STUDY / Southeast Asia's Economic Outlook The Big Picture · STUDY / Southeast Asia's Economic Outlook – The Big Picture 7 Historically, the region relies heavily on trade, though

STUDY / Southeast Asia's Economic Outlook – The Big Picture

2

A. Executive summary

Southeast Asia is an attractive territory: composed of 10 nations having gained independence relatively

recently, it is characterized by conflicting trends. On the one hand, it is one of the fastest growing regions

in the world in terms of economic growth, trade and investments, and on the other, many member nations

still remain poor, plagued by severe socio-economic challenges.

In this paper, we analyze these contradictions from several perspectives: we look first at the overall

geopolitical situation and future prospects of the region, looking ahead toward 2020, and subsequently drill

down into several of the region's leading industries and analyze their current status and potential

development opportunities: automotive, energy, steel and tourism. We then focus on 3 important markets

within the region, namely the most populated (Indonesia), the wealthiest (Singapore) and the most

dynamic in terms of development (CLMV – Cambodia, Laos, Myanmar and Vietnam).

The paper intends to offer a broad introductory overview of Southeast Asia for private and public sector

organizations looking to establish a footprint in the region, without going into the details of any particular

opportunity. With Roland Berger's extensive experience in the region, we are in an excellent position to

develop specific strategies and plans for expansion opportunities.

Anthonie Versluis

Managing Partner, Malaysia

Vincent Casanova

Principal, Singapore

Iman Azman

Consultant, Malaysia


3

Table of contents

A. Executive summary ....................................................................................................... 1

B. Eyes on 2020 ................................................................................................................. 4

C. Southeast Asia: a global contender ............................................................................. 13

D. Transport infrastructure: stuck in first gear .................................................................. 15

D.1 Road networks ............................................................................................................. 16

D.2 Rail systems ................................................................................................................ 17

D.3 Ports ............................................................................................................................ 18

D.4 Airports ........................................................................................................................ 18

E. Automotive: counting down to the boom? ................................................................... 20

F. Energy: seeking "greener" pastures ............................................................................ 24

G. Steeling ourselves to avoid downfall? ......................................................................... 28

H. Tourism: are we too optimistic? ................................................................................... 32

I. Indonesia: an awakening tiger? ................................................................................. 34

J. Singapore: at a crossroads ........................................................................................ 35

K. CLMV: the backbone of Southeast Asia's future? ....................................................... 39

L. Regional integration: is the EU a relevant model? ...................................................... 42


4

B. Eyes on 2020

Figure 1: Southeast Asia's background

Source: BBC, Roland Berger

Southeast Asian nations are young, having only gained independence in the mid-20th century with the

notable exception of Thailand. Indeed, almost all of the countries within Southeast Asia gained their

independence in and around the 1950s, in line with the global trend in those decades in other regions,

mainly Africa.

Figure 2: ASEAN history

The Association of Southeast Asian Nations (ASEAN) was established in 1967 with member states

Indonesia, Malaysia, Philippines, Singapore and Thailand with the aim of fostering integration. It was

meant to enhance regional resilience by promoting greater political, security, economic and socio-cultural

cooperation. Furthermore, its goal was to create a single market and production base, which was to be

stable, prosperous, highly competitive and economically integrated with effective facilitation of trade and

1557

Institution of Manila as capital and surrounding islands to be

called Philippines

1625

Increase of Dutch control over Spice

Islands

1782

Institution of Bangkok as capital

of Siam 1858

Colonization of Vietnam

1863

Establishment of protectorate over

Cambodia

Commencement of the Indochina War

in Vietnam

1887 – 1888

Unification of Cambodia and Vietnam under French

Indochina; Establishment of Brunei as a British protectorate

1893

Incorporation of Laos into

French Indochina

1898

Independence of Philippines from Spain

1939

Institution of Thailand as

the new name of Siam

1946

Establishment of Japanese control

over Burma, Malaya and Singapore

1942

Independence of Indonesia from Dutch control

1949

1948Independence of

Burma from Britain

Acknowledgement from France of Cambodia, Laos and Vietnam independence; Commencement

of Vietnam War

TODAY

Independence of Malaya

from Britain

1957

Establishment of Singapore as an

independent state

1959

Institution of Khmer Rouge in Cambodia;

Formation of Federation of Malaysia

1963

Withdrawal of Singapore

from Malaysia

1965

Creation of Association of Southeast

Asian Nations

1967

1975

End of Vietnam War; Ascension of Khmer Rouge in Cambodia

Independence of Brunei from

Britain

1984

Announcement of v ictory of National League for

Democracy in Burmese general elections

1990

Asian financial

crisis

1997

Independence of East Timor

from Indonesia

1999

Devastation caused by

Indian Ocean tsunami

2004Country name officially

changed to Myanmar

2010

2014Adoption of Islamic

penal code in Brunei

1954


5

investment. ASEAN's aim was also to alleviate poverty and narrow development gaps between the

countries through mutual assistance and cooperation.

From a political perspective, its objectives were to strengthen democracy, enhance good governance and

the rule of law, and promote and protect human rights and fundamental freedoms, with due regard to the

rights and responsibilities of the member states of ASEAN. Another intention was to help the member

states respond effectively, in accordance with the principle of comprehensive security, to all forms of

threats, transnational crimes and transboundary challenges.

Long term, it aims to promote sustainable development so as to ensure the protection of the region's

environment, the sustainability of its natural resources, the preservation of its cultural heritage and a high

quality of life for its people.

Figure 3: Global economic growth

Source: IMF, Roland Berger

In line with its targets, and despite the "booms and busts" in the global economy, Southeast Asia has

indeed emerged as one of the fastest growing economic regions with an average real GDP growth rate of

5.3% over the last 20 years.

-10

-5

0

5

10

15

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Africa

Middle East

Western Hemisphere

Southeast Asia (average)1)

Asia-Pacific

World

Europe

Regional real GDP growth, 1985 – 2014 [%]Geographic region

Notes

> Asia-Pacific has seen the most stable growth as a result of strong developing economies such as China, India and ASEAN member countries

> Developed economies in Europe and in the Americas (Western Hemisphere) still have not recovered to pre-financial crisis growth rates

> Openness and flexibility of economies and diversified export structures have supported SEA growth over the past three decades

5.8%

4.3%

5.3%

3.9%

Average growth rate

1.9%

3.6%

2.8%

1) Real GDP growth data for Myanmar up to 1998 unavailable

Global economic growth


6

Figure 4: SEA's economic performance


In the 10 years after the 1997/1998 Asian financial crisis, the region experienced accelerated growth partly

due to flourishing export demand and competitive exchange rates. Though exposed to volatility and large

swings in liquidity created by monetary easing policies in advanced economies, the economies within

Southeast Asia still managed to grow, albeit at a slower rate, through the 2008/2009 financial crisis. It was

in this period that regional economies seized a larger portion of world GDP as the center of global

economic gravity shifted toward Asia.

However, the recent spike post-financial crisis could be a result of overheating and excessive credit growth

due to the aforementioned monetary easing policies, which may weaken macroeconomic and financial

stability.

Figure 5: SEA trade dependency1)


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

2,500

2,000

1,500

1,000

500

0

ASEAN Member Countries' nominal GDP, 1980 – 2014 [USD bn]

SEA Share of World GDP, 1980 – 2014 [%]

0

1

2

3

4

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

CAGR [%]

+10%

+8%

+10%

1998 – 2007

2007 – 2009

2009 – 2014

CAGR [%]

+4%

+6%

+4%

1998 – 2007

2007 – 2009

2009 – 2014

0.6

0.4

0.2

0.0

2.0

1.8

1.6

1.4

1.2

1.0

0.8

2005 2006 2007 2008 2011 2012 201320102009

Trade Dependency Ratio, 2013 Trade Dependency Ratio, 2005 – 2013

United Kingdom

Japan

India

China

Australia

Southeast Asia

United States

0.6

United Kingdom 0.6

0.5

India 0.5

Lao P.D.R.

Southeast Asia 1.2

Cambodia 1.4

Thailand 1.4

Malaysia 1.6

Vietnam 1.6

Singapore 3.6

Myanmar

0.5

Australia 0.4

Indonesia

China, People’s Republic of

0.4

0.5

Philippines

United States

Brunei Darussalam

Japan

0.3

0.4

0.0

Total SEA

SEA countries

Non-SEA countriesn.a.

-2.9%

-3.3%

0.7%

3.9%

CAGR2005-2013

2.3%

3.3%

1.7%

1) Trade dependency is equal to (Import + Export)/ GDP


7

Historically, the region relies heavily on trade, though the dependency has declined over the last 10 years.

Singapore topped the trade dependency ratio ranking, followed by Malaysia and Vietnam in 2012.

Figure 6: SEA trade overview

Source: ASEAN Stats Database, Roland Berger

Within the cluster of economies, trade continues to grow as efforts to boost intra-region trade gain

momentum and external trade flourishes. Between 2004 and 2013, both intra- and extra-region trade grew

at rates of nearly 10% p.a., with the latter remaining the dominant contributor to growth.

