moving forward with the aec

8/10/2019 Moving Forward With the AEC

1/28

Insight

EIC | Economic Intelligence CenterMonthly/February 2011

Moving forward with the AEC


2/28

The ASEAN Economic Community or AEC will make ASEAN a more interesting place to do business. The AEC will have an aggregate population of 580 million, more than that in the European Union itself.Given the low levels of income in many of the ASEAN countries, however, the aggregate size of the economyin the AEC is not that large, roughly that of just South Korea. This makes it incumbent on businesses toidentify those salient characteristics of ASEAN which should make it of particular interest. For example,aggregate FDI in ASEAN is quite substantial, and it is a top tourist destination, second only to France.

But what the AEC will achieve in 2015 will still be quite far removed from the European Union (EU)in terms of achieving a single market. For example, while the AEC has achieved a FTA in the form of theASEAN Free Trade Area (AFTA), there are no immediate plans for a customs union (charging the same tariffon imports from outside the region). Restrictions on investment and labor will remain more signicantthan in the EU. Signicantly, many of the supranational agencies which will facilitate the emergence of atrue single market (e.g., common central bank, competition authority, and the like in the EU) are all butabsent in the AEC. The AEC has taken a more consensual, intergovernmental approach, with the expectedconsequences.

Next up in the AEC is the liberalization of trade in services, investment, labor mobility, and greaterharmonization of rules and regulations. Liberalization of trade in goods under AFTA was completed in2010. The AEC also makes the usual calls for greater economic cooperation in such areas as SME networkingand joint research.

Businesses in Thailand will confront greater challenges from the AEC as a result of (i) the higherpercentage of ownership by ASEAN investors in services sectors; and (ii) the greater ability of skilledprofessionals to move within the region. Ownership limits are raised to 70% for ASEAN investors. The fourpriority sectors earmarked for such liberalization in 2010 include ICT, tourism, healthcare, and air transport,with others to follow in 2013 (logistics) and 2015 (the rest). The immediate impact of higher foreign ownershipmay not be that large as ownership levels in many sectors are still below the 49% statutory ceiling. Buthigher remuneration of professionals elsewhere in the region-e.g., Malaysia and Singapore-may eventuallymean greater competition for skilled workers in the 7 professions liberalized to date.

With greater challenges come greater opportunities for Thai businesses to expand elsewhere inASEAN. Thai businesses will benet from higher investment ceilings in countries such as Indonesia, Malaysia,and the Philippines. (Statutory ceilings are already high elsewhere.) Sectors with particularly high EBITDAmargins include retail in Singapore and IT in Malaysia. Despite such greater liberalization of statutorylimits, however, businesses need to be aware that many countries still have in place domestic rules andregulations (e.g., on minimum investment and modes of investment) which will continue to discriminate

against foreign investment.

Taking full advantage of opportunities from AEC will require Thai businesses to focus on those particularareas where Thailand has an advantage (our core competencies) and where ASEAN is particularlydistinctive. The AEC will tend to result in a greater concentration of production in the region. But giventhe limited size of the aggregate market, it is important to identify specic opportunities from Thailandsand ASEANs unique relative strengths. For example, Thailand has a traditional strength as a food producer.Demand for halal food has been growing much faster than demand for food overall. With around 270million Muslims, ASEAN has the largest Muslim population in the world. Taken together, this suggests anopportunity for Thailand to be a key (if not the key) producer of halal food for the region and beyond.

Moving forward with the AECWhat the ASEAN Economic Community (AEC)really means for businesses in Thailand


3/28

4

EIC Economic Intelligence Center

ASEAN Economic Community (AEC)offers greater opportunities1

ASEAN Economic Community*

Population 580 million

GDP size 1.5 trillion USD

FDI 50 billion USD

International tourists

65 million persons

International trade

1.6 trillion USD

Compare to

Europe Union

South Korea

6 times Thailand

60% of China

ranked 2 nd globallynext to France

* International trade, FDI and international tourists include intra-region guresSource: SCB EIC analysis based on data from Association of Southeast Asian Nations (ASEAN); China Ministry of Commerce;

United Nations Conference on Trade and Development (UNCTAD); and International Monetary Fund (IMF)

The ASEAN Economic Community (AEC) is not merely about trade liberalization, despite frequentnews coverage focusing on tariff reduction agreements among ASEAN Member States as well asbetween Thailand and other countries. In fact, the AEC involves the economic integration of ASEANcountries. It also covers the liberalization and facilitation of capital movement, labor movement, theharmonization of customs regulations, standards for goods, and economic policies among ASEANcountries. These factors make the AEC more than just a free trade agreement that Thailand has withmore than 10 countries.

The AEC is one of the three pillars of the ASEAN Community. The other two pillars are the ASEAN Political-Security Community and the ASEAN Socio-Cultural Community. These components will one day help realizethe grand vision of an integrated and united ASEAN Community, like the European Union.

