have the potential to undermine the ASEAN community’s efforts. There is also a certain
amount of fear among some workers and smaller companies. Governments will need to help
people see the benefits of closer integration, including more and lower-cost goods and
services, more rapid economic growth, and an increase in job opportunities. A branding
exercise focused on AEC 2015, or even ASEAN as a whole, would help drive a more distinct
ASEAN identity and closer integration across the community. All of this will help governments
address political pressures that may arise in the event that either people or companies are
dislocated by the AEC 2015 changes.
Is Southeast Asia Ready for the AEC?
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Companies
Create and develop a regional game plan. As we highlighted in Creating ASEAN Champions,
this is the most critical step to take advantage of AEC 2015 and other ASEAN structural changes
aimed at establishing market leadership. Some local companies are already well on the way to
creating a defensible competitive position in the region (see sidebar: Building a Brand across
the ASEAN Region).
A regional game plan answers the following three questions (see figure 2 on page 5):
1. Where to enter? Deciding on what markets are the most favorable will hinge on such factors
as market size and growth potential, product or service fit with target customers, customer
buying behaviors, existing competition, and local laws and regulations.
Building a Brand across the ASEAN Region
Many Southeast Asian companies
planning to enter new ASEAN
markets are focused on stepping
up production, but some have
given brand building relatively
short shrift. A notable exception is
Thailand’s Mahaphant Group, one
of the country’s largest manufacturers of fiber cement products
and the largest non-asbestos fiber
cement producer in Asia. Over the
past two years, this 30-year-old
business has transformed from a
Thailand-based manufacturer
exporting to adjacent markets
into a truly regional player, with
local subsidiaries and distributorships that connect directly with
consumers.
In 2012 the company stepped up
its game ahead of AEC 2015,
making significant investments
in manufacturing, product
innovation, distribution, and
resource capabilities in various
ASEAN countries. It now aims to
be the market leader in ASEAN
and is targeting regional sales of
$5 billion in the next three to five
years, according to Mahaphant’s
ASEAN president, Khun Sarat
Khiatbanlue.
Mahaphant offers a range of
products at varying price points
in designs, colors, and specifications that match local tastes,
demand, and regulations.
Company leadership decided to
unify these products under
Mahaphant’s core SHERA brand,
rather than market them as a
portfolio of separate brands.
Furthermore, in a move designed
to connect it more directly to
increasingly sophisticated
Southeast Asian consumers,
the company changed its
brand promise to “Build better,
live better.”
Mr. Sarat says the company is
well prepared for increased
competition from Europe and the
United States. In fact, he believes
that new entrants will help to
grow the category and introduce
more innovation to the marketplace. He is confident that while
larger Western companies may
have the scale and budgets to
challenge regional and local
players, Mahaphant has unique
strengths that will not be easy for
them to match.
“Firstly, we understand better
than anyone what it takes to
make products for hot, tropical
climates,” says Mr. Sarat. “We
have been in this region for three
decades. We understand how
people live, we understand their
needs and desires.
“Secondly, we moved early to
reposition ourselves as a truly
ASEAN company. Today we hire
locally for positions ranging from
management to factory workers,
and there is room for local
entrepreneurship within an
agreed ASEAN framework. We
also use local market insights to
make our products fit specific
market needs.
“Finally, we believe in the power
of brands. We communicate
directly with end-consumers, a
rarity in our category. ASEAN
cities are on the rise. Urbanization
and disposable income are
increasing. Consumers are more
articulate about what they want
and they are better informed than
they used to be. They want to be
involved in the choice of materials
used for their property.”
As the launch of the AEC rapidly
approaches, Malaphant’s
success in building a brand that
is now recognized throughout
the ASEAN region puts it in
good position to compete
against new entrants.
Is Southeast Asia Ready for the AEC?
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Figure 2
Developing a regional game plan involves three key questions
Where to enter?
How to enter?
How to operate?
• Target customers and buying
behaviors
• Exporting
• Market size and market growth
• Franchising
• Go-to-market approach (including
target customers, product portfolio,
and pricing)
• Competitive landscape
• Laws and regulations
• Licensing
• Strategic alliances
• Joint ventures
• Turnkey project
• Organizational structure
• Processes and operations
(supply chain and logistics,
manufacturing footprint)
• Acquisition of existing brands
and players
• Competencies and resources
• Setting up own operations
• Branding
• IT systems
Source: A.T. Kearney analysis
2. How to enter? Potential market entry strategies include licensing, franchising, strategic
alliances or joint ventures, independent operations, or acquisition of an established player.
