Manufacturers shift to cheaper markets as Chinese economy moves up the value chain

Singapore, 18 April 2017 – Southeast Asian countries are winning manufacturers over from China due to lower costs, rising domestic consumption and improving infrastructure. A new report from real estate consultant JLL predicts this will deliver a significant boost for industrial property investment across Southeast Asia, with a yield on development costs in excess of 10 per cent expected in some markets.

“Our top picks for investing in industrial real estate are Indonesia and Vietnam,” says Regina Lim, Head of Capital Markets Research, Southeast Asia, JLL. “Indonesia’s manufacturing sector is expected to grow six to seven per cent annually until 2021, up from 5 per cent in 2016, thanks to a stabilising currency and changes to economic policy. Meanwhile, Vietnam’s edge is in its young and skilled workforce, relatively low cost base, and stable political climate.”

The growth in manufacturing in Southeast Asia will come at the expense of China, says the report. In the last five years, China has been restructuring its economy towards domestic consumption, services and higher value exports. Coupled with rising labour and land costs, China’s manufacturing exports slowed as companies relocated their manufacturing facilities to cheaper locations, such as Indonesia and Vietnam. As a result, export growth from Indonesia accelerated to between five and six per cent annually, while Vietnam’s exports grew by 16 per cent annually between 2011 and 2016, compared to just six per cent in China.

“Even as these markets experience a manufacturing boom, there are still some medium term issues to be addressed,” says Ms Lim. “The ability of Southeast Asia to move up the value chain will depend on the extent to which China’s costs increase. It will also hinge on growth of domestic consumption in these markets, the quality of education, availability of infrastructure and ease of doing business.”

In terms of quality education and skills, Vietnam is making headway while Thailand, Malaysia and Indonesia are underperforming in those areas. Although Southeast Asia has a relatively young and educated workforce that supports the continued industrialisation, it still needs to catch up with China. Policies to improve the availability of talent and skills can help to meet the progressive demand of industrialisation in these countries, says the report.

Although China has the advantage of better infrastructure, the connectivity situation in Southeast Asia is set to improve, with many overseas firms pledging their support to construct power plants and transport links in various cities. China’s ‘One Belt One Road’ initiative and economic integration will also facilitate intra- and inter-trade flow within ASEAN and China.

In addition, JLL data shows that the global real estate transparency score across Southeast Asia, particularly Vietnam and Indonesia, has improved in the last 12 years, giving international investors more confidence to enter these markets.

Ms Lim concludes: “Southeast Asia could potentially become the leading industrial hub in the region but its diverse economies are at various stages of development. Foreign investors and corporates need a really in-depth understanding of the landscape when planning their industrial operations and investments.”

To download ‘A Revival of Southeast Asia Manufacturing Hubs’ report, click here.

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