Integration towards the AEC will make ASEAN more attractive, with a market larger than the EU interms of population. ASEAN can play a greater role in the global economy. Despite the moderate sizeof the ASEAN economy, it is increasingly an investment and tourist destination. Therefore, the realizationof the AEC will increase ASEANs appeal in many aspects.

What is the AEC and whatchanges will it bring?1


4/28

5


Full implementation of the AEC Blueprint does notby itself mean integration has been achieved2

ASEAN Economic Community

73.6%of target achieved

Single market andproduction base

Competitiveeconomic region

Equitable economicdevelopment

Integration with theglobal economy

Liberalizationand facilitationof free ow ofgoods, services,investment, skilledlabor, and capital

Laying thefoundation forcompetitionpolicy, consumerprotection,intellectual propertyrights, andratifying transportagreements

Studies anddevelopmentof SMEs andInitiative for ASEANIntegration WorkPlan 2

Entry into forceof Free TradeAgreements

82% 50% 100% 100%

Source: SCB EIC based on data from Department of Trade Negotiations, Ministry of Commerce

Nevertheless, the completion of the implementation of the AEC Blueprint does not necessarily meanthat the goal of a true, integrated economic community has been realized. It just means that theAEC Blueprint has been fully implemented . The Blueprint covers four important aspects of the AEC whichare (1) becoming a single market and production base, (2) enhancing regional economic competitiveness,(3) building equitable economic development, and (4) integration into the global economy. The successof the integration process will be assessed by its outputs and outcomes, for instance, whether tradeliberalization and tariff reduction have helped bridge price gaps among ASEAN countries; or whether thefacilitation of labor ow has increased labor movement to a level that narrows wage differences.


5/28

Changes arising from the AEC will not be abrupt because the Blueprint towardsthe AEC has been carried out incrementally, with completion targeted for 2015.For example, tariff reduction, and the increase of investment ceilings in the PriorityServices Sector to 70% for ASEAN investors have been in force since 2010.

One concrete output of integration towards AEC are the changing rules andregulations. This includes, for example, an increase of the investment ceiling in theservices sector to 70% for ASEAN investors, less paper work, and easier goods inspectionat checkpoints in ASEAN countries due to harmonized standards. However, in additionto those agreements, some parts of the AEC consist of terms of cooperationwhich may not yield tangible outputs, including networking among SMEs, networkingamong ASEAN universities, and promotion of research and technology cooperation

in the eld of agricultural products, foods, and forestry. Therefore, economic unitywithin ASEAN after the completion of the AEC building process could be evident, orremain vague in 2015. Many countries still have reservations over parts of the AEC,such as the preservation of some business areas for their nationals, and the freemovement only of skilled labor.

The AEC in 2015 is unlikely to meet the high expectations of reaching the EUmodel. There have been discussions that by 2015 the AEC will transform ASEANeconomies into a single market and production base like the EU, but a number ofdifferent factors affecting the AEC will prevent ASEAN from reaching those goalswithin that time-frame.

Box: What will happen in 2015?

6



6/28

7


1. Becoming a single marketand production base

- Trade in Goods

Internal tariff rate - reduced to 0% - reduced to 0%

External tariff rate - all member countries - each member country

enforcing the same tariff enforces its own rate

- Trade in services (share ownership) - 100% - 70%

- Movement of labors - free ow of labors - free ow of only

skilled labor

2. Other aspects of integration - Single currency - National currency - European Central Bank : ECB - Intergovernmental

- Supra-national authorities with method without clear

central organizations such as: authority over each

European Parliament member state

European Court

European Legal System

European Competition

Commission

Features European Union ASEAN

The EU was originally determined to build a supra-national authority. It has authority to make decisions onbehalf of all member countries within its agreed scope of responsibility, and member countries are bound bythese decisions. This supra-national authority has created unity among member countries, and enabled the EU

to move forth more easily while ASEAN is struggling with a slow pace and, in some cases, the impossibilityof moving forward due to its intergovernmental nature, which means that member countries are still holdingtheir sovereignty above the institution. Consensus is required in stepping forward, yet it is not easily reached.Although there have been ideas and attempts to develop ASEAN into a supra-national institution, ASEANremains short of a concrete plan of action towards such a goal. Moreover, even the EU itself is facingdifculties in their attempts toward further integration, for instance, from differences in their scal policy asevidenced by the ongoing Eurozone public debt problems. The path towards integration followed by the EUmay not be an easy one.


