AEC: The great unknown in Asia

Illustration | Bosch Rexroth AG
Marginal Column

July 2012

 

A new economic giant is arising in Southeast Asia with the formation of the ASEAN Economic Community.

 
 

Emerging in the shadow of two well-known growth regions – China and India – a new and as yet little-known free trade zone is being established: the ASEAN Economic Community or AEC for short. By 2015 this community of Asian countries is to join forces to create an economic zone with 600 million consumers. In 2007 the leaders of the ASEAN countries reached agreement on establishing the AEC. The objective being pursued by Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam is to set up a zone free of barriers to the transfer of goods and services. The movement of capital and qualified workers is also to be unrestricted.

A market with 600 million people

The numbers are impressive. At least 600 million people live in the ten ASEAN countries, some 100 million more than in the European Union. The middle class is growing rapidly and its demand for western consumer goods and technologies is great. With projected GDP growth of between 5.7 and 6.4 percent, the ASEAN nations, in spite of a slight decline again in this year, are among the world’s leaders.

The region accounts for six percent of world trade. By comparison, China accounts for ten percent. Almost all the ASEAN countries have deregulated their economies in recent years and opened them to the world market. Many trade barriers have already been lowered between those member countries that of the greatest economic significance. “Goods traffic among Thailand, Indonesia, the Philippines, Malaysia, Singapore and Brunei is already largely free of customs,” emphasizes Rajiv Biswas, Chief Economist at the IHS Global Insight consulting firm in Singapore. “The other countries will follow by 2015.” Dismantling barriers to the free movement of services is still the subject of negotiations.

Even today ASEAN, with transactions worth 175 million euros in goods and services, is the seventh largest trading partner for the European Union. At the same time Europe, at eleven percent and following China, is the largest trading partner for ASEAN. No matter whether it is a question of raw materials production, farming, or the electronics industry, the opportunities are “enormous”, claims an insider, for any industry that focuses on quality – and for middlemarket companies, as well. “In many ASEAN countries there is a massive backlog in infrastructure building. Machinery and equipment ‘Made in Germany’ are, for example, very much in demand.”

And of course that includes renewable energies and environment technology. Malaysia and Indonesia have assigned high priority to reducing CO2 emissions. But other ASEAN countries – where you might not initially expect it – have taken up the cause of environment protection. Myanmar, for instance, wants to establish a fishing industry following organic principles in order to profit from Europe’s increasing demand for seafood from sustainable production.

Variety, but with stumbling blocks

The ASEAN countries – regardless of whether the young democracy of Indonesia, communist Vietnam, or business-friendly Singapore – could hardly be any more disparate. The economic, cultural, social and political diversity in the ten ASEAN countries would give reason to expect that the final dash to AEC 2015 will not be without its hurdles. Some experts feel that the trade barriers which have already fallen are those that were most amenable to political negotiation.

Rajiv Biswas believes that pending talks on easing restrictions on travel and worker relocation and on the free flow of capital could lead to conflicts among the individual countries. “Some countries fear that an AEC could offer a loophole through which outside countries could acquire key holdings in important industries in ASEAN countries.” That could incite fierce political resistance in some member countries. A foretaste of the region’s self-awareness and the growing opposition to the specter of outside dominance was delivered by Indonesia in March, when Jakarta surprisingly limited to 49 percent the share which a foreign company could hold in an Indonesian natural resources company. Thus investors in tomorrow’s AEC will have to pay greater attention to cooperation and expanding local value addition.

Local presence

Bosch Rexroth has been on hand in the ASEAN region since the 1970s and has established a strong presence there. “We see ASEAN as one of the strongest growth markets for mechanical engineering. It – similar to China – has reached the critical mass necessary to catch up with the industrialized countries,” stresses Dr. Karl Tragl, Chairman of the Executive Board at Bosch Rexroth AG. That is why the company is devoting ever more energy to local value addition in this region.

Singapore offers the greatest market volume for mechanical engineering, with that city-state being home to the world’s largest manufacturers of offshore platforms. In this market segment Bosch Rexroth has a regional market share of about 30 percent. The trend toward greater automation is continuing in mining and in natural resources processing. Rexroth supports mining and processing companies with on-site capacities for engineering, installation and commissioning, and service. Responding to increasing mechanization in farming, Rexroth works closely with regional manufacturers who build harvesters for rice, sugarcane and pineapple.

Here, in the same way as for construction machinery, importance is attached to pollution regulations that have been tightened up all around the world. Rexroth is the world’s leader in linking the controls for diesel engines and hydraulic systems – a prerequisite for meeting the TIER 4 final exhaust emissions standard. As regards factory automation, two sectors are responsible for a great deal of the growth: electronics and semiconductors, and food products and packaging. Local and regional firms are putting their faith in European and Asian machinery. Rexroth supports machinery builders and users with on-site installation and commissioning capabilities and a tight-knit service network.

 
 

The Author


 
Photo | Urs Wälterlin

Urs Wälterlin,

correspondent for the Handelsblatt business newspaper for Southeast Asia and Oceania