China-ASEAN Corridor Opening Doors to Diverse Opportunities Contents

Borderless Business: China-ASEAN Corridor Opening doors to diverse opportunities Contents:

Overview of the China-ASEAN Corridor: Opening New Doors for Chinese Businesses 3

Our Growth Watchlist: Three Sectors Driving the Future of the China-ASEAN Corridor 8

Acting with Impact: Five Focus Areas for Chinese Companies to Drive Resilient Growth in ASEAN 18 Overview of the China-ASEAN Corridor: Opening New Doors for Chinese Businesses Overview of the China-ASEAN Corridor

ASEAN presents a major growth opportunity (ASEAN), an emerging economic powerhouse for Chinese companies looking to interna- as the fifth largest economy in the world by GDP tionalise. The region’s fast-growing consumer (~USD 3 trillion), offers significant trade and markets, rapidly maturing supplier landscape, investment opportunities given rising consump- and regional trade links offer Chinese compa- tion and improved manufacturing capabilities. nies strong growth potential in sectors such as high-value manufacturing, energy, and digital Economic linkages between China and ASEAN services. ‘Borderless Business: China-ASEAN have strengthened, accelerated by the former’s Corridor’ is a strategic point-of-view commis- meteoric rise to the world’s second largest econ- 1 sioned by Standard Chartered and prepared by omy by GDP. China is ASEAN’s largest import PwC, looking at high potential opportunities for partner with merchandise imports valued at cross-border growth and showcasing key USD324 billion in 2019, accounting for 23 per areas of focus for Chinese companies to suc- cent of all imports in the region and growing at ceed in the ASEAN region. In addition, this re- a compound annual growth rate (CAGR) of 7.5 port also includes insights collated via a survey per cent from 2014-19. In 2020, Chinese exports of senior-level executives from Chinese compa- into ASEAN stood at a sizeable USD315 billion nies that are currently engaged in cross-border despite COVID-19-related disruptions. Foreign activities across the China-ASEAN corridor. direct investment (FDI) from China into ASEAN had also risen steadily from USD17.4 billion in Economic linkages between 2014 to USD20.0 billion in 2019. China and ASEAN to deepen through trade and investment

Maturing and more sophisticated businesses in China are looking abroad for growth opportunities and new consumer markets. The Association of Southeast Asian Nations

Figure 1: Imports and FDI from China1 into ASEAN

Source: ASEANStats

1 Trade and FDI data cover both Mainland China and Hong Kong.

Borderless Business: China-ASEAN Corridor 4 Overview of the China-ASEAN Corridor

Going forward, further growth is expected Looking within ASEAN, Singapore and across the China-ASEAN corridor. A pulse survey Malaysia have typically been considered as of Chinese companies2 focusing on ASEAN hubs for Chinese investments, providing a revealed that more than 60 per cent of platform for growth throughout the region. This respondents are looking to expand their sales/ trend is expected to continue, with over 60 per production in the region by over 10 per cent over cent of survey respondents from China focusing the next 12 months. There are various drivers for on Singapore and Malaysia for expansion. this targeted growth – whether it is a growing customer base in ASEAN or enhanced manufacturing capabilities within the region. Accord- ing to our survey, 56 per cent of respondents are focusing on ASEAN to gain access to the large and growing consumer market, while 44 per cent are expanding to diversify their production footprint3.

Figure 2: Key Drivers for Focus on ASEAN and Major Economies Offering Expansion Opportunities

56% Access to the large and growing ASEAN consumer market 54% Local government incentives and support for project sustainability/ stability 51% Presence of a mature and reliable supplier base 47% Access to a global market (from ASEAN), enabled by a network of FTAs 44% Diversification of production footprint

28% Availability of abundant and skilled workforce

21% Enhanced connectivity in digital and physical infrastructure

Note: Survey questions asked: ‘What are the key drivers for your focus on ASEAN?’ and ‘Which of these major economies within ASEAN do you think offers the best expansion (sales / production) opportunities for your company?’ For Key Drivers - values indicated above refer to the % of survey respondents who included the driver as one of the top 3 ranked choices Source: Standard Chartered Survey, 2021

2 Survey commissioned by Standard Chartered in April 2021 and completed by senior executives at 43 companies based in China and focusing on the China–ASEAN corridor 3 For key drivers, values refer to the % of survey respondents who included the driver as one of the top 3 ranked choices

Borderless Business: China-ASEAN Corridor 5 Overview of the China-ASEAN Corridor

Growth of the China-ASEAN corridor is expect- Potential boost to regional trade ed to be driven by China-led initiatives, such as the Belt & Road Initiative (BRI) and Renminbi expected post ratification of internationalisation. Ratification of the Region- the Regional Comprehensive al Comprehensive Economic Partnership (RCEP) Economic Partnership Agreement will further support this growth, through increased collaboration and alignment The 2010 ASEAN-China Free Trade Area between China and ASEAN. (ACFTA) was the first major initiative between China and ASEAN, which has led to growing The Belt & Road Initiative will cross-border trade and investment. More facilitate Chinese investment recently, the RCEP Agreement is expected to usher in enhanced economic cooperation and into the region trade in the region, not only in goods but also in services, once it is ratified. Trade between the The BRI has elevated economic cooperation 15 signatories could increase by USD428 billion and connectivity between China and ASEAN, by 2030, according to the Peterson Institute for with a cross-industry focus supporting Chi- International Economics, with China’s exports nese companies’ internationalisation across alone projected to rise by USD248 billion. Our multiple sectors. While the BRI began with an survey respondents share positive sentiments, emphasis on large-scale infrastructure projects with almost 50 per cent of respondents looking to improve the region’s transport and logis- to increase their investment into ASEAN by 25- tics network for facilitating trade with China, 50 per cent over the next 3-5 years, once RCEP greater investment from Chinese companies in is ratified. fast-growing sectors such as renewable energy and digital solutions (cloud computing, artificial Several sectors within high-value manufactur- intelligence and Internet of Things) is expected. ing, energy, and digital, stand to benefit from cross-border expansion with the magnitude China’s RMB internationalisation and growth potential of the China-ASEAN gathers pace corridor. Chinese companies moving into ASEAN should focus on certain key themes to With increased support from the Chinese succeed, including exploring partnerships for government and positive long-term economic market access, stronger digitalisation and cyber prospects, Renminbi internationalisation will resilience, enhanced governance and risk man- continue to expand. The BRI complements the agement, and a greater focus on environmental currency’s internationalisation as it fuels the and social initiatives. These are explored further demand for cross-border Renminbi services. in the following sections. As China-ASEAN trade and investment grow, wider usage and enhanced convertibility of Renminbi will also simplify cross-border settle- ments. Chinese companies targeting ASEAN can benefit from this via reduced foreign exchange risks, lower transaction costs, and more efficient cash flow management. With the People’s Bank of China’s announce- ment of the digital yuan, the role of central bank digital currencies (CBDCs) in enabling and promoting cross-border trade is also a key highlight.