7/28

8


Much works left to be carried outtowards realizing the AEC3

Main types of international economic integration

Removal of tariffs andquotas

Commonexternaltariffs

Investmentmobility

Labormobility

Harmonizationof economicpolicies

Free trade area Common market Economic unionCustoms union

Source: SCB EIC analysis based on data from David J. Dennis and Zainal Aznam Yusof (2003) 1

Only AFTAhas beencompleted

Much more remains to be done to fully realize the AEC vision. If we look at thewhole process of AEC building, we have completed only one part of it, which is thereduction of tariffs among ASEAN countries, with the ASEAN Free Trade Agreementalready in force. There are other important components requiring ASEANs collectiveeffort and time to accomplish. This includes, for example, common external tariffs,which means a single tariff rate to be enforced in all ASEAN countries with theirtrade with external partners. This tends to be very difcult in practice and, in theend, may result in selective cooperation. For example, it is highly unlikely thatSingapore would increase its tariffs from 0% to a higher rate as might be agreed byother ASEAN countries. The harmonization of economic policies among all membercountries is another difcult task because so far there are no legal provisions orregulations binding all member countries. This is a major difference between ASEAN

and the EU.

1 David J. Dennis and Zainal Aznam Yusof (2003), Developing Indicators of ASEAN Integration - A Preliminary Survey for a Roadmap,nal report to REPSF Project 02-001


8/28

As one of the steps towards the AEC, every member country is required to cuttheir tariffs on all goods from ASEAN to 0%, except for those on their sensitive lists.Thailand, Singapore, Malaysia, Indonesia, the Philippines, and Brunei have alreadyeliminated their tariffs since the start of 2010. The rest - Cambodia, Lao PDR,Myanmar, and Vietnam, will work towards 0% tariffs by 2015. (More details regardingimpacts on goods can be found in Outlook special issue: FTAs. )

In order to assess the positive and negative impacts on businesses, it is not enoughto focus only on AFTA because Thailand has at least 10 FTAs in force with 6 tradingpartners beyond ASEAN 2. The combined import value of the six trade partners is asmuch as USD 53 billion, which is higher than ASEANs.

Therefore, we will analyze tariff reduction on goods by employing a projectionapproach to see how every existing FTA and those in the pipeline would affect eachbusiness. For example, canned fruits and vegetables will feel a far greater impactfrom tariff reductions on China, the No. 1 source of imports, in 2010, and India, theNo. 2 source of imports, with tariffs falling from 29% in 2010 to around 8% in 2017than from ASEAN. This will intensify competition in the future.

BOX: Illustrative example of tariff reduction under AFTA

9


35

28.730

25

20

15

10

5

0

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

2 0 1 6

2 0 1 7

2 0 1 8

2 0 1 9

2 0 2 0

Canned fruits and vegetables business has to preparefor more intense competition from 2012 onward4

Weighted average import tariff rate of canning and preservation of fruitsand vegetables sector by FTA countries for the period of 2010-2020

_ ASEAN _ China _ India _ Korea _ Japan _ Australia _ New ZealandUnit: %

Source: SCB EIC analysis based on data from Revenue Department; Department of Trade Negotiations, Ministry of Commerce; and Ofce of National Economic and Social Development Board

0.200

2.8

18.0

21.8

4.1

8.4 7.7

2 Excluding Peru which the agreement will be effective by second quarter, 2011


9/28

10


AEC allow ASEAN investor to hold up to 70%share ownership in services businesses5

Source: SCB EIC analysis based on data from ASEAN

Schedule of liberalization of ASEAN equity participation in services businesses

Priority Integration Sectors

ICT

Healthcare

Tourism

Air transport

Logistics services

Other services

2006 2008 2010 2013 2015

49% 51%

49%

70%

51% 70%

30% 49% 51% 70%

Liberalization of trade in services is on the way. After trade in goods, freer trade in services will followsuit and lead to the liberalization of investment and labor mobility within ASEAN. This report focuseson impacts from freer trade in services. The main topic of interest is an agreement to increase thepercentage of share ownership by ASEAN nationals, as the ceiling of shares held by ASEAN nationals inmost business will be elevated to 70%.


10/28


11/28

12


In fact, foreign investors currently have other channels facilitating greater investment than the AEC. Thiscould mean that the impact may not be as much as anticipated if foreign investors are already usingother available channels to increase their investment. For instance, investment promotion in some specicelds by BOI allows a more exible percentage of shares ownership. Therefore, it is not surprising tosee businesses in some areas owned 100% by foreigners.

Furthermore, impacts on one sector may help others. The education sector is facing more intensecompetition from increasing investment by foreigners, but this competition will lead to the developmentof students who will compose a quality workforce for other businesses in Thailand.

Another negative impact is a shortage of professional workers due to greater labor mobility inASEAN. If we look at the remuneration and cost of living of an accountant, for example, we will nd that

remuneration in Singapore and Malaysia is about 3 times higher than in Thailand. This could causebrain drainage from Thailand, especially to Singapore, which has a decreasing working age population andthe fastest increase of elderly people in ASEAN. It is forecast that the proportion of elderly people inSingapore will reach 30% in 2025 and 35% in 2050, up from the current 16%. This demographical changewill double their need to import workers.

The impact may not be conned to specic sectors. As pointed out above, differences in the remunerationof accountants will affect every business, as they all require accounting services. Moreover, a shortageof critical professionals like physicians and nurses will not only affect the health care business, but alsosociety as a whole, which could suffer from insufcient medical services.