Figure 7: Extra-ASEAN trade

Source: ASEAN Stats Database, ADB, Roland Berger

In the aftermath of the Asian financial crisis in 1997, economies in the region intensified their efforts to

bolster intra-region trade. But political agendas and vested interests have resulted in a rapidly growing

number of free trade agreements with non-ASEAN countries that are outpacing internal agreements. By

2013, the vast majority of FTAs signed by Southeast Asian countries were bilateral and plurilateral,

2004 2007 2010 2013

2,000

2,500

1,000

0

3,000

1,500

500

Total Trade

Intra-SEA

Extra SEA

CAGR2004 - 2013

+9.92%

+9.94%

+9.87%

SEA Trade in Goods, 2004 – 2013 [USD bn] Intra-SEA vs Extra-SEA Imports,2004 – 2013 [%]

Intra-SEA vs Extra-SEA Exports,2004 – 2013 [%]

24% 24% 25% 25% 24% 24% 27% 24% 23%

76% 76% 75% 75% 76% 76% 73% 76% 77% 78%

22%

25% 25% 25% 25% 26% 25% 28% 25% 26% 26%

75% 75% 75% 75% 74% 75% 72% 75% 74% 74%

SEA major export partners, 2013 [%] Status of ASEAN Free Trade Agreements, 2013 [%]Russia

13%Korea

3%Pakistan

3%New Zealand

4%Japan 4%

India6%

EU 28

9%

China

10%

Canada

10%Australia

12%

SEA countries

26%

SEA major import partners, 2013 [%]

Others

15%India

2%Saudi Arabia

3%UAE

3%Taiwan 5%

Korea7%

USA

7%

Japan

10%

EU-28

10%

China16%

SEA countries

22%

22%

25%

17%

20%

25%

31%

15%

75%

50%

52%

65%Proposed

Undernegotiation

Signed;not yet in

effect

Signed;in effect

3%

Plurilateral Agreements between one SEA country and two or more SEA countries

Bilateral Agreements between one SEA and one non-SEA country

Multilateral Agreements between two or more SEA countries and one or more SEA countries


8

emphasizing the desire to enhance trade with countries outside of he region, with Japan, Korea and China

being the primary FTA signatories.

Figure 8: Trade partners with countries in Southeast Asia


Unsurprisingly, China has surpassed any other country or region to become the primary trade partner for

countries in the region over the past decade.

Figure 9: Share of foreign direct investment (FDI), both intra- and extra-region


From an investment perspective, countries outside the region have been the main FDI source, accounting

for a total volume of more than USD 100 bn. The EU, Japan and the U.S. together contribute 41% of the

FDI inflows to Southeast Asia, while intra-region investment alone contributes an 18% share.

Figure 10: FDI inflow by source 2012 – 2014 (USD bn)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

300

200

400

100

0

50

250

350

150

India

China

EU 28

Japan

Korea

US

CAGR2000-2013

20%

7%

16%

6%

12%

4%

Total trade with selected trade partners, 2000 – 2013 [USD bn]

150

125

100

75

50

25

0

2010

2000

2012

2013

2014

2011

2009

2008

2007

2006

2005

2001

2002

2003

2004

Total net inflow

Extra-SEA

Intra-SEA

SEA FDI, 2000 – 2014 [USD bn]Sources of FDI inflows, 2014 [%]

CAGR2000 - 2014

+13%

+12%

+28%

17%

Others

Canada

1%Taiwan

2%Korea 3%

Australia 4%

China7%

Hong Kong

7%

USA

10%

Japan

10%

SEA18%

European Union (EU)

21%


9


Figure 11: National migration by region of origin

Source: UN Migration, Roland Berger

Cross-border migration across various economies has grown significantly since 1990 aided by the Asian

Economic Community (AEC) integration initiatives: 69% of the total migrants in the region were from

ASEAN in 2013, compared to 48% in 1990.

Figure 12: Migration by country ('000 people)

Total SEA net FDI inflow by source country/region, 2012 – 2014 [USD bn]

22 2221

6

SEA

3

9

1

10

45

USA

13

75

Hong Kong

6 7

China

3 3

Australia

24

Korea

31

Taiwan

1 1

Canada

29

EU

21

24

33

Others

28

19

14

Japan

13

5

23

2012 2013 2014

112% -15%9% -21% -5% 32% 25% 33% 68% 0% 10%CAGR

'12-'14

1990 2013

93%

86%

83%

81%

78%

63%

48%

30%

15%

7%

14%

17%

19%

22%

37%

52%

70%

85%

97%

100%

Indonesia

Myanmar0%

Thailand

Brunei

Lao PDR

3%

Philippines

Singapore

SEA

Viet Nam

Cambodia

Malaysia

Rest of the World SEA

96%

38%

92%

16%

67%

61%

69%

53%

15%

100%

62%

8%

84%

33%

39%

31%

47%

97%

85%

3%

4%

0%


10

Source: UN Migration, Roland Berger

More than half of Southeast Asia has seen positive growth in intra-region migration, with Thailand as the

leading destination, followed by Malaysia and Singapore.

Figure 13: Southeast Asia 2020 outlook


Looking forward, the outlook for 2020 is promising for Southeast Asian economies, with strong growth

expected in both total GDP and GDP per capita. Myanmar, Cambodia and Laos are expected to register

the highest GDP growth rates but will also face challenges in remaining competitive as discussed later in

this paper.

Figure 14: AEC assessment

3,191

9,498

1990 2013 2013

1,014

1990

2,469

2013

727

1990

2,323

1990 2013

466295

20131990

159 213 73 206

1990 2013 1990

134

2013

103

1990 2013

7638 28

2013

68

1990

22

20131990

23

1990 2013

529

3,722

SEA

4.9%Migration CAGR1990-2013

SEA Migration CAGR 1990-2013

Thailand

8.9%

6.5% 9.0%

Malaysia

3.9%

3.8%

Singapore

5.2%

7.8%

Indonesia

-2.0%

5.0%

Philippines

1.3%

-5.6%

Brunei

4.6%

-2.6%

Myanmar

-1.1%

n.a.

Cambodia

3.0%

3.5%

Vietnam

3.9%

0.2%

Laos

-0.2%

-0.9%

non-SEA

SEA

-2

-1

0

1

2

3

4

5

6

7

8

9

10

11

12

13

-0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0

No

min

al G

DP

per

cap

ita

CA

GR

, 20

15f -

2020

f [%

]

Average real GDP growth [%], 2015f - 2020f

Vietnam

United States

Thailand

Singapore

Philippines

Myanmar

Malaysia

Laos

Japan

Indonesia

India

Germany

China

CambodiaBrunei


11

Source: The ASEAN Economic Community: Progress, Challenges, and Prospects (Chia, 2013), The Asian Economic Community: A Work in Progress (ADB, 2013), ASEAN Secretariat, Roland Berger

Initial expectations of the AEC's impact on SEA economies by 2015 were highly favorable. However,

analysis has brought setbacks to light. This further highlights the inherent internal challenges that need to

be overcome by the regional community as a whole:

> Low educational attainment and large unskilled workforce – Lack of harmonized policies to manage the movement of skilled and unskilled labor creates problems in raising Southeast Asia's economic productivity to higher levels of competitiveness.

> Considerable development gaps among ASEAN member countries – Pronounced disparities in governance systems and effective implementation of the rule of law is a challenge. There is also an absence of politically funded mechanisms to redistribute resources among member countries.

> Increasing risk of falling into the "middle-income trap" – This is further accentuated by a

loss of competitive edge in exports of manufactured goods that are perceived as low quality, reliance on foreign technologies, while failing to create sufficient incentives and an ecosystem for R&D and innovation.

> Vulnerability to external shocks due to high degree of openness – Cluster economies remain vulnerable to external shocks as regional and economic interdependency deepens.

Figure 15: Transparency of government policymaking index

> Economic integration may be

limited to economies able to

address NTBs and supply-side capacity

> AEC has a greater likelihood of

producing a positive impact than other previous initiatives due to

its more comprehensive nature. However, the 2015 deadline is

unrealistic

> Harmonization of competition

laws at this stage is unrealistic due to the considerable variance

across countries

> AEC-reinforced AFTAs are unable to support commitments,

resulting in minimal effects on

global and economic integration

Singapore

Brunei

Cambodia

Indonesia

Thailand

Myanmar

Laos

Philippines

Malaysia

Vietnam

ASEAN

15.1

0.5

0.6

27.6

12.2

0.6

0.2

4.5

5.7

2.4

69.4

9.7

7.0

6.3

6.2

4.9

4.4

3.6

3.2

3.0

2.8

5.3

Percentage of baseline GDP

USD bn(constant 2004 price)

Expected welfare gains of AEC, 2015 AEC implementation scorecard, 2011 AEC 2015 implications

Targets achieved under phase I and II:

Single market and production base:

Competitive economic region:

Equitable economic development:

Integration in global economy:

0% 50% 100%65.9%

0% 50% 100%67.9%

0% 50% 100%66.7%

0% 50% 100%85.7%

0% 50% 100%67.5%


12

Source: World Economic Forum, Roland Berger

4.4

2.9

3.6

3.6

3.8

3.9

3.9

4.2

5.0

6.1

4.2

4.4

4.4

5.0

5.3

5.2

5.2

1

n.a.