Borderless Business: China-ASEAN Corridor 6 Overview of the China-ASEAN Corridor

“ASEAN is core to Standard Chartered’s “As Chinese companies with international business strategy. As the only expansion aspirations continue to look for international financial institution with growth opportunities, ASEAN has clearly presence in 10 ASEAN markets, we emerged as one of their top choices, with continue to support our clients in tapping its increasingly close trade relationship the myriad of opportunities this region with China and more investment has to offer. In particular, and over our opportunities brought about by the more than 160 years history in China, signing of RCEP. We have been in China we have built strong relationships and and ASEAN for more than 160 years and partnerships with Chinese corporates have an excellent track record helping our in ASEAN from various sectors and Chinese clients venture into the ASEAN industries, offering them our sustainable market. Clients in China tell us that they finance and digital solutions and helping are keen to invest in the 10-nation bloc them evolve their businesses, deliver for the long term, to capture the many their internationalisation strategies and opportunities fuelled by governments leverage the ASEAN opportunity.” and businesses’ focus on environmental sustainability, supply chain optimisation priorities and accelerating digitalisation. Standard Chartered has been with these clients every step of their ASEAN growth journey, extending our extensive cross- border financial products and services as well as local market expertise to help them succeed. We look forward to sharing our knowledge and insights on ASEAN to help more Chinese companies thrive in the region. There’s no better time Heidi Echtermann-Toribio than now to invest in ASEAN.” Regional Co-Head, Client Coverage, Asia Corporate, Commercial and Institutional Banking Standard Chartered Bank

Jean Lu Co-head, Client Coverage, China Corporate, Commercial and Institutional Banking Standard Chartered Bank

Borderless Business: China-ASEAN Corridor 7 Our Growth Watchlist: Three Sectors Driving the Future of the China- ASEAN Corridor Our Growth Watchlist

ASEAN, with a combined GDP exceeding USD3 across global supply chains. Manufacturing, trillion and a population of over 600 million, trade, and agriculture are the largest sectors has emerged as an economic powerhouse. The of ASEAN’s economy, while automotive, ASEAN-6 economies (comprising Indonesia, consumer electronics, renewable energy, Malaysia, Philippines, Singapore, Thailand and e-commerce, and cloud services are the key Vietnam) account for over 95 per cent of the sectors for future growth. region’s GDP, with an established presence

Figure 3: Key Sectors in ASEAN-6 (by contribution to national GDP), 2020

Note: Trade includes wholesale and retail trade Source: ASEANStats

1. High-Value Manufacturing ASEAN’s automotive sector to see strong growth in ASEAN driven by recovery post-COVID-19 ASEAN boasts a large automotive market, enhanced supplier capabilities with sales of 2.5 million vehicles (excluding and competitive production costs two-wheelers) in 2020, projected to grow at a CAGR of 9 per cent from 2020-25 driven by im- In ASEAN, high-value manufacturing industries proving consumer sentiment and an economic are expanding, driven by improved supplier rebound from COVID-19. Thailand, Indonesia capabilities and lower costs. This is bolstered and Malaysia have the largest market share of by a growing consumer market and supportive sales (75 per cent). regulatory policies. Automotive and consumer electronics are two major sectors of focus for this corridor.

Borderless Business: China-ASEAN Corridor 9 Our Growth Watchlist

Figure 4: Sales of Passenger and Commercial Vehicles in ASEAN-6

Source: Fitch Solutions ASEAN’s ambitions to become a production billion were exported from ASEAN globally in and export hub for automotives has catapulted 2019. New and fast-developing segments such manufacturing activity. Companies located in as electric vehicles (EVs) and batteries, offer ASEAN are also selling beyond the region to attractive propositions for Chinese automotive Australia, Japan and the United States. Auto- manufacturers and suppliers to expand their motive goods and accessories worth USD30.7 regional footprint.

Demand for Electric Vehicles poised for growth, backed by government initiatives and incentives

Thailand Indonesia Malaysia Government incentive schemes to Easing of vehicle loan requirements, Malaysia’s National Automotive Policy individuals and businesses (e.g. vehicle suspension of a luxury vehicle tax, and 2020 is designed to drive development scrappage incentives) to drive demand government policy encouraging EV of the established automotive industry in and industrial policies (e.g. trimming of uptake are expected to spur demand for emerging areas such as Electric Vehicles, excise taxes for local EV manufacturing) passenger and electric vehicles. Chinese Next Generation Vehicle (NxGV) and designed to attract OEM manufacturing activity is advancing the development of Industry 4.0. The Energy Efficient Vehicles activity, will be key growth drivers for the Indonesia’s Electric Vehicle sector across Program for local assembly of hybrid sector. Chinese automotive manufacturers the value chain with companies such electric vehicles is designed to further such as SAIC Motors (2016) and Great as Virtue Dragon Nickel Industry and encourage local manufacturing and, in Wall (2019) have invested in plants in the Zhejiang Huayou Cobalt in mining and March 2021, three MoUs were signed be- country to boost their regional footprint. Tsingshan Steel and GEM in production tween Chinese and Malaysian researchers of batteries. to develop an NxGV hub in Malaysia.

