We take a quick dive into some of the arguments for and against the EU and ASEAN and weigh up the pros and cons of doing business as a startup / entrepreneur looking to expand or launch in the respective regions.
The European Economic Community, now the European Union (EU), was created in 1967; the Association of South East Asian Nations, ASEAN, was initially created also in 1967. Both had at that time a smaller number of nations as member states, relatively.
Both organizations also sought initially to drive closer economic, political, security, military, educational and sociocultural integration amongst their member states.
Both organisations have developed and expanded in very different ways, the EU becoming more tightly integrated, ASEAN developing in a much looser way, and acting therefore as a framework.
This is largely due to historical context: Europe had endured two devastating World Wars, and European countries had been at war with each other prior to that for centuries. South East Asian countries have not had this distinct legacy of war to such a large extent.
As the EU goes from crisis to crisis following ever increasing monetary and political union, ASEAN holds firm to its original principles, and has created the preconditions for ongoing inbound investments into South East Asia from all over the world. This is the social contract which ASEAN sought with its peoples.
It is this difference that companies need to seize upon.
Much can be written about the EU; the ongoing focus to attempt to create a superstate, a common military goal, and the insistence on the free movement of people from the 28 member states. Noble concepts but far removed from the original trade driven agenda, which the majority of companies care most about.
The EU is run by a huge government hierarchy across two cities, managed by both elected and non elected bureaucrats, who pass laws which member countries are forced to comply within just about every area of society. The European Court of Justice is the final Court of Appeal. The cost base is phenomenal. The return is questionable.
ASEAN has never had these lofty ideals nor has it established the institutions, hierarchy and bureaucracy, which the EU has created.
ASEAN is pragmatic: its role is about creating and driving the conditions to ensure more Foreign Direct Investment, working across Governments in order to drive more trade and to drive more profitable growth. It focuses on accelerating social progress and cultural development and enabling the smoother physical flow of goods. ASEAN members assist each other; they don’t antagonize each other. Not one member has considered leaving…..
This is very significant and thought-provoking given the range of countries within the Association – Indonesia with a GDP of USD 1,015 Billion, Singapore with a GDP of USD 323 Billion, Laos USD 16.9 Billion and Brunei USD 12.13 Billion (2017 figures).
Between 2005 and 2015, real growth in GDP averaged 1.0% per year in the EU, compared with 5.1% per year in ASEAN.
Having successfully weathered (and learnt from) the Asian financial crisis of 1997, and the global economic crisis of 2008/9, ASEAN is now the sixth largest economy globally.
This growth has been powered by people, a rising middle class which is driving consumption; ASEAN has the third largest labour force worldwide, with 100 million people joining the workforce in the past 20 years.
ASEAN also elected to have a more pragmatic trading model, and it is this approach, which has given South East Asia a framework as to how to trade within a free market with each other.
Why was this necessary?
By creating a single ASEAN market, tariff-free, this has given companies access to 660 million people within the region. With fast-growing e-commerce channels, this is a reality.
In addition, by signing a free trade zone agreement with China in 2002, and agreeing with the target to eliminate tariffs on 90% of products by 2010, ASEAN economic growth has naturally expanded.
Hence in 2010, the ASEAN China free trade agreement became the largest free trade area in terms of population, (approximately 2 Billion people today) and the third largest in terms of (bilateral) trade volumes ($514.8 Billion in 2017, with was 13.8 per cent higher than the prior year) in the world.
The preconditions for growth had been established, and intra-Asia traffic and trade flows are still booming. Distribution models are therefore key.
In addition, connectivity has been achieved through open cross border road networks which link Singapore, Malaysia, Thailand, Cambodia, Myanmar, Vietnam, and Laos with the Eastern Seaboard of China and the Pearl River Delta.
This is highly attractive for many manufacturers as it offers closer connectivity, near-sourcing, the ability to have one or distribution centres for finished goods, and a cheaper and more environmentally friendly (compared to airfreight movements) option of transportation by road.
These reforms were key.
Traditionally, China had been the market where most organizations in the world, thought they wanted to be. The Asia strategy was actually the China strategy….
South East Asia, on the other hand, was overlooked – and especially Vietnam – which was the China “plus one” strategy…. The backup.
Now with increasing wages in China, a trade war with the USA, a slowing down of China domestic demand, South East Asia is no longer “the plus one.” It is the “main one”, and the ASEAN strategy and reforms have paid off. Moreover, with the Free Trade Agreement in place with China, companies who moved to South East Asia can supply China with ease.
Why is South East Asia then so attractive?
Four key elements answer this question – labour costs, labour productivity, energy costs and exchange rates.
Fundamentally, these have been the reasons why MNCs such as H&M have migrated to Myanmar, and Samsung and Intel migrated to Vietnam. There are many similar examples.
Organisations have realized that the ease of doing business in South East Asia is unrivalled; the area has had exposure to many races and peoples over its history; the Dutch, the Spanish, the Portuguese, the French, and the English have all played their part in the history of South East Asia, as well as the longer term effects of the Chinese diaspora. In short new ideas, and new ways of doing things is still an integral part of South East Asia society today.
However, South East Asia is a land of disparity both across the region and within the countries themselves. There are areas that need drastic improvement; infrastructure, training and education, healthcare, and agriculture. It is in these areas where companies with great ideas can truly benefit themselves and in parallel empower communities.
Unlike the over-regulated EU, it is easier to enter these new markets, quicker and faster.
Companies choosing to establish operations in South East Asia, are not only moving to a high growth part of the world to operate, but their consumers and users are right there too.
Hence it is a two-way street, companies can make profits in South East Asia, but at the same time, very visibly contribute back to the communities in which they operate.
This has to be the “win-win”, and it is the basis of the social contract which ASEAN has devised.