11

15

16

33

44

52

64

85

100

116

136

1) Total countries assessed: 148; 2) Total countries assessed: 144

14

22

Score, 2013 [ 1 = High, 7 = Low ]Rank1), 2013 Rank2), 2014Score, 2014 [ 1 = High, 7 = Low ]

n.a.

130

113

1

50

14

20

11

46

48

65

61

92

93

121

143

13

23

119

104

SEA nations average

2.9

3.2

3.5

3.5

3.7

3.8

4.0

4.2

4.4

4.5

4.8

5.2

5.2

5.2

5.3

6.1

Germany

United Kingdom

4.0

Brunei

Myanmar

Cambodia

Vietnam

Lao PDR

Philippines

Thailand

Malaysia

Indonesia

China

United States

India

Netherlands

Japan

Singapore


13

C. Southeast Asia: a global contender

Figure 16: The region's competitiveness

Source: Global Competitiveness Report 2014 – 2015, Roland Berger

The regional economy relies on trade and FDI in order to increase its wealth, and improving

competitiveness is critical to its future. Barring Singapore, there is still significant room for improvement for

all ASEAN member nations.

Figure 17: Economic stage assessment

Source: Global Competitiveness Report 2014 – 2015, Roland Berger

With the exception of Singapore and, in part, Malaysia, other countries are mainly factor- and efficiency-

driven and should continue to develop their basic systems to achieve sustainable competitiveness. Only

then can the region as a whole aspire to move toward being an innovation-driven ecosystem.

+10%

2013

2,512

2000

759

Total trade [USD bn]

Total FDI [USD bn]

+14%

2013

122

2000

24

> Global competitiveness index (GCI) is a comparable worldwide

assessment of competitiveness

> Competitiveness is measured as the set of institutions, policies and

factors that determine the level of productivity of a country

> The GCI is built on a foundation of

12 pillars:– Institutions

– Infrastructure– Macroeconomic environment

– Health and primary education

– Higher education and training– Goods market efficiency

– Labor market efficiency– Financial market development

– Technological readiness

– Market size– Business sophistication

– Innovation

3.243.89

3.91

4.23

4.40

4.41

4.57

4.66

5.16

5.65

Myanmar

Cambodia

Laos

India

Vietnam

Philippines

ASEAN countries

Indonesia

Thailand

ME

China

Korea

Malaysia

EU

Netherlands

Japan

Germany

USA

Singapore

Global competitiveness index, 2014

Stage I: Factor-driven Stage II: Efficiency-driven Stage III: Innovation-driven

Provision of basic needs:> Institutions> Infrastructure> Macroeconomic environment> Health and primary education

> Higher education and training> Goods market efficiency> Labor market efficiency> Financial market efficiency> Technological readiness> Market size

> Business sophistication> Innovation

Economic stage

Competition focus

Cambodia

Malaysia

Philippines

Indonesia

Singapore

Thailand

Brunei

Vietnam

Laos

Myanmar

ASEAN countries' assessment

Benchmark economies

Germany

India

Japan

Netherlands

United States

China


14

Figure 18: Selected measures of bureaucracy

Source: World Bank, World Economic Forum, Roland Berger

But bureaucratic challenges prevail for the majority of the region's countries, dampening the business

attractiveness of the region. Apart from Singapore (ranked as the global number 1 since 2013) and

Malaysia (ranked 6th in 2014), the remaining member countries are all outside of the top 15 in the world.

The CLMV states (Cambodia, Laos, Myanmar, Vietnam), in particular, have a lot of catching up to do in

order to capitalize on the economic growth potential on offer.

Figure 19: Burden of government regulation index


However, as the region positions itself from the perspective of bureaucracy, it's important to bear certain

aspects in mind. Bureaucracy was initially introduced to root out corruption in a patrimonial system. As

societies became wealthier and more complex, an inherent mistrust of bureaucracy developed. When

applied wrongly, bureaucracy dampens business attractiveness through inefficiencies and subtle partiality

as it is subject and liable to factors such as:

Ease of doing business (2014 rank, 2013 rank)

Vietnam (99, 98)

Singapore (1, 1)

Thailand (18, 18)

Malaysia (6, 8)

Indonesia (120, 116)

Myanmar (182, 182)Chad (189, 189)

Laos (159, 163)

Cambodia (137, 135)

Philippines (108, 133)

SEA countriesBest and worst countries

Germany (21, 19)

China (96, 99)

India (134, 131)

Japan (27, 23)

Non-SEA countries

Burden of government regulations, 20141)

Transparency of government policymaking, 20142)

1) Scale: 1 = Extremely burdensome, 7 = Not burdensome at all; 2) Scale: 1 = Not transparent at all, 7 = Extremely transparent

2.9

3.1

3.3

3.4

3.4

4.0

4.0

5.0

5.2

Cambodia

Philippines

Singapore

Malaysia

Indonesia

Thailand

Laos

Vietnam

Myanmar

2.9

3.2

3.5

3.5

3.7

3.8

4.2

5.2

6.1

Laos

Thailand

Singapore

Malaysia

Indonesia

Vietnam

Philippines

Cambodia

Myanmar

2.9

3.1

3.3

3.4

3.4

3.4

3.5

3.6

3.6

3.9

3.9

4.0

4.0

4.1

5.0

5.2

3.8

Lao PDR

Indonesia

United Kingdom

Vietnam

Thailand

Germany

Cambodia

Myanmar

India

Malaysia

Philippines

Netherlands

Japan

United States

China

Brunei

Singapore

3.4

3.4

3.1

3.6

3.7

4.0

4.3

4.3

2.7

3.1

3.3

3.5

3.2

3.7

3.9

4.6

5.4

3.8SEA nations'

average

2

n.a.

4

23

26

37

55

59

64

73

82

89

112

1) Total countries assessed: 148; 2) Total countries assessed: 144

19

30

Score, 2013 [ 1 = High, 7 = Low ]Rank1), 2013 Rank2), 2014Score, 2014 [ 1 = High, 7 = Low ]

n.a.

101

85

1

16

8

31

`55

45

56

104

81

98

80

90

131

14

28

106

70


15

> Time consuming multi-level processes > Biased political agendas > Exploitation of loopholes > Bureaucrat agendas > Exclusion of out-of-the-ordinary circumstances

Conversely, it is arguable that bureaucracy is necessary as it forms the basic foundation of organization

and provides formal rules that offer protection from the bias and prejudices of those in power, when applied

correctly. Nonetheless, for countries in the region, the following questions still remain:

> Should ASEAN member countries welcome bureaucracy as a region riddled with accusations of corruption?

> If bureaucracy has its merits, do the nations have the right tools and mindset to impose it?

The answers to these questions will allow the region to chart its own path in becoming more efficient with

greater government transparency and effectiveness.

D. Transport infrastructure: stuck in first gear

Figure 20: Logistics performance and infrastructure assessment


16

Source: World Bank, Roland Berger

Logistics performance in the region trails behind that of more developed economies such as Germany and

Japan, as it correlates with the poor quality of overall infrastructure. Among ASEAN member countries,

Singapore outperforms its peers the most, followed by Malaysia and Thailand.

We have analyzed the quality of infrastructure from 4 different perspectives: quality of roads, railroads,

ports and airports.

D.1 Road networks

Roads form the backbone of economic development. Recent developments including the establishment of

a high-level master plan for regional connectivity and private external funding from China and other Asian

countries, particularly in the CLMV nations, signal positive trends in the sector. However, efforts to improve

the current state have been stifled by political friction. Some of the key challenges include disparities in the

quality of roads from country to country, overcoming border security concerns and obtaining adequate joint

financing for large cross-border projects.

Figure 21: Overview of roads

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Philippines

Cambodia

Myanmar

Lo

gis

tics

per

form

ance

inde

x, 2

014

Thailand

Vietnam

Indonesia

India

Germany

Malaysia

Netherlands

Quality of overall infrastructure, 2014

Japan United States

United Kingdom

Singapore

China

Laos


17

Source: World Economic Forum, World Bank, ASEAN Secretariat, Roland Berger

D.2 Rail systems

Development of rail systems has been less extensive, though urban rail and HSR projects have garnered

considerable attention. Total passengers per kilometer in the region grew at a rate of 3% between 2005

and 2012, while total goods transported by rail within the region grew just 1% over the same period.