Source: Nikkei, Bloomberg, S&P Global, Nasdaq, Fitch: Indonesia Autos Report Q2 2021, Press Articles

Borderless Business: China-ASEAN Corridor 10 Our Growth Watchlist

Consumer electronics in ASEAN offers Consumer electronics manufacturing and sec- multiple opportunities across the value chain toral foreign investment is focused on Vietnam, Thailand and Indonesia, due to maturing sup- Consumer electronics sales (including computer plier capabilities, lower labour costs, and avail- hardware, audio-visual equipment and hand- able incentives. These countries possess the sets) across the six major ASEAN economies (In- largest markets for consumer electronics with donesia, Malaysia, the Philippines, Singapore, combined sales of USD25.7 billion in 2020 and Thailand, Vietnam) was estimated at USD39.5 a projected CAGR of 6.8 per cent (2020-2025). billion (2020) with a projected CAGR of 6.4 per Expansion into ASEAN can benefit Chinese cent to reach USD53.8 billion by 2025. Handsets companies thanks to lower manufacturing costs account for the highest share (56 per cent in and quicker access to a fast-growing market. 2020) while audio-visual equipment (including television sets, music systems, speakers, etc.) is projected to be the fastest growing.

Figure 5: Sales of Consumer Electronics in ASEAN-6

Markets covered: Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam Source: Fitch Solutions

Lower labour costs and additional incentives attracting consumer electronics manufacturers to ASEAN

Vietnam Thailand Indonesia Trade openness, low labour costs, and Electronics is the second largest sector Indonesia’s low labour cost makes it an supportive industrial policies in Vietnam attracting foreign investment into the attractive manufacturing location, and are encouraging foreign investment into country, including major manufacturers of the government is making further efforts setting up assembly plants in Vietnam, computer hard drives as well as electrical to attract foreign investors by offering tax driving production for exports. Mobile appliances such as air conditioners and and land concessions for local manu- phones are the focus of Vietnam’s con- refrigerators. Top manufacturers having facturing. Production of TVs and set top sumer electronics manufacturing with a presence here include Western Digital, boxes has historically been a mainstay Samsung and LG being two of the largest Seagate, Electrolux and Schneider. In of Indonesia’s consumer electronics foreign investors in this segment. order to further develop the electronics industry. There has also been increased manufacturing industry, the government manufacturing activity in printers and is providing manufacturers incentives such mobile handset assembly in recent years as exemptions on import duties on raw with Chinese smartphone brands Oppo, materials and exemptions on income tax and Xiaomi also setting up plants in the for projects in special industrial zones. country.

Borderless Business: China-ASEAN Corridor 11 Our Growth Watchlist

2. Ramp-up in demand for target to increase ASEAN’s renewable energy supply to 23 per cent of total primary energy energy and resources in ASEAN by 2025. This will require new investments with includes focus on renewable a focus on greater installed power capacity for sources renewable energy across the region. In 2020, electricity generated from renewable Urbanisation and increased consumption sources (excluding biomass and waste) was 214 have intensified ASEAN’s need for energy and TWh, which is expected to reach 271 TWh by resources, but conventional sources of energy 2025, given a CAGR of 4.8 per cent. Solar power have adverse health and environmental con- generation has been identified as the fastest sequences. Therefore, ASEAN is ramping up its growing segment (CAGR 16 per cent between focus on renewable energy, with some countries 2020-25) and a key focus area for Chinese in- investing in waste management projects to vestments and partnerships in ASEAN. counter the effects of climate change. Respon- sible for 10 per cent of the world’s population, it is imperative that ASEAN member states adopt green measures and prioritise sustainability.

Regulatory policies around renewable energy expected to drive growth and address increased energy needs Globally, ASEAN’s electricity consumption has been amongst the fastest growing. CAGR was ~6 per cent over the past 20 years, with consumption levels at 994 terawatt-hours (TWh) in 2020 and expected to reach 1287 terawatt-hours by 2025. To reduce carbon emissions, the ASEAN Plan of Action and Ener- gy Cooperation (APAEC) 2021-2025 has set a

Figure 6: Renewable Energy Generation in ASEAN (excluding Biomass & Waste)

Source: Fitch Solutions

Borderless Business: China-ASEAN Corridor 12 Our Growth Watchlist

ASEAN markets are increasingly focusing on growing renewable energy generation, with ambitious government targets and sizeable projects in the pipeline

Thailand Vietnam Philippines Solar is a key growth segment in Thai- Solar and wind energy show the maxi- Renewable energy is expected to account land’s renewable energy industry pushed mum growth potential in Vietnam. The for 35 per cent of the country’s power mix by initiatives such as the Energy Ministry’s government has emphasised the offshore by 2030 as per the latest energy targets. Solar Rooftop Scheme. In April 2020, wind sector under Vietnam’s National Geothermal energy (currently accounting China Energy Engineering Corp won a Energy Development Strategy. Chinese for 70 per cent of renewable genera- contract to install a photothermal and solar companies are increasingly moving tion) will now allow 100 per cent foreign photovoltaic power station in Thailand. production to Vietnam with Trina Solar investment. As per the country’s Energy completing a solar power plant and Longi Plan 2040, there will be a stronger focus Solar acquiring a production facility on solar projects as the country looks to in 2020. increase capacity. In 2020, Chinese firm Jiangsu Seraphim Solar Projects signed an agreement to supply solar modules for solar farm projects in the Philippines.