12/28

13


Professional workforce tends to move toSingapore and Malaysia7

* From 2001 accountant salary inated by headline ination of each countrySource: SCB EIC analysis based on data from WEO, IMF; Cost of investing and doing business in ASEAN (2001 edition), ASEAN; and Penn world table

Accountant remuneration, purchasing power parity adjusted, 2010*

5,000

4,000

3,000

2,000

1,000

0

Unit: USD (PPP) per month

Singapore Malaysia Indonesia Brunei Thailand Vietnam Lao PDR

One of the attempts to facilitate labor mobility within the AEC is to develop mutual recognition ofprofessional accreditation. ASEAN has already concluded Mutual Recognition Agreements (MRA) in 7 elds,namely engineering, nursing, architecture, surveying, medicine, dentistry, and accountancy 3. Professionalworkers who are accredited as agreed in the MRAs will be recognized in all member countries, enablingthem to more easily work in any member country.

Despite mutual recognition, labor movement may not be so easy in practice. Many countries stillpreserve rules and regulations that may prevent labor mobility from happening. For example, medicalpersonnel who wish to work in Thailand will have to obtain a license by passing an examination, someparts of which are in Thai. There are also other obstacles such as differences in language, culture, andsocial acceptance.

3 More details of each MRA could be found from Department of Trade Negotiations, Ministry of Commerce


13/28

BOX: The liberalization of trade in services within the AEC

The ASEAN Framework Agreement on Services (AFAS) is implemented along thesame lines as the General Agreements on Trade in Services (GATS), which meansa rather slow process. Instead of employing a negative list approach, GATS uses thepositive list approach in negotiation, which leaves room for countries to prioritizespecic service sections for negotiation. Countries are also entitled to determinetheir limitations in terms of minimum quantities and so forth, for each round ofnegotiation. Moreover, countries are allowed to choose professions for negotiationson liberalization of labor movement. The positive list slows down the liberalizationprocess as it requires many rounds of negotiation, while the negative list approach onlyallows member countries to select their exceptions instead of their preferences. The liberalization of trade in services among ASEAN countries will be GATS-Plus

(additional to that agreed in GATS). Trade in services is categorized into 4 modesof service supply: (1) cross-border supply, (2) consumption abroad, (3) commercialpresence, and (4) temporary movement of natural persons. AFAS contains rounds ofnegotiation where a package of services is to be further liberalized. There will be 11packages in total, which will be concluded by 2015. The latest concluded package isthe eighth of the series.

Presently, some ASEAN country members of the WTO are likely to protect their servicessector. They have very few agreements on services businesses, especially, professionalservices. Singapore, which has the greatest number of agreements on liberalizingtrade in services within GATS compared to other ASEAN countries, has only opened7 out of 12 service sectors agreed by WTO members in the Uruguay Round, and hasalmost no agreements on labor mobility. On the other hand, Vietnam, which hasrecently joined the WTO, has signicantly opened their trade in services. Vietnamsservices sector will be less affected by integration towards the AEC.

14



14/28

15


Thai investors will have greater opportunity forinvestment in Malaysia, Indonesia, and Philippines8

Source: SCB EIC analysis based on data from World Trade Organization (WTO) and Asian Development Bank (ADB)

Average foreign share ownership limit in services businesses in ASEAN countries

Cambodia

Vietnam

Singapore

Indonesia

Thailand

Philippines

Malaysia

70% in 2015

100%

100%

100%

49%

49%

40%

30%

Example of other domestic regulation

One Cambodian director required in health services

Economic needs test based on criteria such as no. of existing service suppliers

Not allowed in some retail operations Must reserve at least 30% of shelf space

for goods produced by Bumiputera-owned small and medium size industries

Not allowed in certain retail operations

3As businesses in Thailand will be affected, the higher ceiling of foreign shares held by ASEAN memberswill provide opportunities for Thai businesses in other ASEAN countries.

Thai businesses will be presented with greater opportunity to increase their investment, especially inMalaysia, the Philippines, and Indonesia. These countries have so far capped the percentage of foreignshare ownership at 30%, 40% and 49% respectively. The liberalization of trade in services under the AECwill push the ceiling up to 70% and enhance opportunities for Thai businesses. Singapore, Vietnam, andCambodia are already largely open towards foreign investors (at least on paper!).

However, the elevation of foreign investment ceilings may be difcult to enforce. In practice, thereare many other domestic rules and regulations to be complied with by foreign investors. These rulesand regulations will be obstacles or barriers that could impede an increase in foreign investment. Themost frequently raised example is the right of foreigners to own land, which remains prohibited in manycountries, including Thailand. Some countries have found a way out by allowing long-tern rent instead.Moreover, there are other rules, for example, regarding minimum investment, modes of investment, thecomposition of a companys board of directors (which must be local people), economic needs tests, jointventures, and technology transfer.