Figure 22: Overview of railroads

Source: World Economic Forum, ASEAN-Japan Transport Partnership, Roland Berger

Key trends include a shift in focus to urban rail projects (e.g. MRT) as the urban population grows rapidly

and cross-border high-speed rail works are undertaken in the wake of improvements in mutual trust

between countries. But basic challenges will continue to impact the sector: decreasing reliance on

1 – Extremely underdeveloped

7 – Extensive and efficient

Singapore (6, 6.1)

China (49, 4.6)

My anmar (134, 2.4)

UAE (1, 6.6)

Malay sia (19, 5.6)

Germany (13, 5.9)

Indonesia (72, 3.9)

Thailand (50, 4.5)

Timor-Leste(144, 1.9)

Laos (68, 4.0)India (76, 3.8)

Philippines (87, 3.6)Cambodia (93, 3.4)

Vietnam (104, 3.2)

Japan (49, 4.6)

World1) av erage SEA av erageNon-SEA countries SEA countriesBest and worst countries

1) Information was collected from 144 countries worldwide. Data for Brunei unavailable

Road network density, 2014 (km/sq km)Quality of roads (rank, value)

Myanmar

0.1

Laos

0.2

Cambodia

0.2

Indo-nesia

0.3

ASEAN

0.3

Thailand

0.4

China

0.5

Malaysia

0.6

Brunei

0.6

Philippines

0.7

USA

0.7

Vietnam

0.7

India

1.7

Germany

1.8

Japan

3.4

Singapore

5.0


1) Not applicable to Singapore and Laos 2) Information was collected from 144 countries worldwide. Data from Brunei unavailable 3) Data unavailable/negligible for some countries

Quality of railroads1)

(rank, value) Total passengers per kilometer3), 2005 – 2014 (m people/km)

Total goods transported on railway3), 2005 – 2012 ('000 tons)

1%

-3%

1%

15%

CAGR

-3%

6%

7%

0.1%

CAGR

3%ASEAN

1%ASEAN

Philippines (80, 2.3)

Cambodia (98, 1.6)

Vietnam (52, 3.0)

India (27, 4.2)

Indonesia (41, 3.7)

Thailand (74, 2.4)

Japan (1, 6.7)

My anmar (94, 1.8)

Albania (104, 1.1)

Malay sia (12, 5.0)China (17, 4.8)

Germany (8, 5.7)



25,000

20,000

15,000

10,000

5,000

0

2014201320122011201020092008200720062005

Singapore

Philippines

Myanmar

Malaysia

Indonesia

6%

15,000

10,000

5,000

0

2014201320122011201020092008200720062005

Thailand

Myanmar

Malaysia

Indonesia


18

traditional rail transportation, extensive missing links in existing networks, and the geographical terrain in

island nations like Indonesia and Philippines to name but a few.

D.3 Ports

The region's history as a trade-focused area is reflected in the growth of port throughput, though quality of

infrastructure remains a concern across the region. Maritime transportation is now becoming a focus area

on the national agendas of governments and internal initiatives have promoted healthy competition to

improve maritime infrastructure and efficiency. Coping with the continued growth in demand and vessel

sizes with the current infrastructure levels will remain a challenge.

Figure 23: Overview of ports

Source: World Economic Forum, ASEAN-Japan Transport Partnership, Roland Berger

D.4 Airports

Air passenger traffic has grown tremendously since 2005, driven by both domestic and international

passengers. Growing tourism interest in the region has prompted the need to provide adequate aviation

facilities. Explosive growth of low cost carriers, particularly in intra-region travel, and open sky policies with

the implementation of ASEAN's Single Aviation Market have further boosted the tourism industry. At the

same time, the poor overall quality of many airports in the region and limited connectivity to countries like

Laos represent challenges to the sector's growth.

Figure 24: Overview of airports


1) Information was collected from 144 countries worldwide. Data for Brunei unavailable



Netherlands(1, 6.8)

India (76, 4.0)

Vietnam (88, 3.7)Philippines (101, 3.5) Cambodia (97, 3.6)

Laos (129, 2.6)My anmar (125, 2.6)

Kyrgyz Republic (144, 1.3)

Singapore (2, 6.7)

Germany (14, 5.7)

Japan (26, 5.3)

China (53, 4.6)Thailand (54, 4.5)

Indonesia (77, 4.0)

Malay sia(19, 5.6)

Quality of ports1) (rank, value) Port throughput, 2005 – 2014 (m tons)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

500

600

700

900

800

1,000

1,100

400

100

0

300

200

Thailand

Indonesia

Cambodia

Philippines

Myanmar

Malaysia

15%

CAGR

5%

5%

11%

3%

4%

5%ASEAN


19

Source: World Economic Forum, ASEAN Stats Database, Roland Berger

To summarize, infrastructure connectivity remains a major hurdle for economic development in ASEAN

and needs to be tackled with urgency.

Figure 25: Overall infrastructure assessment

Source: World Bank, Roland Berger




Singapore (1, 6.8)

Laos (82, 4.0)Vietnam (87, 4.0)

Philippines (108, 3.6) Cambodia (106, 3.6)

My anmar (137, 2.5)

Lesotho (144, 2.1)

China (58, 4.7)Indonesia (64, 4.5)

Malay sia(19, 5.7)

Thailand (37, 5.3)

India (71, 4.0)

Japan (27, 5.5)

Germany (13, 5.9)

Quality of airports (rank, value) Passenger traffic [m people]

92 99

CAGR

10%

7%

20062005

121

260

122

138

287

140

148

332

156

176

373

175

198

376

175

201

195

120

2008 2009 2010 2011

99

96

214

2007

Domestic

International

108

106

241

120

2012 2013

242

121

2.10

2.40

2.20

2.80

2.87

2.54

2.68

3.08

3.43

3.61

4.11

3.95

4.14

4.15

4.15

4.26

2012

2.14

2.21

2.58

2.60

2.88

2.92

3.11

3.40

3.56

3.67

4.16

4.16

4.18

4.23

4.28

4.32

2014

Germany

Singapore

Netherlands

United States

United Kingdom

Japan

China

Malaysia

Thailand

Vietnam

Indonesia

India

Philippines

Cambodia

Laos

Myanmar

0.07

0.13

0.08

0.05

0.21

0.05

0.06

0.13

0.32

0.43

0.38

0.01

-0.20

0.39

-0.20

0.04

Index improvement


20

E. Automotive: counting down to the boom?

With the notable exception of Malaysia, car penetration (calculated in units/1,000 people) is significantly

low. However, there is a correlation between growth in car penetration and that of income levels as

measured by GDP per capita. Most regional economies lie relatively close to this correlation curve and

hence, it is expected that as their economies become more affluent, car ownerships will rise in tandem.

This makes the prospect of a boom in car demand very strong in the region in years to come.

Figure 26: Automotive market global overview

Source: World Bank, ASEAN Secretariat, Euromonitor, Roland Berger

The case of Singapore is an anomaly and has to be viewed in a different context, the island nation having

long restricted car ownership. The Singaporean government has issued a list of regulatory measures (high

prices driven by import duties as well as buying the right to own a car, road taxes, defined lifetime of a car,

among other things) to control and even reduce the number of cars plying its roads in view of its limited

geographical size and the need to keep transportation decongested, safe and efficient.

Automotive producers have opted for different strategies to develop their industries. Thailand focuses on

pickups and eco-cars and has created clusters, leveraging upon a strong export/import infrastructure.

Indonesia has a stronghold on the MPV and truck markets and hosts a number of foreign OEMs, while

Malaysia is more known for its small cars produced by local manufacturers.

Figure 27: Assessment of major auto producers

0

50

100

150

200

250

300

350

400

450

500

550

600

650

700

75605550454035302520151050 7065 80 85

Malaysia

Laos

Japan

Indonesia

Germany

China

Singapore

Philippines

Netherlands

Thailand

United Kingdom

USA

Vietnam

GDP per capita

Pas

sen

ger

car

s in

use

(per

’000

peo

ple)

Cambodia

Laos 11.2

India 23.0

Vietnam 23.0

Cambodia 27.4

Indonesia 50.2

China 85.8

Thailand 111.4

Singapore 117.2

Malaysia 368.5

USA 387.0

Netherlands 472.1

United Kingdom 502.9

Germany 544.1

31.4Philippines

Passenger car penetration rate, 2014 [units/'000 people] Car penetration growth correlation


21

Source: Desk Research; Roland Berger

Furthermore, production footprint is negatively impacted by the low logistics performance among most

Southeast Asia nations, as measured by criteria like customs, infrastructure, international shipments,

logistics competence, tracking and tracing, and timeliness.

