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Series: ASEAN Economic Integration and Japanese Companies (Part 2 of 4) Current Status of Japanese Operations in ASEAN and Changes in Manufacturing Industry Supply Chains and Locational Trends | Tomikazu Hiraga Senior Research Fellow and General Manager for Asia NLI Research Institute [Date of Issue: 30/May/2014 No.0231-0931]

Date of Issue: 30/May/2014

Series: ASEAN Economic Integration and Japanese Companies (Part 2 of 4)
Current Status of Japanese Operations in ASEAN and Changes in Manufacturing Industry Supply Chains and Locational Trends

Tomikazu Hiraga
Senior Research Fellow and General Manager for Asia
NLI Research Institute


Most Japanese companies setting up operations in ASEAN choose the original five ASEAN members and Vietnam, and many companies already have a long history in the five original member countries in particular. By contrast, Korean firms tend to opt for Vietnam or Cambodia, while Chinese companies are focused on Myanmar and Cambodia. Here we look at characteristic trends in the manufacturing industry, using the automobile industry as an example to explore directions in the development of supply chains and the deployment and redeployment of production bases.


1. ASEAN deployment trends among Japanese companies (including comparisons with Korea and China)

The 2014 data on Japanese firms' ASEAN operations shown in Figure 1 reveals that a total of 6,135 companies have an ASEAN presence, right up alongside the 6,276 companies in China. Within ASEAN, 1,956 have operations in Thailand, 1,149 in Singapore, 944 in Indonesia, 841 in Malaysia, 679 in Vietnam, 479 in the Philippines and 87 in Cambodia, Laos and Myanmar, with the majority accordingly in the five original ASEAN member countries and Vietnam. Comparing the ratio of deployments in the latter up to 2004 and then from 2005, up to 2004, percentages ranged from 79.8 percent in Malaysia to 64.3 percent in Indonesia, with many companies demonstrating long histories in the original member countries. In more recent years, there has been a high ratio of companies launching operations in the newest ASEAN member countries, as seen in the 33.1 percent figure for Vietnam. While figures are still low, a growing number of firms are also moving into Cambodia, Laos and Myanmar. (Japanese foreign direct investment in ASEAN as the end of 2012 was US$122.27 billion, topping the US$93.2 billion that went into China.) Growth areas in terms of Japanese investment in ASEAN are additional investment by firms that already have operations there, investment in other ASEAN countries, and investment by newcomers to ASEAN. This investment is being directed primarily at Indonesia and the Philippines, which are experiencing something of a renaissance as investment destinations, as well as Cambodia, Laos and Myanmar as the region's frontier. More small and medium enterprises (SMEs) are also moving into ASEAN, parts, components and service firms included. In the case of Singapore and Malaysia, for which company numbers remain virtually unchanged in the 2000 and 2014 data, in addition to new operations replacing old operations, the purpose also seems to be changing from production bases to regional headquarters, while the functions of these operations are also being upgraded and more value added.

Japanese companies’ operations in Asia In this regard, looking at trends in Korean and Chinese investment in ASEAN, Korean investment in ASEAN has outweighed investment in China since 2010, while many companies are moving into Vietnam and Cambodia-around 2,800 as at the end of 2013-where Japanese companies have a relatively limited presence. Vietnam in particular has enjoyed a marked drive by companies from a wide range of industrial sectors. In addition to the establishment of a massive mobile phone manufacturing base by Samsung Electronics, which, as noted in the previous article, singlehandedly accounts for more than 10 percent of Vietnam's exports, LG Electronics, Posco, Doosan Heavy Industries & Construction Co., Ltd., and other major manufacturers are setting up new manufacturing bases, the Lotte Group (which deals in department stores, supermarkets, restaurants and hotels, etc.) is moving in, and real estate development is also underway. Many labor-intensive light industries such as textiles have also been quick to set up production in Vietnam. In the case of China, Singapore is attracting substantial investment capital, particularly as Chinese corporate majors set up regional headquarters there, but this is followed by major investment in Myanmar and Cambodia to secure energy and resources and build infrastructure. In addition, like Japan, both Korea and China are becoming more interested in Indonesia, which is not only attractive in terms of resources and energy but also has a large population which is expected to provide a growing consumer market as the wealthy and middle classes swell. (This point will be discussed in greater detail later in the series.)