3. How to operate? The nuts and bolts of operating successfully in the ASEAN region include a
wide range of considerations, including product selection, branding, pricing, organizational
structure, supply chain and logistics practices, and information technology systems.
For large regional corporations, consider M&A options. Most large players already have some
semblance of a game plan and the resources to follow through on it. Nevertheless, many will
need to consider inorganic M&A as a way to scale up quickly enough to compete with the global
multinational corporations. For example, even though ASEAN is home to many consumer goods
and food and beverage companies that appear quite sizeable, including Yeo Hiap Seng and
Masan Foods, they are typically 10 to 500 times smaller than global giants such as Nestlé and
Coca-Cola. Markets where growth is in the double digits, and where we expect significant M&A
activity, include fast-moving consumer goods, agribusiness, banking and finance, and
e-commerce.
For SMEs, begin preparations for AEC as soon as possible. Our recent research with CARI has
shown that new technologies, particularly those supporting e-commerce, are allowing SMEs to
reach markets beyond their local borders, potentially at a lower cost than they would be able to
do so by establishing local operations. But it will require some amount of education and upfront
investment for these SMEs to fully realize the potential of ASEAN. They will need to develop game
plans that play to their unique strengths to adapt to the seismic shifts that are in the offing. They
will also need to be as entrepreneurial and creative as possible, bearing in mind that innovations
can start in the most unlikely of places, and that many of the region’s larger companies, including
San Miguel, CP Foods, and AirAsia, started out small.
Joining Together to Ensure Future Success
Whether or not the AEC is fully launched by December 2015, the fact is that the community,
and the ASEAN integration it advocates, will ultimately become a reality, bringing the potential
to strengthen the economic standing of the entire region. We take heart that many companies,
Is Southeast Asia Ready for the AEC?
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large and small, are showing intense interest in AEC 2015, and that some large companies,
including CIMB, AirAsia, and Lippo are taking on the role of informal ambassadors of ASEAN,
championing more rapid integration.
Speed is truly of the essence in this regard. ASEAN governments need to up their game and
integrate faster, or the region will be left behind as an investment and business destination.
Likewise, ASEAN companies, particularly SMEs, need to have a regional game plan or they will
lose out to foreign players with deeper pockets. It is clear that strong public-private partnerships
focused on promoting AEC and ASEAN integration will go a long way toward moving the ASEAN
agenda forward.
Given the enormous economic potential of the ASEAN region, AEC 2015 offers regional players
opportunities they cannot afford to miss.
A.T. Kearney
Soon Ghee Chua
partner and head of Southeast Asia,
Singapore
[email protected]
J. Walter Thompson
Bob Hekkelman
Southeast Asia CEO,
J. Walter Thompson Asia-Pacific
[email protected]
Is Southeast Asia Ready for the AEC?
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About A.T. Kearney
A.T. Kearney is a leading global management consulting firm with offices in
more than 40 countries. Since 1926, we have been trusted advisors to the world’s
foremost organizations. A.T. Kearney is a partner-owned firm, committed to
helping clients achieve immediate impact and growing advantage on their most
mission-critical issues. For more information, visit www.atkearney.com.
About J. Walter Thompson
J. Walter Thompson, the world’s best-known marketing communications brand, has
been inventing pioneering ideas for the past 150 years. Headquartered in New York,
J. Walter Thompson is a true global network with more than 200 offices in more than
90 countries, employing nearly 10,000 marketing professionals. J. Walter Thompson
consistently ranks among the top agency networks in the world and continues to be
a dominant presence in the industry by staying on the leading edge—from producing
the first-ever TV commercial in 1939 to developing award-winning branded content
today. J. Walter Thompson opened its first office in Asia in 1929 and today employs
more than 3,800 people in 53 offices across 18 countries in the region. J. Walter
Thompson’s parent company is WPP (NASDAQ: WPPGY). For more information, please
visit www.jwt.com/asiapacific.
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