Figure 28: Logistics performance review

Source:World Bank LPI, Roland Berger

In response, the larger countries are taking active measures to improve the logistics situation to become

production hubs for the region. Thailand, for instance, will open up a new economic corridor from Bangkok

Thailand Indonesia Malaysia

> Pickups and eco cars, trucks

> Depth/clustering of auto industry

> Export/import infrastructure

> Industry policy

> Political stability

> Free port capacity (Leam Chabang)

> Attractiveness to foreign OEM/OES

> Dawei deep sea port for export to EMEA

> Hub & spoke strategy 'Thailand + 1'

> Wage growth, particularly for engineers

> Labor force peak before 2020, well before Malaysia and Indonesia

> MPVs, trucks

> # of foreign OEMs in the market

> Labor cost

> Local market demand

> Road/port/train infrastructure

> Export/import infrastructure

> Lack of Tier 1/2 suppliers

> Euro-2 as dominant fuel economy

> Abundant local long-term demand

> Rise of new middle class

> Industry policy (LCGC – fuel subsidy elimination – infrastructure investment)

> Cost competitiveness of local Tier 2 suppliers

> Rising fuel and energy costs

> Small cars (Myvi)

> Political stability

> English language capabilities

> Industry protectionism/overregulation

> White-collar labor cost

> Depth/dispersion/quality of industry

> Local market size

> Local OEM and OES champions

> Proton Euro-4 initiative to authorities

> Destination of 75% of German luxury car exports to ASEAN

> Shortage of skilled labor

> Rising energy costs, given reliance on gas and looming shortfall 2020+

Strengths

Weak-nesses

Oppor-tunities

Threats

Logistics performance indicator 20141) (5 = max)

1) Scoring criteria are customs, infrastructure, international shipments, logistics quality and competence, tracking and tracing, timeliness. Numbers in brackets indicate the global rank

2.3

2.4

2.7

3.0

3.1

3.2

3.4

3.6

3.9

3.9

4.0

4.1

Myanmar (#145)

Laos (#131)

Cambodia (#83)

Philippines (#57)

Indonesia (#53)

Vietnam (#48)

Thailand (#35)

Malaysia (#25)

Japan (#10)

Singapore (#5)

USA (#9)

Germany (#1)

1

2

3

4

5

6

1

2

3

4

5

6

1

2

3

4

5

6

1

2

3

4

5

6

1

2

3

4

5

6

1 = Customs 2 = Infrastructure3 = International shipments 4 = Logistics competence 5 = Tracking & tracing 6 = Timeliness


22

to Dawei that will significantly reduce export lead times, especially from the large number of production

sites located around Bangkok.

Figure 29: Production hubs

Source: Marklines, News, Roland Berger

With Thailand dubbed the "Detroit of Southeast Asia", a Hub+1 footprint strategy is expected to further

stimulate the automotive industry's development of the lesser developed neighbors Myanmar, Laos and

Cambodia.

Figure 30: 'Hub+1' footprint strategy

Source: Nikkei Business (2013/05/13)

Figure 31: SEA LCV1)

production capacity growth [units, m]

Sales volume ('000)

Indonesia

Export (CBU)

Domestic sales

2013

1,128

1,331

2012

888

423 4%5%

Australia2%

Middle East

United States

ASEAN

3%

21%

South America

9%

28%

Africa

EUJapan

14%

14%

Others

Thailand

Destination country

Export lead time/volatility will shorten once the economic corridor opens from Bangkok to Dawei

> Most of the production sites in Thailand are located around Bangkok, so direct benefit for Middle East/India/Africa flow

Sales volume ('000)

Mainly production for domestic demand but also some export

> Since the damage to parts and car plants wrought by the tsunami in Thailand, many OEMs have developed Indonesia as a second ASEAN production hub

BangkokDawei

Myanmar

Cambodia

Thailand

Vietnam

China

Laos

Present Route

Jakarta

Economic CorridorAfrica

Middle East

Middle East

Dawei Bangkok

300km

1,116

273

2012 2013

276

1,230

Export (CBU/CKD)

Domestic sales

New economic corridor shortens lead time but is yet to be completed

> Currently 10 days from Bangkok to Dawei, to be shortened by 3 days

> Possibility to bypass the Strait of Malacca

> However, corridor will only open around 2020

Myanmar

Extent of low wage population is attractive. However, poor infrastructure is a bottleneck

Laos

CambodiaThailand ASEAN's production hub

Not only production hub in ASEAN, but export hub to Japan, Australia and Middle East

Products produced in Thailand

Issue

Entire car, concentrated production products (engine, transmission, electronics), etc

Demand for labor exceeding supply and increasing wage levels are critical issues

Restriction on investment NoneRoad infra. to Thailand Under constructionPort 1Electricity Unsustainable (need to have gen-

sets)Infra

stru

ctur

e

Restriction on investment NoneRoad infra. to Thailand Completed (east-west economic

corridor)Port 1Electricity Good in main areaIn

frast

ruct

ure

Limits in labor population and infrastructure, despite the linking of northwestern Laos and Thailand

Infrastructure is the most advanced among the three candidates for a labor-intensive hub

Restriction on investment NoneRoad infra. to Thailand Starting (2 north-south economic

corridors)Port NoneElectricity Good in main areasIn

frast

ruct

ure


23

Source: Marklines; Roland Berger

Moving forward, the industry is expected to register growth of nearly 5% p.a. in the period through 2020,

with management focus increasingly placed on achieving efficiency gains in existing production lines and

optimizing the logistics networks in the region.

2.43.0

1.0

1.71.8

0.6

0.7

0.7

0.2Others2)

2020f

6.0

>3.3

0.2

5.2%

2018f

5.6

0.2

2013

4.2

1) Light vehicle production forecast (up to 6 tons) 2) Philippines and Vietnam

> LCV production capacity growth mostly led by Thailand and to some extent also Indonesia. Potential international trends (e.g. green cars) also likely to become more popular among customers

> Existing production lines (pickup, MPV) capacity foreseen to be roughly flat

> Likely future management attention

– Focusing existing production lines strongly on efficiency gains and quality optimization

– Local players likely to push for further logistics optimization, thereby creating a virtuous circle for production enhancement


24

F. Energy: seeking "greener" pastures

Energy demand for the region is predicted to grow steadily over the 2015-2035 period at a pace of 3% p.a.

Overall, the split between the main sources of energy is shifting toward coal, and this trend is likely to

continue in the future. While in 1990, oil was the main source of primary energy, way ahead of other

sources (37% vs. 13% for natural gas and barely 5% for coal), by 2035 the oil share is expected to

gradually decrease to 33%, with coal accounting for a quarter of the demand and natural gas coming third

with 23%.

Figure 32: SEA primary energy demand, 1990 – 2035f [Mtoe]

Source: ADB Energy Outlook, Roland Berger

> Fossil fuels face challenges of their own in the region, prompting governments to explore new avenues in power generation.

> Oil is characterized globally by volatile prices, heavily impacting Southeast Asian countries that are net oil importers. Moreover, countries in the region have long subsidized retail prices, creating strong fiscal burdens upon the national budgets. Only recently have nations like Indonesia and Malaysia started to address this politically sensitive topic through gradual reductions in subsidies.

> Southeast Asia is richer in natural gas than it is in oil and the region is a key exporter of LNG in the global market. Nonetheless, availability of infrastructure and pricing regulations challenge the future prospects of this industry.

> Coal continues to be a cheap and abundant resource in the region. It is estimated that existing coal reserves in Indonesia and Vietnam could be sufficient to sustain production for 80 years. However, protectionist measures like Indonesia's new ban on exports of unprocessed minerals could thwart the rapid rise of coal.

> It is interesting to note that despite environmental benefits, natural gas is set to remain unpopular into the future as prices on average remain higher than those of coal.

Figure 33: Natural gas for power generation

0

300

600

900

1,200

2020f2015f2010200520001990 1995

+3%

+4%

Oil

Coal

Natural gas

Others

Hydropower

2035f2030f2025f

Forecast


25

Source: Southeast Asia Energy Outlook, Roland Berger

In this context, governments are increasingly seeking renewable energy opportunities to diversify away

from reliance on fossil fuels and also support green development. Regulators are adopting energy mix

policies that support renewable energy development, with most countries having laid down targets for

increasing their share of renewables in power generation.