Borderless Business: China-ASEAN Corridor 13 Our Growth Watchlist

Circular Economy: Waste-to-Energy (WtE) perspective – seeing waste as a resource in a scalable opportunity to combat growing a circular economy model with public-private urban waste and energy needs partnerships – can address the challenge more holistically. Singapore has been the regional ASEAN’s urban population is expected to leader in adopting WtE practices, with a exceed 400 million by 2030, reinforcing the structured waste management system and need for efficient and sustainable waste four WtE plants. Since Singapore’s success, WtE management solutions. Despite national has increasingly been considered in Indonesia, waste management policies and frameworks, Thailand, and Vietnam as a sustainable many countries still rely on open dumping and solution. Overall energy generation from burning, given poor technological infrastructure, biomass and waste in ASEAN is projected to financing, policy, and stakeholder participation. increase from 31.2 TWh in 2020 to 40.8 TWh A United Nations Environment Programme in 2025, at a CAGR of 5.5 per cent. (UNEP) report, ‘Waste Management in ASEAN Countries’, suggests that changing one’s

Figure 7: Energy Generation from Biomass and Waste in ASEAN

Source: Fitch Solutions

Chinese companies increasing their participation in WtE projects in ASEAN markets

Indonesia Thailand Vietnam The Indonesian government has been The country has several WtE projects in The Vietnamese government has intro- encouraging cities to build WtE plants as development, with a target of achieving duced fiscal tax exemptions for WtE pro- a solution to the growing issue of waste. 550MW by 2036 under the Alternative En- jects to encourage investment in the area. In 2018, China-based Zheneng Jinjiang ergy Development Plan. In 2021, the Thai Chinese company Everbright has commit- (formerly Jinjiang Environment) acquired Metropolitan Electricity Authority (MEA) ted to developing WtE plants in primary Indo Green Power for a WtE project in signed an MoU with Chinese-owned com- and secondary cities in the Mekong Delta Palembang. pany Newsky Energy for two WtE plants that supply electricity to the local grids. in Bangkok.

Borderless Business: China-ASEAN Corridor 14 Our Growth Watchlist

3. Opportunities in ASEAN’s such as Lazada, Shopee, and Tokopedia. Re- gional demand for e-commerce services (in- ICT services market expected cluding online retail, online travel, online media, to flourish with rapid rise in transport and food) has gained significant digitalisation momentum during COVID-19, as seen in the sector’s upsurge in gross merchandise value (GMV) ASEAN is one of the fastest growing markets across the six markets (USD104 billion) in 2020. for digital services, with 400 million internet The industry is projected to grow at a CAGR of users and a thriving digital ecosystem. Rapid 24 per cent to reach a GMV of USD309 billion digitalisation across the region offers several by 2025. Rising income levels and increased opportunities for businesses, especially in the consumer preference for shopping online, com- e-commerce and cloud services sectors, to grow bined with an improved digital and logistics in- rapidly and reach new customers. frastructure, is expected to drive future growth. In fact, leading Chinese e-commerce players E-commerce: ASEAN is well-positioned Alibaba and JD.com have already invested in for continued growth due to favourable ASEAN. market conditions Recently, e-commerce ASEAN has witnessed spectacular growth and given rise to players

Figure 8: E-Commerce GMV in ASEAN-6

CAGR 24.3% USD billion 309

300 35

104

Markets covered: Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam Source: Google & Temasek, e-Conomy SEA, 2020

Borderless Business: China-ASEAN Corridor 15 Our Growth Watchlist

Strong government support in key ASEAN markets likely to further accelerate e-commerce growth

Indonesia Thailand Vietnam With the aim of attracting technolo- The government’s National E-Commerce The government’s National E-Commerce gy-related investments, the government Strategy (2017-2022) and initiatives such Development Plan for the 2021-2025 has established friendly foreign direct as the PromptPay e-payment service have period is focused on boosting e-commerce investment policies and allows 100 per supported the growth of e-commerce in adoption and envisions that 55 per cent cent foreign ownership of e-commerce the country and made it an attractive of the population will shop online by 2025 businesses. In 2018, Alibaba led a USD1.1 destination for investments. In 2018, Chi- and average annual consumer spending billion funding round in local e-commerce nese online retailer JD.com partnered with online will rise to USD600 by 2025, up start-up, Tokopedia. Thailand’s Central Group to launch JD from USD202 in 2018. JD.com has invest- CENTRAL e-commerce platform. ments in local e-commerce company, Tiki.

Source: Reuters, Bloomberg, Nikkei, E-Marketer, Press Articles

Borderless Business: China-ASEAN Corridor 16 Our Growth Watchlist

Accelerated digital transformation of the six leading ASEAN economies is estimated companies in ASEAN expected to propel at USD4.26 billion and a forecasted CAGR of 26 demand for cloud services per cent (2019-24), with Vietnam as the fastest growing (34 per cent CAGR). Increased demand for cloud services due to rapid digitalisation during COVID-19, coupled with As businesses in Southeast Asia become more digitally maturing businesses in the ASEAN, offer digitally mature and invest in technologies such expansion opportunities for Chinese cloud or as artificial intelligence, machine learning, IoT, Platform as a Service (PaaS) providers in areas and data analytics, further opportunities for such as artificial intelligence, machine learning, Chinese Platform as a Service (PaaS) providers IoT, and data analytics. Cloud spending among are expected.