Business opportunitiesarise from the AEC


15/28

16


There are many services businesses withhigh EBITDA margin in Malaysia and Singapore9

Services businesses with highest EBITDA margin among ASEAN countries

Source: SCB EIC analysis based on data from Bloomberg

Malaysia

Advertising

Commercial printing

Environmental services

Internet softwaresand services

Food and staples retail

IT Services

Marine

Singapore

Apparel retail

Computer andelectronic retail

Distributors

Department store

Publishing

Thailand

Healthcare

Metal and glasscontainer

Entertainment

Restaurant

Philippines

Educational services

Leisure facilities

Telecommunicationservices

Indonesia

Paper packaging

Vietnam

Hotels and resorts

Businesses with high prot margins, to some extent, possess potential and could be a good start inseeking interesting services businesses in ASEAN countries, especially after the agreement on trade inservices under the AEC framework enters into force. In terms of prot, it was found that Malaysia andSingapore have many services businesses with a high EBITDA margin. According to statistics, Malaysia andSingapore have the highest average EBITDA margins for 7 and 5 service elds, respectively, out of a totalof 21 elds for services sector companies 4.

Business Opportunities in the AEC

4 This nding was a result of an analysis of limited data which covers only data of listed companies in stock exchange of each member countries collected fromBloomberg. They are categorized into each services eld according to Global Industry Classication Standard (GICS) by Morgan Stanley Capital International(MSCI) and Standard & Poors (S&P).


16/28

17


10

Source: SCB EIC analysis based on data from Bloomberg

Publishing Distributor Departmentstore

Computerretail

Internetsoftware

IT services Commercialprinting

Food andstaplesretail

39% 19% 9% 7% 7%11% 5%

9% 8% n/a n/a

19% n/a n/a n/a n/a

15% 8% 21% 21%

21%

7%

7%

2% 4% 5%

4%

7% 17% 25% n/a

17% 17%

16% 15%19%

10% 12% 0%5%

21% 10% 26% 25% 22%9% 8%n/aMalaysia

Indonesia

Thailand

Philippines

Vietnam

Singapore

EBITDA margin of some services businesses

Potentially attractive services businesses in Singapore are those related to trade, such as retail apparelshops, computer and electronics shops, distributors, and department stores. In Malaysia, IT services andinternet software services tend to make high prots. From the data collected for this analysis, we havealso found interesting trends; for example, in ASEAN, low-cost airlines have almost twice the EBITDA marginthan general commercial airlines; and there is only one human resources services company registered inan ASEAN stock exchange, and its prot margin is as high as 40%.


17/28

18


AEC opens a window of opportunity for further investment inhealthcare services in Indonesia, Thailand, the Philippines and Malaysia11

Source: SCB EIC analysis based on data from Jutamas and Fink (2007) 5

Current foreign share ownership limit of healthcare services in ASEAN countries

100%

100%

100%

67%

AEC = 70%

49%

40%

30%

Singapore

Vietnam

Cambodia

Indonesia

Thailand

Philippines

Malaysia

ASEAN countries attach great importance to the hospital sector as it is one of the four PriorityIntegration Sectors. Thailand has an advantage given her international reputation and protability inservices. Integration towards the AEC will open competition which, on the other hand, also presents agreater opportunity for Thailand to exercise her existing advantages in seeking more benets, but thecountry will need to nd the right opportunities.

The liberalization of the hospital sector under the AEC will signicantly affect the sector in Malaysia,the Philippines, Thailand, and Indonesia because of the elevation of the percentage of foreign sharesownership of ASEAN nationality to 70%. The hospital sector in Singapore, Vietnam, and Cambodia willexperience a smaller impact as they do not limit foreign shareholding.

4 Sector in Focus: What is the impact of AEC on the hospital sector?

5 Jutamas Arunanondchai and Fink, Carsten (2007), Trade in Health Services in the ASEAN Region, World Bank Policy Research Working Paper 4147, March 2007


18/28

19


Inadequacy of healthcare professionalworkforce in ASEAN12

Country Physician Nursing andmidwifery personnelPharmaceuticalpersonnel

Source: SCB EIC analysis based on data from World Health Statistics 2010, World Health Organization (WHO)

Lower-middle income countries

Unit: per 10,000 population

15 44 3

12 61 6

11 61 1

18 1

6 8 3

4


19/28

20


Demand for healthcare services inASEAN is on an upward trend13

Source: SCB EIC analysis based on data from United Nations

Singapore

Thailand

VietnamIndonesiaMalaysiaPhilippines

Proportion of population aged over 60 in ASEAN countries

Unit: %

In terms of business growth opportunities, demand for healthcare services in ASEAN look quite positive,with an increase in the aging population as a major driving factor. The United Nations has forecasted that theproportion of aging population (people above the age of 60), will jump from 11% in 2010 to 15% in 2025 and 22%in 2050. Singapore will rank rst among ASEAN, with a proportion of 30% in 2025 and 35% in 2050, increasing fromthe current ratio of 16%. Thailand will come in second with an increase from the current 12% to 27% by 2050.