Figure 34: Energy sources in Southeast Asia

Source: ADB Institute, International Energy Agency, Roland Berger

Figure 35: Energy mix policies by country

10.0

7.5

2.5

5.0

2007

2001

2000

2003

2004

2002

2006

2005

2010

2009

2008

2014

e

2013

2012

2015

f

2011

Coal

Natural gas

700

1,5001,600

4,0004,500

WindGeothermal Coal supercritical Gas CCGTNuclear

19 22 24 26

16 1012 14

48

28

36

46

2026 - 2030

Coal

2013 - 2020

Gas

2021 - 2025 2030 - 2035

Hydropower

Natural gas vs. coal prices1) [USD/MMBtu)Capital costs in power generation technologies, 2020 – 2035 [USD/kW]

Estimated total investment in power generation capacity, 2013 –2025 [USD bn]

1) Conversion rate for coal: 1 ton of coal = 27.8 million Btu (American Physics Society)

OIL NATURAL GAS COAL HYDROPOWER OTHERS

> Volatile oil prices

> Majority of ASEAN countries are net oil importers – volatile prices have a negative impact

> Countries have subsidized retail oil prices creating fiscal burdens

> However, governments are moving toward removing subsidies, e.g. Malaysia and Indonesia

> Southeast Asia is richer in natural gas than it is in oil

> The region is a key exporter of LNG in the global market

> Controlled low domestic prices of gas could feed domestic markets

> Availability of infrastructure will be a key determinant of growth

> Existing coal reserves in Indonesia and Vietnam could be sufficient to retain production for 80 years

> However, domestic demand is pushing production to the limit

> Indonesia's new ban on the export of unprocessed minerals could damage the country's export market

> Not fully developed to capture the region's full potential

> Small, run-of-river systems that can help development of isolated areas and islands

> Large hydropower dams in landlocked countries like Laos along the Mekong River can help boost the national economy

> Biofuels could potentially be a new area for ASEAN countries to explore to reduce their dependence on imported petroleum and improve BoP

> It is also in line with regional efforts to reduce greenhouse gas emissions

> Biofuels include biodiesel (palm and coconut oil) and bioethanol (sugar or starch-based feedstock)


26

Source: Southeast Asia Energy Outlook, Roland Berger

Although relatively small compared to the share of other resources, hydropower has gained strong traction

in Southeast Asia, with Vietnam at the forefront of its implementation owing to the existence of natural

resources and the active support of its government.

Figure 36: Installed hydropower capacity, 2013

Source: International Hydropower Association, International Energy Agency, Wall Street Journal, Roland Berger

Southeast Asia boasts considerable hydropower potential, mainly concentrated along the Mekong River, to

the tune of 30-60 GW. Significant projects have been announced in the Mekong basin, proposing to add

nearly 13 GW over the next 2-4 years on top of an existing capacity of 37 GW in the region. However,

HydropowerBiofuels Nuclear GeothermalGeneralCountry

Renewable energy

Coal Oil Natural gas

Non-renewable energy

Myanmar > 15-18% of power generation by 2020

Singapore > 5% 2020 peak electricity demand

Indonesia > Increase to >30 of mix by 2025

> Reduce to <25% of mix by 2026

> Reduce to 22% of mix by 2025

> Increase to >23% of mix by 2025

> 5% of primary energy mix by 2025

Malaysia > Increase RE share to 13% by 2030

> Long-term option

Thailand > Reduction in share of natural gas

> 25% of consumption by 2021

> Introduction in 2026

Vietnam > 5% of power generation by 2020

> Source of energy by 2030

Cambodia > 15% of generation from RE

Laos > Increase share by 30% by 2025

Philippines > 30% vehicle use by 2030

> Main RE use growth driver

> Main RE use growth driver

> 10% share in transport by 2025

> Develop HP to lower domestic cost of power

> HP to account for 11% of total power capacity

> 5 GW of HP capacity by 2015

10 – 50 GW5 – 10 GW1 – 5 GW< 1 GWVietnam

Indonesia

Malaysia

Thailand

Philippines

Laos

Myanmar

Cambodia

Singapore

Brunei

14.25

5.08

3.92

3.83

3.82

3.26

2.90

0.34

n.a.

n.a.


27

opposition from environmental groups and limited financial resources have so far stifled efforts to fully

develop this energy source, and governments are exploring alternative funding mechanisms including

PPPs for the construction of dams and other facilities.

Figure 37: Hydropower capacity additions in the Mekong basin, MW

Source: Press Research, Roland Berger

Pak BengCapacity:COD:

1,2302016

Luang PrabangCapacity:COD:

1,4102016

XayaburiCapacity:COD:

1,2852019

Pak LayCapacity:COD:

1,3202016

SanakhamCapacity:COD:

7002016

PakchomCapacity:COD:

10792017

Ban KoumCapacity:COD:

1,8722017

Lat SuaCapacity:COD:

6862018

Don SahongCapacity:COD:

2402016

Stung TrengCapacity:COD:

9802016

SamborCapacity:COD:

2,6002020


28

G. Steeling ourselves to avoid downfall?

Asia has been the main engine of growth in global steel demand over the past decade, driven by strong

demand in the construction, automotive and machinery sectors, particularly in China. In fact, the industry

remained unscathed even by the global financial crisis, in stark contrast to its Western counterparts where

demand declined sharply in 2009. ASEAN-6 – comprising ASEAN and six other nations (China, India,

Japan, South Korea, Australia and New Zealand) – has shown relatively strong growth as well over the

past decade, clocking nearly 6% annually.

Figure 38: Apparent steel use (finished steel)

Source: World Steel Association; Roland Berger

Indonesia, Vietnam and Thailand are the biggest consumers of steel in the region, accounting for nearly

2/3 of total demand. However, per capita steel consumption in ASEAN-6 is only half of the global average

– in Indonesia it's only 1/4 – suggesting much more scope for growth in the region.

Figure 39: Apparent steel consumption by country, 2014

1) Baseline of 100 in 2005

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

170

150

140

130

120

110

100

90

80

70

0

160

100

EU

N. America

Asia

World

ASEAN-6

CAGR (2005-14)

+6.1%

-0.4%

-1.6%

+5.8%

+4.9%


29

Source: South East Asia Iron and Steel Institute (SEAISI); Roland Berger

Looking forward, the region is expected to register strong growth in steel consumption, though potentially

at a slower pace than before, driven by the development of the steel-consuming industries: the

construction industry is forecast to grow at 4.7% p.a. over the 2015-2020 period (vs. 6.7% over 2005-

2014), the automotive industry at 4.4% (vs. 7.9%) and machinery/equipment at 4.9% (vs. 8.5%). In order to

satisfy this need for steel, the region has so far relied heavily on imports – production volume makes up

only half of the apparent consumption in the region.

Figure 40: Industry outputs in SEA [2005-2020f, USD bn1)

]

Source: IHS Global Insights; Desk Research, Roland Berger

Figure 41: Steel production, % of apparent consumption, 2014

3.9

7.4

10.4

13.6

14.6

17.3

Singapore

Philippines

Malaysia

Indonesia

Vietnam

Thailand

ASEAN-6 67.1

Total consumption [m tons] Per-capita consumption [kg]

73

339

53

161

258

122

220

707

Top 3 steel consumers in ASEAN

Global avg.

2020

274

2015

218

2010

163

2005

116

88

2010

61

2005

41

2020

110

2015

2020

73

2015

57

2010

44

2005

26

1) At 2005 constant prices

CAGR (2005-14) CAGR (2015-20)

6.7% 4.7%

7.9% 4.4%

8.5% 4.9%

Forecast (2015-20)

Construction

Motor vehicles, trailers and parts

Machinery, equipment, appliances


30


This fact has an even stronger relevance in Singapore, where only 1/5 of the apparent consumption is

supplied internally, with the rest coming from imports. In addition, exports substantially exceed domestic

production and imports combined, indicating significant re-exports and transshipments.

This strong dependency on imports can be attributed to the region's persistent gap between consumption

and production capacity.

Figure 42: Net exports, m tons

Source: World Steel Association, Roland Berger

Asia exhibits significant variations – while China, India, Japan, Korea and Taiwan have continuous

overcapacity in steel production, the opposite is true for Southeast Asian countries, making the region a

high net importer. Cheaper imports have forced most countries in the region to take protectionist measures

to support domestic producers.

50% 59%

100%

Production Imports

Singapore 131%17% 114%

Philippines 100%52% 48%

Malaysia 55%

Vietnam 110%50% 60%

Indonesia 106%58% 49%

Thailand 105%48% 57%

ASEAN-6 109%

111%57%

Exports1)

1) Exports can include domestically produced steel products, and re-exported or transshipped imports of steel products

7476

63

51

-45-39

-31-32

20112010 2012 2013

Asia excl. ASEAN-6 1)

ASEAN-6

1) Includes China, India, Japan, Korea, Taipei

Over-capacity

Under-capacity


31

Figure 43: Recent steel trade measures regionally


In summary, the region will register strong demand growth in steel; however, a lack of production facilities

and regulatory barriers may prevent the region from capturing the full potential of the industry.

Country Trade measures Country Trade measures

> Anti-dumping duties of 7% to 55.6% on imports of cold-rolled coil/sheet products from China, Japan, Korea, Taiwan and Vietnam, effective for 3 years

> Safeguard measures against imports of seamless pipe casing and tubing, for a period of 4 years

> Safeguard measure imposed on the imports of alloy-added I and H beams for a period of 3 years

> Anti-dumping duties of up to 25.2% on wire rod with carbon content below 0.6% from China, Indonesia, Korea and Taiwan, effective for 5 years

> Dumping investigation on stranded wire originating or exported from China

> Anti-dumping duties of between 3.15% and 29.37% imposed on hot-rolled coils imported from China, Indonesia and South Korea, effective for 5 years

> Safeguard investigation into imports of galvanized and pre-painted sheet/coil

> Safeguard measure on angle bar imports for 4 years

> Anti-dumping duties on imports of pre-painted galvanized and Zn-Al coated steel, as well as unpainted Zn-Al coated steel from China, Korea and Taiwan, effective for 5 years

> Anti-dumping duties of 13.58% to 58.85% on hot-rolled coil and sheet from Korea

> Tariff increase of 34.01% of the CIF price proposed on non-alloy hot-rolled coil, sheet and plateimports of thickness 0.9-50 mm and 600-3,048 mm wide classified under HS code 7208

> Preliminary anti-dumping duties of 16.14% to 33.98% on imports of alloy-added high carbon wire rod from China, effective for 4 months

> Definitive measures on imports of alloy hot-rolled coil, sheet and plate until February 2016.