Figure 9: Cloud Services Spending in ASEAN-6

Markets covered: Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam Source: Google & Temasek, e-Conomy SEA, 2020

Cloud services providers from China are making a foray into ASEAN markets

Indonesia Singapore Vietnam Growing demand for data services during The city-state has been the preferred des- The manufacturing sector in the country the pandemic and government regu- tination for cloud vendors due to its strong will be a major beneficiary of the ongo- lations requiring public entities to store business and regulatory environment, ing diversification of supply chains due data locally has spurred the growth of robust zoning laws, and well-defined to the US-China trade war and Covid-19 the domestic cloud industry and attract- guidelines for data centre construction. In pandemic. As supply chains in the country ed leading cloud players. Chinese cloud 2020, Singapore-based Asia Digital Bank mature and move up the value chain, computing company, Alibaba Cloud, Corporation (ADBC) signed an MoU with demand for cloud-based automation and which already operates two data centres China-based Tencent Cloud to use the lat- industrial services is expected to increase. in Indonesia, announced plans to open a ter’s financial platform to provide digital third data centre in the country in 2020. banking services to SMEs.

Borderless Business: China-ASEAN Corridor 17 Acting with Impact: Five Focus Areas for Chinese Companies to Drive Resilient Growth in ASEAN Acting with Impact

Building a successful business beyond domestic programmes that are being prioritised or accel- shores, particularly in a fast-evolving business erated following the pandemic. Companies are landscape like ASEAN, will require focus on also paying particular attention to engaging several areas. local partners and driving sustainability / ESG initiatives as they venture into the region, and As shown in figure 10 below, Chinese compa- are also mindful of the importance of develop- nies targeting ASEAN are considering multiple ing ASEAN-specific risk management practices areas to remain competitive in the region, with for long term resilient growth. the highest focus on digital transformation

Figure 10: Key focus areas to drive resilient growth in ASEAN

Note: Survey question asked: ‘What are the key initiatives / focus areas for your organisation to drive resilient and rebalanced growth in ASEAN? Please select the relevant options and rank them in order of importance, 1 being the most important.’ Values indicated above refer to the % of survey respondents who included the initiative as one of the top 3 ranked choices Source: Standard Chartered Survey, 2021

Borderless Business: China-ASEAN Corridor 19 Acting with Impact

1. Diversification of production Build ‘profitable redundancy’ in supply networks and supply chains to chains to drive resilience mitigate risk whilst enhancing Whereas companies have historically resilience focused on cost efficiency of their supply chains, disruption caused by events Changing market fundamentals and emerging like trade wars, climate disasters and risks due to trade tensions and COVID-19 are COVID-19 have pushed risk management driving companies to rebalance their supply up the agenda for most manufacturers chains and make them more resilient. Higher and gave way to building in redundancy to wages and stricter environmental regulations maintain resilience during crises. Taking this in China have affected profitability, pushing a one step further, the use of digital solutions growing number of Chinese manufacturers to to improve visibility and transparency, expand their production presence to ASEAN, along with a “just-in-case” approach prioritising locations with lower costs, a robust targeted to higher-value customers, will manufacturing ecosystem and added incen- enable companies to not only enhance tives. Overall, companies are choosing to main- their supply chain responsiveness and tain their footprint in the Chinese market whilst resilience but also provide a premium establishing an additional manufacturing pres- customer experience, which can be ence in another geography – a strategy com- commercialised. monly referred to as ‘China Plus One’.

Our survey results illustrate this shift, with 44 per cent of respondents listed “diversification of production footprint” as a major driver (among top three) for expanding into ASEAN.

A. Understand ASEAN’s diverse industrial landscape Site selection, setting up new production plants or acquiring new procurement networks will require companies to understand ASEAN’s manufacturing diversity.

• Varying regional landscape: ASEAN’s industrial ecosystem varies across countries, de- pending on economic trajectory, production capabilities, quality of support infrastructure, and future priorities. More mature ASEAN-5 economies (Singapore, Thailand, Malaysia, Indonesia and the Philippines) are focusing on high-tech manufacturing, while lower-income markets (Vietnam, Laos, Cambodia, and Myanmar) are building capacity in more labour intensive production.

• Push toward Vietnam: Vietnam in particular has emerged as a major hub for Chinese manufacturers due to its geographic proxim- largest sources of FDI into Vietnam, account- ity, lower labour costs, and access to global ing for more than 30 per cent of inbound in- trade agreements, such as the EU-Vietnam vestments into the country in 2019 and grow- Free Trade Agreement. China is one of the ing at a CAGR of 28 per cent from 2014-19.

Borderless Business: China-ASEAN Corridor 20 Acting with Impact

B. Take cognisance of local policy implications on business viability Apart from labour and infrastructure param- eters, awareness of the impact of changing policies on the ease and cost of operations are also relevant.

• Regulatory incentives: In addition to sector-specific incentive packages (e.g. tax incentives for EVs in Thailand, tax and land concessions in Indonesia for consumer electronics manufacturing, etc.) and profession- ally-managed investment agencies, companies should also be cognisant of the level of strictness associated with local tax, environment and labour laws, and understand their ease of compliance.

• Customs and trade norms: Chinese companies will also need to understand how existing (e.g. ASEAN-China FTA) or emerging agreements (such as the Regional Compre- hensive Economic Partnership) could impact trading operations with major regional and global partners.