Business opportunities for hospitals in ASEAN, Indonesia, the Philippines, Lao PDR, Cambodia, andMyanmar appear attractive compared with other countries. The ratios of the number of hospital bedsto population in these countries are below the average of lower-middle income countries. They also spendless on healthcare compared with Malaysia, Singapore, and Thailand.


20/28

21


More healthcare services are needed in Indonesia,the Philippines, Lao PDR, Cambodia and Myanmar14

Hospital bed in 2000-2009 Per capita total expenditureon health in 2007

Source: SCB EIC analysis based on data from World Health Statistics 2010, WHO

Unit: per 10,000 population Unit: USD at average exchange rate

32 1,148

28 58

26 753

22 13618 307

6 42

n/a

6 7

5 63

27

36

12 Lower-middleincome countries = 18

Lower-middleincome countries = 80

Singapore

Vietnam

Brunei

ThailandMalaysia

Lao PDR

Indonesia

Cambodia

Myanmar

Philippines

Despite greater opportunities in the hospital sector, businesses will face other barriers, such as domesticrules and regulations. For example, in Indonesia, foreigners can only invest in hospitals with more than200 beds and can only work as consultants. The Indonesia government intends to prevent money owingout of the country from Indonesian patients using health services abroad. In addition, every hospitalmust provide 10% of their total services as third-class services to poor people, in order to enhance theiraccessibility to services in quality hospitals. Nonetheless, the hospital sector in Indonesia remains temptingbecause of an increase in the number of people in the middle and upper classes, as well as cheap labor.During 1993-1999, the National Investment Coordinating Board authorized foreign investment in 12 projectsworth about USD 234 million. Most of the investors were Singaporean or Australian.

The Philippines has an advantage in possessing a large number of nurses who can communicate inEnglish and are qualied by US standards. The number of nurses from the Philippines working abroadaccounts for 25% of the total number of foreign nurses around the world. In the US alone, nurses fromthe Philippines account for 83% of total foreign nurses. Their salaries are as high as USD 5,760 a month.On the contrary, working in the Philippines will earn them only USD 175 a month. This could lead todifculty for hospitals in the Philippines as many nurses will ow out of the country.


21/28


22/28

23


Full leveraging of corecompetencies will be a key16

3 trends in AEC 4 potential ASEAN market

+ Concentration of production

Non-tradables to tradables ASEAN expatriate class

Intra-region tourism

Biggest Muslim population Growing middle-incomeclass

Aging population

Healthcare services + aging population = real estate for retiree

Hotel management + ASEAN tourists = Thai brand hotel management

Food processing + muslim = center of halal food

Leverage core competency

Source: SCB EIC analysis

Example

Full leveraging of core competencies will be key in maximizing benets from emerging opportunitiesin the ASEAN market under AEC.

Thai businesses must step out by using the ASEAN market as a starting point in strengtheningthemselves before possible further market integration like ASEAN+3, where we will see even moreintense competition from businesses in China, Japan, and South Korea. We need to start by fully leveragingand rolling out our core competencies or strengths as well as seeking out opportunities from trendsarising from the AEC and the salient features of the ASEAN market.

5 How shouldbusinesses adapt?


23/28

The AEC will bring forth greater opportunities for advantageous and strong Thaibusinesses such as the hospitality, automotive and auto-parts manufacturing, andfood processing sectors.

Hospitality and spa sectorThe Thai hospitality sector earns more income from foreign tourists for Thailand incomparison with other ASEAN countries. During the time when tourism was notaffected by the global economic crisis, Thailand made about USD 18 billion from foreigntourists, 20% higher than second place Malaysia. Thailand also has advantages, as ithas many renowned tourist destinations. Thus, it is likely that Thailand will benetfrom the growing popularity of tourism in Asia. The World Tourism Organization(UNWTO) forecasts that in the next 10 years, the proportion of tourists travelling

to Asia-Pacic will increase from the current 20% to 27%, while the proportion oftourists travelling to Europe will drop from 52% to 46%.

ASEAN integration towards a single market will top-up opportunities for theThai hospitality sector to earn additional income. For example, the organizing ofpackage tours throughout ASEAN instead of only in Thailand by networking withtravel agencies in other ASEAN countries or establishing branches abroad. Thailandsreputation will help attract tourists to the country. On top of this, travel agencieswill have an opportunity to advertise and try to sell their package tours to otherASEAN countries.