> Tariffs imposed ranging from 10.71% to 37.29% on stainless steel from mainland China, Taiwan, Indonesia and Malaysia


32

H. Tourism: are we too optimistic?

The landscape of global tourism has evolved over the last 25 years, with Asia-Pacific attracting tourists at a

much faster rate than any other region (CAGR of 2.5% vs. -1.2% in the Americas and -0.7% in Europe).

Within APAC, Southeast Asia was the second most attractive region in 2014, drawing 38% of tourists. It

has also recorded the fastest growth in total tourist receipts over the past 5 years at 11.6% p.a.

Figure 44: Share of global tourist arrivals by region, 1990-2014 (%)

Source: UNWTO, Roland Berger

Figure 45: APAC tourist arrivals and receipts


However, over the next 15 years, Southeast Asia is expected to face tough competition from faster growing

neighbors as they ramp up their infrastructure, marketing and product development.

Figure 46: APAC tourist arrivals forecast by region, m visitors

60% 58% 57% 56%51% 52% 52% 51%

13% 16% 16% 19%22% 23% 24% 23%

21% 21% 19% 17%16% 15% 15% 16%

5% 5% 5% 5%4% 6% 5% 5% 5%

2014

Europe

APAC

Americas

Africa

Middle East

2013201220102005

4%

2000

4%4%

1995

4%3%

1990

3%2%

CAGR

3.0%

1.6%

-1.2%

2.5%

-0.7%

7%

5%

Northeast Asia

Southeast Asia

South Asia

Oceania

52%

37%

Share of APAC tourist arrivals, 2014 (%) Tourist receipts in Asia-Pacific by region, 2010 – 2014 (USD m)

45

Northeast Asia

+10%

Southeast Asia

Oceania

South Asia

2013

359

185

107

43

24

2012

329

167

96

43

23

2011

302

150

85

42

24

2010

256

128

69

39

20

377

2014

107

27

198

CAGR

7.9%

3.8%

11.6%

11.4%


33


Southeast Asia is expected to face challenges of its own as it prepares to face the competition.

> Deteriorating environment: several countries continue to neglect the upkeep of their environment despite repeated commitments.

> Uncertain safety and security: there is a perceived unreliability of police services, in addition to threats of riots and terrorist attacks.

> Poor health and hygiene: a high prevalence of communicable diseases and underdeveloped healthcare infrastructure in some Southeast Asia countries further impedes tourist inflow.

> Inadequate human capital: with the notable exception of Singapore, quality of education and training is generally poor.

Despite these challenges, there remain significant opportunities for Southeast Asia to exploit proactively in

the future, some of which include:

1. Inclusive visa requirements: impose less restrictive visa requirements than most other regions

2. Supportive government: governments to give higher priority to tourism promotion and spend on tourism-related services

3. Improving connectivity: focus efforts across the region to address shortcomings in basic and "soft" infrastructure

4. Competitive prices: keep the cost of travel and tourism in the region competitive 5. Rich cultural heritage: develop a wide range of diverse cultural offerings that provide

interesting experiences for travelers

South Asia

Southeast Asia Oceania

Northeast Asia

36

2117

4.8%

203020202014

187

12397

2014 2030

4.2%

2020

19

1513

20302020

2.3%

2014

293

195

136

20302020

4.9%

2014


34

I. Indonesia: an awakening tiger?

Figure 47: Indonesian economy

Source: IMF, Indonesia Investment Coordinating Board, Roland Berger

Indonesia has the potential to become an economic giant with easy access to vast natural resources. The

country has a large quantity of natural gas resources and petrochemicals, is the world's second

largest exporter of coal and has the world's largest geothermal reserve. It is also the world's largest

palm oil exporter and second largest cocoa producer, and is rich in minerals – being the largest tin

producer and fourth largest nickel and bauxite producer globally.

Figure 48: Public sector challenges

Source: BBC, World Competitiveness Report 2014 – 2015, Roland Berger

However, political instability and institutional challenges have posed a setback to its economic

development, restricting growth. Since declaring independence in 1945, Indonesia has been through

0

2

4

6

8

10

Other SEA average

Indonesia

201020052000 2014

Natural gas

Coal

Geothermal

Palm oil

Cocoa

Tin

Nickel

Bauxite

Annual real GDP growth, 2000 – 2014 (%) Key indicators of natural resources1)

Large amount of gas-based resources and petrochemicals

World's second largest exporter of coal

World's largest geothermal reserve – 40% of resources

World's largest exporter of palm oil – over 19 m tons per year

World's second largest cocoa producer –770,000 tons per year

World's second largest tin producer –65,000 tons per year

World's fourth largest nickel reserves – 12% of world reserves

World's fourth largest bauxite producer

1) Data as of 2011

8%

6%

Government

regulations

and practices

Human capital

Financialinstitutions

Macroeconomicenvironment

Infrastructure

Others

55%

12%

11%

10%

Issues in government regulations and practices

Corruption 15.7%

Inefficiency 8.3%

Policy instability 6.9%

Tax rates 5.3%

Instability and coups 5.2%

Regulation 13.7%

Most problematic factors for businessPolitical timeline

1949Dutch recognize independence after 4 years of guerilla warfare

1965Failed coup resulting in killing of

suspected communists

1998 Protests and rioting topple Suharto

1999Free elections

2000Buloggate and Bruneigate

government embezzlement scandals> Indonesia found guilty of human

rights v iolation against East Timor prior to the latter's independence

> IMF halts loans due to lack of progress in tackling corruption

> President Wahid dismissed over allegations of corruption and incompetence

2001

2002Constitutional changes – first step

toward democracy

2003Martial law in Aceh imposed as

government mounts military offensive against rebels

2004First direct presidential elections

2013Petrol and diesel price hike sparks v iolent protests

1945Indonesia declares independence

TODAY

2014Newly elected president promises

the gradual lifting of petrol subsidies


35

several periods of political turbulence. In 1999, Indonesia finally implemented free elections, but in 2001

the IMF froze loans due to lack of progress in tackling corruption. In 2004, the country had its first direct

presidential elections. The economic instability that followed led to petrol and diesel price hikes, which in

2013 led to violent protests in the country. Undeterred, the newly elected president is treading the path of

gradually lifting petrol subsidies.

One of the key challenges for the new president will also be to improve the business environment in the

country, currently reeling from corruption, excessive regulations and inefficiency issues.

To its credit, the new government has announced new policies and targets, though the actual impact on

the economy remains to be seen. Since 2010, the highest GDP growth Indonesia has achieved has been

6.5%, making the stated 7% GDP growth target ambitious. The ban on exports of unprocessed minerals

and the reduction in fuel subsidies may augur well for the government deficit, but their economic and

political impact is as yet unknown. The government's plans to improve the marine infrastructure are a

welcome move to boost trade and connectivity, but they need to include the boosting of operational

efficiencies as well, without which the expansion may create more problems than it solves. Other initiatives

on education, healthcare and corruption look good on paper, but how much of them will be realized in the

short to medium term remain a big question mark. On the whole, the government wants to boost economic

performance and support local companies, but by implementing protectionist policies, there is a real

danger of alienating much-needed foreign investment in the country that aspires to be Asia's next

powerhouse.

By 2020, Indonesia's population is expected to reach 274 million. With more and more people entering the

workforce, job creation will be a key challenge, the unemployment rate already being higher than it is in

Malaysia and Thailand. Even with the provision of new jobs, GDP per capita is expected to remain low and

grow slower, with higher inflation exacerbating the situation.

It is clear that structural reforms are the order of the day for Indonesia if it is to truly fulfill the huge potential

on offer as it navigates its way under a new political regime.

Figure 49: Indonesian macroeconomic forecasts


J. Singapore: at a crossroads

To exacerbate the situation, annual growth in inflation is high and the situation seems unlikely to change in the short term

Growing population indicates higher need for government spending and support

With more and more people entering the workforce, job creation will be a key challenge – unemployment is already higher

However, even with the provision of new jobs, GDP per capita is expected to remain lower than in Malaysia and Thailand

Inflation rate, annual change in average consumer prices (%)

Unemployment rate (% of workforce)Population (million people)

Nominal GDP per capita (USD per capita)

274270266262259255251248244241238234231228225221

+1%

2020201920182017201620152014201320122011201020092008200720062005

0

5

10

15

200720062005 2011201020092008 202020192018201720162015201420132012

-5

0

5

10

15

201020092008 20152014201320122011 20202019201820172016200720062005201320122011 20182017201620152014

20,000

15,000

10,000

5,000

0

20202019201020092008200720062005

ThailandMalaysiaIndonesia ThailandMalaysiaIndonesia

ThailandIndonesia Malaysia


36

Singapore has consistently ranked high on many indices. Its Global Competitiveness Index – which

measures a number of critical factors for innovation, such as education and technological readiness – has

been consistently high.

