The Philippines is among Southeast Asian countries that can eat away at China’s global manufacturing market share, owing to differences in wages and the recent improvement in the domestic business environment.
Capital Economics, an international think tank with offices in London and Toronto, said several countries have advantages that would allow industries to erode China’s position as the world’s workshop.
Southeast Asia’s collective efforts are proving to challenge China’s dominant role in the global supply chain, it said.
The Association of Southeast Asian Nations (Asean) has ambitious plans for regional integration, Capital Economics said in a report this week. The so-called Asean Economic Community (AEC) aims to transform the region into a single market and production base, which its supporters hope will boost manufacturing, and allow it to one day rival China.
However, the think tank said Asean faces a number of obstacles towards reaching the goal. These include a tradition of non-interference into the affairs of member countries, the absence of penalties for noncompliance, and the lack of a powerful central bureaucracy.
Even though the AEC is likely to fall short of its ambitions, there are still reasons to be positive about prospects for parts of the region, it said.
Close proximity to the supply chains of southern China, low wages, expanding workforces, rapidly growing consumer markets, and rising costs in China mean that Asean economies have plenty of potential to do well, the firm said.
The country that has so far been making the most of this opportunity is Vietnam, where a combination of low labor costs, political stability, openness to foreign investment and proximity to China have seen it pick up plenty of low-end manufacturing opportunities from its neighbor.
Recent improvements in the business environment should also allow the Philippines to pick up market share, Capital Economics said.
Myanmar and Cambodia, where wages are even lower than in Vietnam, could also benefit with the right reforms, it added.
One likely laggard is Indonesia, which is straddled with rigid labor laws and relatively substandard infrastructure. Malaysia and Thailand are also expected to fall behind.