Source: Nikkei, Company Reports, Press Articles

Borderless Business: China-ASEAN Corridor 21 Acting with Impact

2. Digital transformation and Companies should adopt an ‘assumed cyber security will be key to breach’ mentality towards cyber security succeed in ASEAN With companies fast evolving towards Evolving market needs in the region have made more digital business models, it is important digitalisation an imperative for growth, both as that they fully incorporate best-in-class a tool to optimise operational performance and cybersecurity practices into their operations. as a channel to enhance customer experience. This means working with the assumption, In the industrial sector, digital solutions are in- or certainty, that an organisation will face creasingly being adopted to address productiv- a cyber security breach at some point, i.e. ity gaps, margin pressures and improve supply adopt a ‘not if but when’ mindset. The more chain visibility to mitigate risks or disruptions. companies are prepared to ‘assume breach’ The surge in e-commerce during the pandemic and develop the necessary capabilities also highlights the importance of omni-channel to mitigate the impact and withstand presence. The World Economic Forum estimates cyberattacks, the more poised for resilient that ~80 per cent of ASEAN’s population will be growth they will be. online by 2030, signalling the need for companies to digitalise to remain relevant.

Chinese companies targeting ASEAN are already recognising the growing importance of digitalisation. As per our survey results, 58 per cent of Chinese companies are considering digital transformation programmes as their top initiatives to drive resilient growth in the region.

A. Build digitally integrated regional supply chains Chinese firms operating in ASEAN need to focus on digitally integrating their regional supply chains, to improve visibility across procurement, production, and distribution operations. Doing so will involve: and consolidate the company’s procurement, production, and logistics processes across the • Establishing a digital supply chain hub: region. It is currently working with its suppli- Companies will need to establish a digital ers, start-ups, and universities to speed-up control tower (or supply chain hub), equipped digitalisation efforts across its regional supply with an advanced data analytics engine in chain networks. As per our survey, majority of ASEAN. This hub will be linked in real-time to respondents are also considering Singapore different parts of the supply chain through as a major regional procurement hub (47 per digital tracking and communication solu- cent) and a regional R&D/ Innovation centre tions. The hub will also be responsible for key (44 per cent). management actions including analysing information, alerting stakeholders of dis- • Adopting an agile mindset to digitalisation: ruptions and suggesting remedial actions. Chinese companies will also need to deploy Being a major trading centre with advanced a holistic digital transformation programme logistics and technology infrastructure and to achieve visible impact across their ASEAN strong innovation capabilities, Singapore operations. Instead of the conventional and shows major potential to evolve into a digital linear way of testing and implementing new supply chain hub in ASEAN. For example, technologies, companies should adopt a Henkel, a global manufacturer of industrial more iterative approach toward piloting new and consumer products, has set up its digital technologies and nurturing their digital tal- supply chain hub in Singapore, to standardise ent to complement firm-wide digitalisation.

Borderless Business: China-ASEAN Corridor 22 Acting with Impact

B. Strengthen digital trust Establishing digital trust is necessary to manage growing threats to data and digital identi- ties. This requires strong cyber resilience.

Our survey results indicate only 35 per cent have plans to strengthen cyber security as one of their priority initiatives (within the top three). This will need to change for Chinese companies to remain relevant and competitive in the region.

• From incident prevention to management: Chinese companies targeting ASEAN will need to shift the focus from incident prevention to building processes and systems that can actively monitor cyber threats, detect breaches, and respond timely and effectively.

• Develop internal response capabilities: More effective post-attack response mecha- nisms are required to mitigate cyberattacks. Simulation exercises with relevant scenarios can be conducted to validate action plans and better understand execution readiness, constantly adapting as per evolving cyber threats.

Borderless Business: China-ASEAN Corridor 23 Acting with Impact

3. Sustainability and ESG Linking ESG goals to senior management trends are taking centre-stage KPIs and incentives critical for success as ASEAN increases focus on With ESG principles growing in importance, climate change and the notion that companies with strong ESG practices deliver sustainable returns, ASEAN is facing mounting challenges related companies are increasingly incorporating to environmental and social sustainability, with such practices into their human capital more frequent and extreme natural hazards strategies and even executive incentives. (e.g. cyclones, landslides, and floods). Climate As Chinese companies seek to enter and change could increasingly damage lives, cause expand in ASEAN, they can consider resource shortages and disrupt supply chains. formalising ESG KPIs by attaching them Socially, there remains corruption and security to senior executives’ compensation and concerns. Growing income inequalities and annual incentive plans as a key driver to health issues stemming from the pandemic are push for greater integration of ESG into forcing companies to rethink existing ways of business practices. working by strengthening community relations, providing safer working conditions, and enhancing supplier diversity.

In fact, our survey indicates that almost 50 per cent of respondents are currently focusing on of sustainability issues, consumers in mature ‘driving ESG initiatives’ as one of their top three ASEAN-5 economies are showing a grow- priorities in ASEAN. While the focus on sustain- ing preference for ethically-sourced and ability opens up new growth avenues for Chi- eco-friendly products. The trend is being led nese companies in the region, they also need by the region’s Millennial and Generation Z to prepare for increased regulatory scrutiny demographics, who are projected to repre- and disruption risks that could negatively sent three-quarters of ASEAN’s consumers impact costs. by 2030.

A. Differentiating through sustainability- • Consider new market positioning: Aligned driven models with fast changing consumer preferences, Factoring in sustainability within business mod- companies targeting growth in ASEAN can els will require some initial investment, but it has establish a stronger sustainability-driven the potential to generate strong market re- positioning to differentiate over competition. turns post-COVID-19. Sustainably-sourced and A UNDP report estimates that 89 per cent of healthier solutions can garner stronger consum- Chinese enterprises are aware of the Sustain- er loyalty in a highly competitive environment, able Development Goals, 69 per cent have driving growth momentum for Chinese compa- publicly mentioned them, and 10.1 per cent nies in ASEAN. Players such as Tencent and Ant have taken clear actions on them. Compa- Group have actively leveraged sustainability nies can do so through various means, such initiatives to enhance user engagement and as launching new product lines (e.g. products draw in a higher number of users to their plat- using biodegradable materials or offering forms – Tencent Foundation gathered RMB 2.8 greater nutritional value), adopting new billion in direct funding for CSR from 98 million operational practices (e.g. sustainable sourc- users, and “Ant Forest” enabled 550 million users ing of raw materials or talent diversity pro- to indirectly plant 200 million trees by accumu- grammes), or enabling new business models lating ‘green points’, cutting daily carbon emis- (e.g. shared economy businesses or circular sions by 12 million tonnes. economy models). Chinese F&B giant Master Kong works with local suppliers in Indonesia • Acknowledge changing regional prefer- and Malaysia to improve agricultural man- ences: Sustainability must not be seen as a agement. The company also cooperates challenge alone, as it leads to new opportu- with scientific research and technology insti- nities for companies. With rising awareness tutions to share food safety technologies.

