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South East Asia Manufacturing South East Asia Manufacturing “China plus One” considerations for new investments June 2019 With rising trade tensions between the People’s and weaknesses, but a few locations stand out. Republic of China (“China”) and the United States According to the Financial Times FDI Report 2019, of America (“U.S.”), many enterprises are now Indonesia and Vietnam ranked third and fourth in wondering how to manage emerging geopolitical attracting the most inbound greenfield FDI by value risk and its likely impact on their regional in 2018 in the Asia Pacific region, after China and manufacturing strategy. KPMG has prepared this India. Thailand experienced the highest growth in publication as an introductory overview of potential new FDI projects by number with a 55% increase alternative manufacturing locations in South East over the prior year. Asia. Ease of doing business What is at stake? According to recent trade data, the U.S. imported According to the latest annual World Bank survey on USD540bn worth of goods from China, whereas China the Ease of Doing Business (2019), many ASEAN imported only USD120bn from the U.S. in 2018. This countries have improved their overall rankings, but escalating trade imbalance resulted in growing trade more work is needed on digital transformation to tensions and ultimately resulted in the imposition of reduce the administration burden of doing business in trade sanctions by the U.S. in 2018. Currently, nearly those jurisdictions. Countries that have implemented half of all imports into the U.S. from China are subject automated compliance processes have achieved to levies of up to 25%. The Trump administration is higher overall rankings. As two of the more developed also now threatening to apply tariffs on all remaining countries in the region, Malaysia and Thailand scored imported Chinese goods. China has been quick to well (see table 1). On a different metric (political risk), retaliate with tariffs on USD110 billion of U.S. imported Vietnam ranked highest among comparable countries goods into China. This tit for tat application of levies and has benefited from a stable political system. and sanctions by both parties is not likely to be resolved Table 1: Non-cost factors among selected ASEAN quickly, if at all. Accordingly, this rise in tariffs may have countries compared to China a significant impact on global economic activity and for U.S. enterprises who rely on imports from China in ) 90 particular. 0-100 ( Malaysia As uncertainty grows, many enterprises with Thailand manufacturing capacity in China are now exploring a 80 manufacturing diversification strategy commonly referred China to as a “China plus One” strategy. The basis of this business Vietnam strategy is retaining a foothold in China, but expanding 70 Indonesia into a new jurisdiction for cost reduction or other reasons. f doing o Major ASEAN countries are getting more attraction Philippines 60 and foreign direct investments (“FDIs”) Ease Many manufacturing enterprises are now turning their attention and foreign direct investment (“FDI”) to Cambodia 50 some of the countries that comprise the Association of 55 65 75 85 95 Southeast Asian Nations (“ASEAN”) as an alternative Short-term political risk (0-100) to China, especially emerging markets, as wage costs are a factor. Each country has its strengths Source: World Bank, BMI (2018, 2019) Economic and logistics comparison of selected countries Selected cities Guangzhou Shenzhen 20+ mil Hong Kong Haiphong Hanoi 10 – 20 mil 5 – 10 mil Danang 1 –5 mil Bangkok Manila Major international Phnom Penh airports Ho Chi Minh City Davao Cityy Major deep sea ports Kuala Lumpmpur Medand Logistic performance index1 3.5 –4.0 Makassar 3.0 –3.5 Jakarta Surabaya 2.5 –3.0 Country/ China (CN) Thailand (TH) Malaysia (MY) Cambodia(KH) Vietnam (VN) Indonesia (ID) Philippines (PH) Population 1,386 m 69 m 32 m 16 m 96 m 264m 105 m GDP/ 12,238bn 455 bn 315 bn 22 bn 224 bn 1,016 bn 314 bn Growth2 (+6.95%) (+2.79%) (+5.30%) (+7.04%) (+6.42%) (+5.00%) (+6.44%) FDI/ 168.2 bn 8.0 bn 9.5 bn 2.8 bn 14.1 bn 21.5 bn 10.1 bn growth2 (-12.8%) (-15,7%) (-4.2%) (+7.7%) (+12.2%) (-2.0%) (+28.1%) Currency/ Renminbi Thai Baht Malay. Ringgit Cam. Riel Viet.Dong Indo. Rupiah Phil.Peso Volatility3 (1.15%) (1.53%) (2.47%) (0.69%) (1.15%) (1.15%) (1.35%) Electronics, Electronics, Top Electronics, Electronics, Garment, Electronics, Palm oil, Machinery/ Machinery/ exports Automotive Oil and gas Footwear Garment Coal instruments instruments Source: World Bank (2017), OEC (2017), Fitch Solutions (2018), Investing.com (2019) Notes: 1The Logistics Performance Index is scored on the scale of 0 – 5 based on the combination of the following sub indicators: customs, infrastructure, international shipments, logistics competence, tracking & tracing, timeliness; 2Total in USD, growth: CAGR 2013-2017; 3Volatility from 01/2013 