Manufacturing sector: food processing and automotive & auto-partsFood processing and automotive & auto-parts manufacturing tend to receivebigger benets arising from comparative advantages in manufacturing and trading.Thailand holds the largest proportion of exports, with a percentage of 77% in foodprocessing and 61% in automotive and auto-parts manufacturing. The automotiveand auto-parts industry will especially benet from Thailand being a big productionbase due to infrastructure, knowledge, and labor capacity. This will further pushThailands benets in a bigger market with more intense competition, and in futureautomotive trends. An obvious example is the growing popularity of eco-cars, ofwhich investment worth 34 billion baht is planned in Thailand. Indonesia, which isthe second largest automobile manufacturer in ASEAN, is promoting investment ineco-car manufacturing but has not yet had clear criteria and specication for sucheco-cars. This business in Thailand will have an excellent chance to benet morefrom the integration towards a single market. There is also increasing consumption

in ASEAN, especially in Indonesia and Lao PDR, where food consumption is increasingas a result of the growing number of middle and high income populations. Demandfor durable goods, including cars, will also increase in parallel.

BOX: What about the sectors where we have traditionally been strong?

24



24/28

25


A single market and production base in AEC will likely foster at least three key trends worthkeeping an eye on: (1) the concentration of production to new bases with potential in terms of rawmaterials and markets, like the evolution of pick-up truck manufacturing in Thailand, (2) the age of newservice products where non-tradables (services) become more tradable, e.g. organizing wedding eventsin Thailand for foreign couples, and (3) the emergence of a new ASEAN expatriate class, resulting fromlabor mobility in ASEAN, as exemplied by the increasing number of Singaporean executives in Lao PDRand Cambodia.

Production will be increasingly concentrated to new bases with market advantages and naturalresources, and can benet from production networks and regional logistics webs in ASEAN. This issimilar to the expansion of pick-up truck manufacturing in Thailand, which started with their popularityamong Thai people and continuously developed until Thailand became a regional pickup center, beneting

related businesses. In addition, there may be a natural resource-based advantages. For instance, Indonesiahas ample marine resources, especially, tuna sh and shrimp, and is the biggest overseas shery. Althoughnot specialized in food processing, Indonesia intensely promotes foreign direct investment, which attractmany international food processing companies 6.

Non-tradables will increasingly become tradable in ASEAN. For example, patients can choose theirhospital in other countries; the retired can decide to live in a place with appropriate services; andcouples from overseas might come to Thailand to have a grand wedding ceremony at a cheaper price.Thai tourism can build upon these new service products which, in turn, will bring greater competition intourism and will lead to the creation of new tourist attractions and recreation developments like MarinaBay in Singapore. Wedding ceremonies and celebrations by foreign multimillionaires in Thailand, whichhave made the news recently, furnish examples of new service products for which borders have beenexpanded. Additionally, the hospitality and tourism sectors will benet from wedding couples and guestsspending extra time in Thailand.

The promotion of and support for the Malaysia My Second Home Program (MM2H) is another exampleof a new way of generating income from services for retired people, formerly conned to the domesticmarket. The focus has now shifted to an aging foreign population with high purchasing power. This leadsto the development of related businesses, such as real estate and healthcare services. Another exampleis Singapores big step beyond her land limitation. She overcomes the limit by investing in schools andinstitutions in Thailand as well as developing curriculum in accordance with her standards to accommodateboth local students and Singaporean students in the future.

A new class has emerged from freer labor mobility in countries, especially those that lack skills andneed highly skilled labor. For example, companies investing and locating in Lao PDR, Cambodia, andVietnam need executives and managerial expertise from more developed countries like Singapore. Thishas created a new class and market with higher purchasing power than locals, as we can see from thecustomers of Thailands leading hospitals.

6 Indonesian law stipulates that 70% of marine creatures caught in Indonesian water must be uploaded at Indonesian ports for distribution or process in the country. For foreigners, food processing business must be in a form of joint venture with Indonesian nationals. The maximum percentage of foreign shares held is 80%.


25/28

26


While the AEC is facilitating the creation of a single market, businesses should hasten to tap thesenew markets in order to establish market share. Emerging opportunities will come form at leastthree areas. 1. Behavioral changes in ASEAN. Greater importance is given to childrens education. More time isspent on vacation. People tend to spend for satisfaction and pleasure over utility. Obvious examples arethe competition in the eld of education in Singapore that has policies underscoring human resourcedevelopment, and the increasing number of Lao students in Thailand. Regarding time spent on vacation,intra-ASEAN travelling has grown at an average of 7% per annum during the last 8 years compared toglobal travelling, which has only risen an average of 5% a year. In addition, the group of consumers whoare willing to pay for their satisfaction and pleasure has expanded, as we can see from the spawningof expensive restaurants in many cities.

2. Demographic changes in ASEAN. The working population is on the decrease while the aging populationis increasing. The size of the middle-income class that has a modern lifestyle i.e. using mobile phones,living in condominiums, and spending most of their time in shopping malls, is growing.

3. Country-specic factors. For example, in Singapore, agricultural elds account for only 3% of the totalland in the country and can only produce 3 kinds of goods which are (1) seafood (sh), (2) eggs and, (3)vegetables accounting respectively for 4%, 23% and 7% of total consumption. Indonesia has the largestMuslim population, who composes an important market for Halal food, while the Muslim population inMalaysia has the third highest purchasing power among Muslim populations, following Saudi Arabia andTurkey.