Borderless Business: China-ASEAN Corridor 24 Acting with Impact

B. Building sustainability into supply chains The increased focus on ESG (environmental, Standard Chartered social and governance) in ASEAN will create significant opportunities for players who are launches a new new to the region and are looking to build such practices into their expanding supply chains Sustainable Trade whilst seeking to create a positive brand image. Finance Proposition • Maximising sustainability-related opportuni- With the aim of helping global supply ties: Chinese companies could use ESG-based chains become more sustainable, Stand- criteria when shortlisting new plant locations ard Chartered launched a suite of trade or selecting suppliers in ASEAN – for example, finance products and services designed to a scoring matrix to assess a supplier’s waste, help companies across Asia, Africa and the pollution, natural resource conservation Middle East, Europe and the Americas im- efforts, business values, health and safety plement more sustainable practices across standards, and reliability. their ecosystems and meet ESG-related • Working with regional suppliers: Large-scale sustainability objectives. Its solutions will Chinese companies will need to work with provide financing support for: their smaller regional suppliers to build ESG-re- • Financing of goods that meet lated expertise. This could mean extending sustainability standards incentives to suppliers to adhere to sustainability targets (e.g. long-term contracts, favour- • Suppliers who meet acceptable ESG- able credit terms), offering training assistance, related thresholds sharing best practices with suppliers and con- ducting more periodic audits to check if the set • Sustainable industries such as targets are being met. renewable energy, blue economy, clean transportation • Leveraging available ESG-related products and solutions: When building sustainability • Industries in transition looking to reduce practices in supply chains companies can lev- their carbon footprint erage innovative technologies such as block- chain for traceability and transparency, for example. Given the initial investment required in implementing ESG practices, companies investing in sustainable projects or practices can consider available financing solutions from public and private banking partners.

Source: Xinhua Silk Road Information Service, Company Websites Borderless Business: China-ASEAN Corridor 25 Acting with Impact

4. Leveraging partnerships key Local partnerships also crucial to bridging to unlocking access to ASEAN the cultural divide markets Chinese companies targeting ASEAN Domestic market challenges, such as slowing markets would benefit from liaising with consumer spending in mature product seg- local partners on the ground to enable a ments, intensifying competition, and a higher deeper and more realistic understanding cost burden due to regulatory changes, are of the market intricacies, consumer pushing Chinese companies to internationalise. attitudes and behaviours, business norms As ASEAN recovers from the downturn caused and ways of operating, as well as cultural by COVID-19, its robust consumption growth in nuances. This would enhance their the coming years is proving attractive to Chi- decision-making and speed up their market nese companies. The World Economic Forum access, as well as provide additional expects ASEAN’s middle class to represent resilience when having to operate using two-thirds of the region’s population by 2030, local business practices. which will nearly double consumer spending to USD4.0 trillion by then.

Our survey respondents echo these sentiments. A high 56 per cent listed “access to the large and growing ASEAN consumer market” as one of their top three reasons for expanding to ASEAN, and 65 per cent of the respondents also plan to increase annual revenues in ASEAN by more than 10 per cent over next 12 months.

A. Develop local cross-stakeholder • Investment agencies: When asked about partnerships for market expansion success their key drivers of focus in ASEAN, over 50 Chinese companies with limited capacity to per cent of Chinese companies in our sur- conduct due diligence on foreign markets can vey cited “local government incentives and engage with local partners to understand support for project sustainability/stability” growth dependencies and risks, address capa- as a major driver (amongst the top three) bility gaps, and mitigate market entry barriers. to entering ASEAN. In this regard, investment promotion agencies in ASEAN (such as With almost 60 per cent of survey respondents Singapore’s Economic Development Board, indicating “adapting the business model to or the Malaysian Investment Development industry practices and conditions” as a major Authority) can help businesses in connect- growth challenge in ASEAN, companies are ing with multiple government departments increasingly giving high importance to local to attain clearances, shortlisting potential partnerships to increase market presence in production sites and negotiating incentives. the region. With different ASEAN markets competing to attract foreign investment, the importance • Commercial and banking partners: Compa- of government support has increased signifi- nies can consider tapping on the expertise of cantly in recent years. local commercial partners for project financing, structuring transactions, and legal or • Government programmes: Participation in advisory services. Standard Chartered Bank large-scale government-led programmes has a strong regional network and an array such as China’s Belt & Road Initiative or of solutions, including trade financing, cash major industrial development initiatives in management, and capital market offerings, ASEAN (such as Thailand’s Eastern Economic which over 50 per cent of surveyed compa- Corridor), can also be a viable entry route, nies consider to be the most critical require- especially in more capital-intensive sectors ments from banking partners, to support such as high-tech manufacturing and energy their expansion efforts in ASEAN. infrastructure development.

Borderless Business: China-ASEAN Corridor 26 Acting with Impact

Figure 11: Key requirements from banking partners to support growth in ASEAN

60% Strong cash management capabilities

56% Extensive trade financing services

56% One-stop corporate financing and capital raising services

49% Digitalised platforms for foreign exchange, transaction banking, etc.

