Opportunities for CLMVT subregion

New tides bring increased opportunities for electronics manufacturing in the CLMVT Photo: Le Toan

With its favourable locations and resources, the ASEAN, including the CLMVT subregion covering Cambodia, Laos, Myanmar, Vietnam, and Thailand, is rising as a star alternative for investors. Proactive approaches towards trade integration, investment in trade-related infrastructure, and human capital development are some potential paths for the ASEAN, especially Vietnam, to rise to the occasion.

According to the World Bank and the Asian Development Bank, despite external woes, Vietnam remains an attractive investment spot in Southeast Asia, with a rise in foreign direct investment (FDI) and investors seeking to cultivate their big projects here, turning the country into part of their global supply chains.

Currently, the number of partners in Vietnam on the Apple supplier list increased from 16 in 2015 to 22 in 2018. Notably, recently Apple supplier GoerTek decided to move its AirPods production base to Vietnam.

Samsung Electronics, the world’s biggest smartphone maker, said late last year that it would cease operations at one of its mobile phone plants in China, and continued raising its localisation rate in Vietnam, which jumped from 34 per cent of the total product value in 2014 to 57 per cent in 2017. Currently, 29 Vietnamese companies are Tier-1 vendors of Samsung, and the number is expected to rise to 42 in 2019, and 50 in 2020.

In March 2019, LG Electronics Inc. said it would stop producing smartphones in South Korea and move manufacturing to the northern city of Haiphong. The move will boost annual production capacity of its smartphone plant in Vietnam by 83 per cent to 11 million handsets from the second half of 2019.

Room for trade growth

At the CLMVT Forum 2019 organised in Bangkok city of Thailand nearly two weeks ago, the story of Vietnam in attracting FDI was highlighted as one of the most prominent points in the subregion’ expansion of FDI and trade.

In fact, amid external headwinds, the subregion has wooed FDI from all over the world thanks to its favourable location, bustling economic activities, good infrastructure, abundant resources, and capable human capital. With its large and growing population, as well as its emerging economies, the CLMVT has proven to be a strategic production base and supply centre.

“The CLMVT subregion is set for significant growth in internal co-operation and investment in the next decade. To achieve this, the region’s private and public sectors must work together to enhance economic connectivity between the CLMVT countries,” Thai Prime Minister Prayut Chan-o-cha stated at the forum.

The total trade value of the CLMVT stood at $951 billion in 2017. “The figure demonstrates that there is still large potential for intra-regional co-operation for CLMVT countries,” said acting Minister of Commerce Chutima Bunyapraphasara.

She said that the subregion is growing fast with a combined GDP growth of 5.06 per cent in 2017, higher than the world’s 3.15 per cent in the same year. “The subregion is thus likely to experience significant growth in business co-operation and FDI,” she added.

In 2017, together with the disbursed FDI in Vietnam of $17.5 billion, total disbursed FDI into CLMVT countries stood at $31.9 billion, an on-year growth of 28 per cent, according to the Thai Ministry of Commerce.

This means Vietnam is an important investment spot in the subregion.

The ministry even expected higher FDI inflows into the subregion once the shared infrastructure projects and cross-border transportation are complete, especially into the subregion’s special economic zones.

Notable cross-border infrastructure projects include the East-West Economic Corridor, which will connect the East Sea with the Indian Ocean through Vietnam, Laos, Thailand, and Myanmar; the North-South Economic Corridor connecting Kunming in China with Central Thailand through Laos; and the Southern Economic Corridor which will connect the Andaman Sea with the Gulf of Thailand – all of which are well underway, according to Bunyapraphasara.

The increased infrastructural connectivity will also be supported by an improvement to the region’s soft infrastructure, such as deregulating customs clearance to allow for the more seamless movement of goods across the different CLMVT countries.

Pan Sorasak, Cambodia’s Minister of Commerce, stated, “The CLMVT countries have set up special economic zones across their borders to enhance connectivity and boost investment in the subregion. What we have to do next is to continue our efforts to improve the transportation infrastructure between these zones to enhance regional connectivity.”

This will reduce transportation costs for businesses and increase the ease of doing business across the subregion, he explained.

Meanwhile, Laos’ Minister of Industry and Commerce, Khemmani Pholsena, stated, “With the prolonged trade tensions having an adverse impact on the exports of all CLMVT countries, the subregion must look inwards to initiate more regional co-operation and rely less on exports.”

New form of value chain

In order to become an important and high-potential market in the ASEAN, Veerathai Santiprabhob, governor of the Bank of Thailand, said that wages are an important aspect going up in conjunction with living standards. Soon, the subregion will not be able to rely on low-cost labour for comparative advantage.

“The new form of value chains should be based on rapid advancements in technology,” he emphasised. “Automation is on its way to replace low-skilled and semi-skilled manufacturing jobs, making it much harder for a country to be competitive with low wages alone.”

For example, at an egg farm in China it takes only one employee to oversee 170,000 hens. At this farm, machines do all the collecting and sorting of eggs while sensors have been trained to spot sick or dead hens and alert the controller. Meanwhile, a traditional farm would have to employ at least 170 employees for the work.

Humanless warehouses are also becoming more prevalent, and some e-commerce giants are trying to go further: ­Amazon is exploring ­automated delivery systems, and China’s JD.com is looking to automate the entire process, starting from shipping containers.

Moreover, the importance of services in the economy has been increasing. According to McKinsey Global Institute, cross-border service trade is growing more than 60 per cent faster than trade in goods. This will continue in at least two ways: the creation of supply chains for the service sector, and the increasing value-added share of services within the manufacturing supply chain.

Even in manufacturing supply chains, the value-added share of services is increasing. Rapid technological progress brings about shorter product lifecycles, and manufacturing firms in many areas start providing leasing services, adding value to downstream processes and blurring borders between products and services.

The middle-income group’s increasing demand for services and the increasing supply of services through companies’ changing business models mean that services will have a large role to play in tomorrow’s value chains. “I should also point out that trade in services is seldom a victim of trade tensions, giving it all the more potential to grow,” said Santiprabhob.

“In order to realise these changes, the subregion needs to upgrade digital infrastructure,” added the governor of the Bank of Thailand. “While traditional physical infrastructure is indeed crucial for the subregion to become the value chain hub of Asia, subregional co-operation needs to extend beyond that and shift to digital infrastructure, since it will be a key factor that would support value chains.”

Echoing this view, Nguyen Minh Cuong, principal country economist from the Asian Development Bank in Vietnam, said that one of the key factors for the subregional nations including Vietnam to climb the value chains is investment into skill development, amid Industry 4.0. “Skill development requires more comprehensive and integrated solutions that can bring together all stakeholders to strengthen the quality of graduates. Greater participation of the private sector in technical and vocation training is critical to make the training more demand-oriented,” he said. “Conducive environment for development of large domestic private enterprises is critical to create greater linkages with the global value chains (GVCs).

These combined policy measures would ensure the improvement of quality of the domestic private sector and consequently their entering into the GVCs, according to Cuong.

“Most importantly, the development of GVCs in Vietnam should be embedded within a holistic industrialisation strategy rather than having the GVCs treated as preferential entities in the economy with special privileges and incentives.”