2. Supply chain and locational trends among manufacturing firms in ASEAN

Turning to characteristic trends among manufacturing companies in ASEAN in recent years, here we explore directions in the development of supply chains and the deployment and redeployment of production bases, taking as an example the automobile industry because of the major contribution to local economic development afforded by the breadth of its supporting industries, and the fact that Japanese companies enjoy a leading position in the auto industry with a market share of around 80 percent.

Auto production by country (2013)As seen in Figure 2, Thailand boasts the highest level of automobile production in ASEAN -2.46 million vehicles- to the extent that it is known as "the Detroit of Asia". Many companies are clustered there, including not only Japanese firms but also European, American, other Asian and local Thai firms covering all aspects of production from parts and materials manufacturing to final assembly, and that in turn is encouraging further clustering. According to Thailand's Board of Investment (BOI), the country's automobile industry has a three-tier structure comprising (1) assembly operations (14 auto firms, including foreign firms and joint ventures, seven motorcycle firms and 100,000 workers); (2) Tier 1 suppliers (635 parts majors, including both Thai firms and joint ventures with foreign companies, and 250,000 workers); and (3) Tier 2 and 3 companies (1,700 small and medium local enterprises and 175,000 workers). The advance of auto-related industries has also helped to promote growth and expand employment in many companies in the transport, finance and insurance industries, as well as other service industries. With companies utilizing the free trade agreement (FTA) networks of Thailand and ASEAN, production bases in Thailand are playing an increasingly important role as export hubs. Thanks to these factors, not only are key Japanese auto-related firms expanding their production facilities in Thailand, but auto-related manufacturers from other countries, including China's Shanghai Automotive Industry Corporation and Dongfeng Motor Corporation, Ford and General Motors from the US, and Bosch from Germany, are also setting up plants. A recent trend in new investment has been to locate new plants away from the traditional choice of the outskirts of Bangkok to the east of Thailand so as to avoid flood risk. Some companies with bases in Thailand, such as Minebea, Yazaki, Nidec Corporation, Sumitomo Wiring Systems and Toyota Boshoku Corporation, also appear to be pursuing a "Thailand + 1" strategy, dispersing their labor-intensive operations out to neighboring Cambodia, Laos and Myanmar primarily in response to Thailand's rising labor costs and the difficulty of securing workers there. The development of logistical infrastructure that will facilitate the transport of neighboring countries' goods, such as the roads, bridges and ports within the East-West, North-South and Southern Economic Corridors, should encourage the above trend toward greater dispersion of facilities. One particular feature, then, is the way in which companies are clustering in Thailand on the one hand, while on the other, a trend is also emerging toward the geographical dispersion of production bases to different areas within Thailand and also out to neighboring countries.

Indonesia's large population and growing appeal as a consumer market are drawing an increasing amount of investment from not only Japanese companies but also auto manufacturers such as GM (US), Geely Automobile (China) and Volkswagen (Germany), with Indonesia now manufacturing more vehicles than anywhere in ASEAN except Thailand. With Thailand and Indonesia as the two major production hubs in the ASEAN auto market, a pattern of international specialization is emerging whereby other ASEAN countries serve as suppliers of components and materials to the big two.

Here we have looked at trends in supply chains and location choices using the example of the auto industry. Traditionally, production in each country has been almost autonomous, but as companies develop more integrated strategies that view ASEAN and the Asian region as one coherent area, they are using their hubs and trading partners in the various countries more organically and bringing the information, knowledge, experience and knowhow of these to bear to boost efficiency, introduce greater standardization and spread risk as part of far more dynamic specialization and partnership arrangements. As systemic integration advances-the 2015 start of the Asian Economic Community, East Asia's Regional Comprehensive Economic Partnership, and the Trans-Pacific Partnership Agreement, among other moves-this trend seems likely to generate even more sophisticated and polished structures. To reap maximum benefit, companies will need to address not only cost-cutting and standardization directed at economic rationality and efficiency, but also focus on localization, organizing their operations in such a way that they will be able to inject into the different markets products with designs, functions and features tailored to the diverse needs and tastes of local consumers.

(original article : Japanese)



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