40% Foreign exchange hedging and multi-currency settlement services

23% Advisory services (financial advisory, ESG rating etc)

16% Widespread cross-border network and understanding of the local markets

Note: Survey question asked: ‘Where are the key requirements from your banking partner, to support your growth in ASEAN? Please select the relevant options and rank them in order of importance, 1 being the most important.’ Values indicated above refer to the % of survey respondents who included the requirement as one of the top 3 ranked choices Source: Standard Chartered Survey, 2021

B. Consider alliances and acquisitions to internet platform Sea Limited – to strengthen bridge capability gaps their market penetration in mobile and PC entertainment in Asia. ASEAN’s diverse market requirements and consumer demand for greater choice and faster • Making acquisitions: Larger companies can product introductions, is driving companies to also consider making strategic acquisitions localise their strategies. Entering alliances or to reduce their time to market and gain ac- making strategic acquisitions can help Chinese cess to critical capabilities such as innovative companies targeting ASEAN bridge potential products, strong Research & Development information and capability gaps. (R&D) skills or a loyal customer base. More affordable and alternative sources of capital • Entering alliances: Chinese companies tar- are available in today’s economic scenario, geting ASEAN will not only need to remain which can further help Chinese players in price-competitive but also improve market exploring this route-to-market. agility to stay ahead. To do so, players entering the region will need to explore partnerships with local firms to better understand consumer behaviour, competitor strategies and local business practices. Through its affiliate, leading Chinese technology firm Tencent signed a joint agreement with Garena – the digital entertainment arm of

Borderless Business: China-ASEAN Corridor 27 Acting with Impact

Borderless Business: China-ASEAN Corridor 28 Acting with Impact

5. Reinforcing risk management Extensive scenario and business continuity and governance practices planning will be necessary for operating in an uncertain future Amongst the key risks or concerns for Chinese companies surveyed are the pandemic, trade COVID-19 has brought to the forefront the conflicts, and sluggish economic recovery idea that change is here to stay and that (Figure 12). The pandemic has necessitated companies must prepare to operate in an companies to rebuild trust among stakeholders. increasingly uncertain world. Effective risk Purposeful growth, achieved through balancing management has taken an ever-important the interests of the company and shareholders, role and scenario planning capabilities will require the right governance frameworks. will be crucial to enable companies to ASEAN markets vary significantly in terms of mitigate risk and minimise disruption to political stability, regulatory quality, and the their operations going forward. Chinese adoption of intellectual property norms and companies should focus their attention on therefore robust risk management is essential strengthening such capabilities for greater to prepare Chinese companies for these institu- resilience when entering and operating in tional differences and changing business needs. the ASEAN market.

Figure 12: Key business risks in ASEAN

70% The COVID-19 pandemic or other health crises

67% Geopolitical uncertainty and trade conflicts 67% Slow revival of the economy and drop in consumer spending 28% Limited availability of skilled talent

28% Understanding of regional regulations

19% Exposure to cyber threats

19% Impact of climate change

Note: Survey question asked: ‘What are the key risks for your business in ASEAN? Please select the relevant options and rank them in order of significance, 1 being the highest risk factor.’ Values indicated above refer to the % of survey respondents who included the risk as one of the top 3 ranked choices Source: Standard Chartered Survey, 2021

Borderless Business: China-ASEAN Corridor 29 Acting with Impact

A. Adopting a future-ready approach to • Enhancing internal planning capabilities: governance Effective risk management will also need companies to strengthen their scenario plan- Looking beyond COVID-19, companies will ning capabilities, which includes determining need to revamp governance as per changing worst case scenarios, understanding their social and economic realities in ASEAN. This will financial impact and identifying key trigger entail: points for decision-making.

• Adopting new governance principles: Com- panies in ASEAN will need to reassess their

growth principles to rebuild trust and enable Conclusion a more purposeful, resilient and ethical fu- In recent years, geopolitical tensions, economic ture trajectory. For example, companies will protectionism and trade conflicts have been on need to realign all stakeholders’ interest to a the rise, and adding to these global shifts, the shared purpose, encourage risk-conscious- COVID-19 pandemic has exposed the fragility ness, resilience and greater transparency of existing economic models and social realities. regarding the environmental and social im- Sustainability-related concerns and the impact pact of business practices. Companies that of climate change have also become more take the lead in reporting on areas which prominent. Such dynamic times have signifi- they previously did not and target stakehold- cantly accelerated the need for businesses to ers and shareholders in doing so can differ- transform, thereby prompting Chinese compa- entiate themselves from their competitors nies to rethink their existing ways of working to and be market leaders in this aspect. drive cross-border expansion. Going forward, • Making governance more comprehensive: Chinese companies targeting ASEAN must Chinese businesses in ASEAN will also need focus on more purposeful and risk-conscious to adopt a more unified approach to gov- growth whilst balancing the interests of both ernance, one which constantly monitors and their shareholders and local stakeholders as plans for all strategic assets (internal and ex- they strive for resilience. ternal) including the workforce, supply chain operations, data and technology systems, and key customer relationships. B. Developing stronger risk management systems Chinese businesses in ASEAN must also adopt more robust risk management frameworks within their organisations, to bolster their crisis planning and response capabilities. This will require: • Developing a dedicated risk management team for ASEAN: The team will be responsible for monitoring and communicating risks to the leadership, covering all aspects related to financial, operational, legal or repu- tational risks. The team will need to define Standard Operating Procedures (SOPs) to manage business risks, outline the company’s strategy to ensure business continuity and maintain communication with stakeholders in case of an incident.

Borderless Business: China-ASEAN Corridor 30 Sources

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Borderless Business: China-ASEAN Corridor 31 Sources

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Borderless Business: China-ASEAN Corridor 32 Disclaimer

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