Full leveraging and rolling out of core competencies or strengths seems to be a good start to expandingbusiness in the ASEAN market in the age of the AEC, which will create a critical mass of consumersin the region that all businesses can access. Each business needs to nd its core competencies. Forinstance, Thailand has reputation and strength in the area of healthcare services, including hospitals andpersonnel. It will be a great opportunity to tap the retired population of ASEAN, of which the proportionwill increase from the current 9% to 12% in the next 10 years. Both Thailand and Malaysia are voted thetop 2 destinations out of 30 to spend post retirement years. We in turn begin to see the developmentof real estate aiming at attracting this market both in Bangsaen, Hua Hin, Chiang Mai, and Phuket.

Brand building in Thailands hotel management is another example of expanding business from strengthsand advantages. It will also create more ASEAN brands, in addition to the Red Bull that is the onlyASEAN brand ranked in the world top 100 most valuable global brands 2010 according to MillwardBrown. Regional hotel management brands tend to have an advantage over international brands giventhe increase in intra-ASEAN travel. It is forecasted that intra-ASEAN travel will increase at an average of8% yearly for the next 20 years, while travel between ASEAN and other regions will increase by 6% onaverage. Even though international hotel chain brands gain more recognition regarding uniform standardsand excellent customer databases, the increasing number of customers who are willing to pay will be agood opportunity for Thai brands.


26/28

27


The expertise in the food processing sector and being a source of raw materials are advantages for movingtowards becoming a center for Halal food. There are 270 million Muslims in ASEAN. Moreover, the growthrate of the global trade value of Halal food remains higher than the total food trade. In 2005-2009, thetrade value of Halal food increased by 18.2% annually, higher than total food trade value, which increasedby only 10.4%. Furthermore, the export of Halal food from Thailand is growing, and Thailand is now thefth largest exporter of Halal food globally and the rst in ASEAN.

From now on, the main difculties faced by businesses may not necessarily be in nding markets, becausethe AEC will help create a critical mass of consumers for many businesses. From traditional service products,there will be new products which become more tradable. For example, the wedding event organizingbusiness, which was formerly conned to the domestic market, will now attract foreign clients. The nextstep for Thai businesses will be to penetrate markets and businesses in which we are competitive and

can fully leverage our core competencies to be the very rst to enter the market and imprint Thai brandsat the ASEAN level to progress further in the global level in the future.


27/28

28


Contributors

Vithan [email protected](662) 544-2478

Ekasit [email protected](662) 544-3085

Vithan received his BA in economics with honors from ChulalongkornUniversity and his MSc Economics from Thammasat University.

Prior to joining Siam Commercial Bank, Vithan has previously held positionswith Ministry of Finance (Fiscal Policy Research Institute) and the StockExchange of Thailand.

Ekasit received his Bachelor of Economics with honors and MA in InternationalEconomics and Finance (international program) from ChulalongkornUniversity.

Metinee received her BA in accounting (international program) with GoldMedal from Thammasat University and her MBA as Fulbright scholarshiprecipient from Kellogg School of Management, NorthwesternUniversity.

Prior to joining Siam Commercial Bank, Metinee has previously heldpositions with McKinsey & Company, PricewaterhouseCoopers and theStock Exchange of Thailand.

Metinee JongsaliswangHead of [email protected](622) 544-3259


28/28


Sethaput Suthiwart-NarueputChief [email protected](662)544-4996

Research

Metinee [email protected](662)544-3259

Pornthep [email protected](662)544-3066

Pranida [email protected](662)544-2705

Paradee [email protected](662)544-2475

Vithan [email protected]

(662)544-2478

Witchuda [email protected](662)544-1644

Kampon [email protected](662)544-1463

Akarapat [email protected](662)544-5602

Bunyanuch NiltakochExecutive [email protected](662)544-5644

Research Networking

Darakorn [email protected](662)544-4006

Pinattha [email protected](662)544-2953

Vipasara [email protected](662)544-6566

Jiraporn KritsadarakExecutive Assistant

[email protected](662)544-6759

Disclaimer : The information contained in this report has been obtained from sources believed to be reliable. However, neither we nor any ofour respective afliates, employees or representatives makes any representation or warranty, express or implied, as to the accuracy orcompleteness of any of the information contained in this report, and we and each of such persons expressly disclaims any and all liabilityrelating to or resulting from the use of this report or such information by the receipt and persons in whatever manner.

Any opinions presented herein represent the subjective views of ours and our current estimated and judgments which are based on variousassumptions that may be subject to change without notice, and may not prove to be correct.

This report is for the recipients information only. It does not represent or constitutes an advice, offer, recommendation, or solicitation by usand should not be relied as such. We or any of our associates may also have an interest in the companies mentioned herein.

SCB Economic Intelligence Center

Ekasit [email protected](662)544-3085

Mantana [email protected](662)544-6760

moving forward with the aec

Documents