to 04/2019 Global trade integration Table 2: Overview of relevant FTAs Free trade agreements (“FTAs”) have a direct impact FTAs VN MY TH PH ID KH CN on the movements of goods across international AFTA x borders. China has a higher total number of FTAs, ✔ ✔ ✔ ✔ ✔ ✔ while Malaysia and Vietnam on the other hand have AFTA-China ✔ ✔ ✔ ✔ ✔ ✔ ✔ more multilateral trade agreements in place. This India ✔ ✔ ✔ ✔ ✔ ✔ x multilateral trade approach arguably provides access Korea ✔ ✔ ✔ ✔ ✔ ✔ ✔ to more countries with larger markets (see table 2). Japan x The Comprehensive and Progressive Agreement for ✔ ✔ ✔ ✔ ✔ ✔ x Trans-Pacific Partnership (“CPTPP”) is also a key CPTPP ✔ ✔ x x x x x consideration. Malaysia and Vietnam have signed EU ⭕ ⭕ ⭕ ⭕ x x the CPTPP, whereas Thailand, Indonesia and the US x ⭕ ⭕ x x x x Philippines have not. Vietnam has also signed a multilateral free trade agreement with the European Legend: ⭕ To be ratified ⭕ In negotiations Union. Source: WTO (2019) cost which is more than double Thailand or Indonesia. Cost considerations Vietnam and Malaysia also have a low total tax cost when compared against China (see table 4). A key consideration for manufacturing is cost and a primary component of the cost is labor. Malaysia and Table 4: Ease of paying taxes Rate (% Hours China have significantly higher wage costs compared Global Rate Number of Country of per year ranking trend payments to say Indonesia and Cambodia. Vietnam and the profit) spent Philippines have similar wage costs (see table 3) which Slightly 59th TH 29.5 229 21 are significantly lower than China. However while increased Indonesia’s wage cost is the lowest, it has the fastest 72nd MY 39.2 Unchanged 188 8 rate of increase. It is also worth noting that its lower wage cost is usually associated with less developed 94th PH 42.9 Unchanged 181 14 Noticeably infrastructure or is driven by the fact it is located in 112th ID 30.1 207.5 43 more remote places. decreased Slightly 114th CN 64.9 142 7 decreased KPMG Observation: Wage costs in China are Noticeably 131st VN 37.8 498 10 expensive by regional standards. Leaving aside U.S. decreased Slightly trade tarriffs, rising costs in China are already driving 137th KH 21.7 173 40 FDI into other regional locations. increased Source: WTO (2019) Utilities, taxes, and land rental costs are other key cost considerations. Some of these cost elements are KPMG Observation: The World Bank survey does country driven, while others are driven by geographic not provide a clear picture, because it does not and strategic locations. While this is another key cost capture all relevant tax considerations. Tax consideration, a detailed analysis of this matter is incentives, withholding taxes and customs duties beyond the scope of this publication. are not included. A country-by-country analysis of tax incentives for new investment may result in Table 3: Relevant cost factors – wage significantly lower overall tax costs. $1,200 11.0% $1,038.2 $1,000 $897.7 10.0% 7.8% 8.0% Supply chain considerations $800 6.4% 6.0% China has significant competitive advantage when it $600 4.2% $454.7 comes to supply chain management. Most inputs can 3.2% $400 4.0% be sourced locally which may reduce transportation $278.3 $248.0 costs and result in fewer supply chain disruptions. $200 $181.4 $182.6 However, cost escalations, regulation, and recent trade $- 0.0% levies imposed on exports into the U.S. raise concerns with respect to ongoing manufacturing in China. Average monthly wage 2017 (USD) KPMG Observation: Vietnam’s shared land border Annual average monthly wage growth (CAGR 2013-2017) with China (with direct road connections) enhances Source: Fitch solutions, BMI, 2017 its interconnectivity with China and arguably reduces supply chain disruption risks arising from a “China KPMG Observation: Cost factors are always plus One” manufacturing strategy. impacted by location and so generalizations can be misleading. Industry considerations Taxation considerations When looking at specific industry sectors like textiles, clothing, automotive, chemical, equipment, electronics The annual World Bank survey on paying taxes provides and white goods, each jurisdiction will have its own a useful jurisdiction by jurisdiction benchmarking exercise advantages and disadvantages. on taxation, because the hypothetical taxpayer is a manufacturing enterprise. The overall ranking is based Philippines has had some success with heavy industries on time to comply with tax laws plus the total tax cost. like ship building. Thailand is the largest automotive Thailand and Malaysia achieved a good overall ranking in manufacturer in the region and second largest exporter 2018 due to the automation of tax compliance processes, of computer hard drives in the world. Vietnam is also while Vietnam and Cambodia scored poorly overall for a rising electronics manufacturer and is the largest the same reasons.
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