Figure 50: Singapore's competitiveness summary

Source: World Competitiveness Report 2014-2015, Roland Berger

Ranked second in the world for several consecutive years, it boasts well-educated workers who are able to

perform complex tasks and adapt rapidly to their changing environment.

Figure 51: Singapore economic snapshot: 1985 and 2014

Source: MTI Singapore, Department of Statistics Singapore, Roland Berger

Figure 52: Singapore's cost of living overview

0

1

2

3

4

5

6

7

Singapore Other advanced economies

Infrastructure

Macroeconomicenvironment

Health and primaryeducation

Higher education and training

Goods market efficiency

Labor market efficiency

Financial marketdevelopment

Technologicalreadiness

Market size

Businesssophistication

Institutions

Innovation

Institutions Labor market efficiency

Sound and fair legal and administrative framework for indiv iduals, firms and government to generate wealth

Workers are allocated to their most effective use in the economy and prov ided with incentives to perform at maximum capacity

Infrastructure Financial market development

Extensive and efficient transport and communications infrastructure has enabled integration of national and foreign markets

Allocation of resources saved by citizens, and foreign workers, to their most productive uses in entrepreneurial and investment projects

Macroeconomic environment Technological readiness

Stable macroeconomic environment and flex ibility of the government to adapt to business cycles

Agile economy that adopts ex isting technologies to enhance the productiv ity of its industries leveraging on ICT

Health and primary education Market size

Healthy workforce has improved worker productiv ity and quantity and quality of basic education has improved efficiency

Markets available to firms are moderately constrained by national borders with international markets acting as a substitute

Higher education and training Business sophistication

Well-educated workers able to perform complex tasks and adapt rapidly to their changing environment

Good quality of national business networks and indiv idual firms' operations and strategies

Goods market efficiency Innovation

Well positioned to produce the right mix of products and serv ices and efficient trade of these goods within the economy

Good foundation in which firms are able to design and develop products and processes to maintain competitiveness

Global competitiveness index, 2014 – 2015

Index score:1 – Poor 7 – Good

Stage of

development

Transition1 – 2

Efficiency driven

Factor drivenInnovation

drivenTransition

2 – 3

6.0

6.5

6.1

6.7

6.1

5.6

5.7

5.8

6.1

4.7

5.1

5.2

2.7

5.5

10% 13%

19%16%

22%

2%

18%3%

4%

2%

18%

13%

2%

28%

20%

2%

5%

3%

ConstructionFinancial and business services Other industriesManufacturingCommerce Transport and communications

Financial and business services

Commerce

Transport and communicationsConstruction

Chemicals

Othermanufacturing

Others

Financial and businessservices

Commerce

Water transport (maritime)Air transport (aviation)

Other transport

Info and communications

Construction

Chemicals

Biomedical engineering

Othermanufacturing

Others

61

3811985

2014GDP at 2010 prices [SGD bn]

Relative size of the economy, 1985 vs. 2014

Economic structure


37

Source: Economist Intelligence Unit, Euromonitor, Roland Berger

However, one of the biggest concerns for policymakers – and for residents of this city state – is the cost of

living in Singapore. Two years in a row, 2014 and 2015, the Economist Intelligence Unit (EIU) ranked

Singapore the most expensive city globally, a far cry from its 2005 ranking of 19th most expensive city in

the world.

Sudden rapid immigration, according to the EIU, caused a surge in demand for housing and a rise in the

cost of living. Housing prices have gone up 9% p.a. since 2009, driven significantly by demand from a

large population of wealthy expatriates.

Figure 53: Income distribution outlook

Source: Euromonitor, Roland Berger

But beyond the increased cost of living, it is the Gini coefficient – an index that measures income inequality

– that is the real worry for Singapore. Its Gini coefficient was 0.463 in 2014 and could go as high as 0.474

by 2020 – levels that are much higher than most of the other expensive cities in the world. Singapore is set

Copenhagen

Tokyo

Melbourne

Geneva

Caracas

Sydney

Zurich

Oslo

Paris

Singapore 130

129

128

125

120

118

118

118

118

117

Rank 2014

1

2

3

4

5

6

6

6

6

10

Top 10 most expensive cities in the world1)

1) Indices with base of New York City = 100

Consumer price index (2000 = 100)

117

134

122120122

98

109

134

148

131128130

100

108

AustraliaDenmarkFrance SingaporeNorwayJapanSwitzerland

2014

2010

Average'10 – '14

2.1%0.6% -0.1% 2.0% 1.8% 2.0% 3.0%

40

50

45

20001995 20101990 2005

0

35

202520202015 2030

Singapore

Others2)

SEA1)

GINI coefficient Income distribution of population (% of annual disposable income)

4 5 6 8 1012

16

35

5 6 89

1216

36

3 43

26x

Dec

ile 1

0

Dec

ile 8

Dec

ile 9

Dec

ile 7

Dec

ile 6

Dec

ile 5

Dec

ile 3

Dec

ile 2

Dec

ile 4

11

Dec

ile 1

27x

0% – perfectly equal 100% – perfectly unequalScale Decile 1 – Lowest earning 10% Decile 10 – Highest earning 10%Scale

2014 2020

Current income gap Estimated 2020 income gap

Forecast


38

to see the world's fastest growth in "the number of super rich individuals" in the coming decade, according

to Frank Knight, a real estate consultancy. By 2024, the island nation will have almost 5,000 UHNWIs with

assets of USD 30 million or more, up from 3,227 in 2014. In fact by 2020, the top 10% of the population is

expected to make 28 times the income of the bottom decile.

Economists from the IMF outlined that for economies with Gini coefficients below 0.45, growth can still be

robust, but once it surpasses 0.45 – which Singapore has consistently scored above throughout the last

decade – growth slumps. Better income equality would also ensure a sturdier middle class, boost

consumer spending and create more jobs, enhancing the multiplier effect within the economy.

The other repercussion of income inequality is social unrest, also driven by an ever increasing proportion

of foreigners in the country. The number of foreigners living in Singapore rose by 112% to 1.6 million

between 2004 and 2014, while the resident population rose by only 13%, to 3.9 million, over the same

period. Social tensions, as seen in recent riots in a small Indian-dominated area, will remain a cause for

concern for the government as it plans to further increase populations through immigration.

Additionally, Singapore needs to keep its economy as diversified as possible. Already, the country is

economically trade-dependent, which is often cited as a bellwether for economies in the region. It has, in

the past, claimed to be the center of the region, given the number of multinationals headquartered on the

island. But it must identify ways of keeping alive its traditional industries that contribute to continued

economic growth, while making sure Singapore remains a desirable place to live.

Given the cost-of-living pressures, widening income disparities, increasing population and declining

economic diversity, the government has to continue improving social policies, while pursuing economic

growth. To this end, policies must continue strengthening segments of society facing constraints that are

due to these circumstances; after all, a bigger middle class will enable Singapore to achieve its economic

goals.

http://www.usnews.com/opinion/blogs/economic-intelligence/2013/09/12/record-high-income-inequality-threatens-us-growth


39

K. CLMV: the backbone of Southeast Asia's future?

The CLMV states (Cambodia, Laos, Myanmar, Vietnam) are considered the poorest nations in Southeast

Asia, with GDP per capita in the range of USD 1,000 – 2,000. This is attributable partly to a substantially

higher share of agriculture in GDP, but also to much lower agricultural productivity, which makes the

situation worse.

Figure 54: Agriculture's contribution to the economy

Source: CIA Factbook, Roland Berger

In addition, institutional challenges have resulted in low performance on indicators related to governance

and efficiency of public services, further hindering socio-economic growth. This can be seen through the

lenses of infrastructure, competitiveness, education and corruption indices.

Figure 55: Selected performance indices


11%

12%

14%

11%

19%

27%

38%

35%

89%

88%

86%

89%

81%

73%

62%

65%

Real GDP per capita, 2013 (USD)

1,037

Thailand

1,325

Philippines

Malaysia

5,462

Indonesia 3,276

Myanmar

Cambodia

Laos

Vietnam

10,460

2,729

1,938

1,606

539

480

476

1,152

1,018

1,166

9,687

Agriculture Industry & serv ices

Agriculture value added per worker [USD]Sector contribution to GDP, 2013 (%)

n.a.

Myanmar 3.24Cambodia 3.89Laos 3.91India 4.21Vietnam 4.23Philippines 4.40Indonesia 4.57Thailand 4.66China 4.89Malaysia 5.16Netherlands 5.45Japan 5.47Germany 5.49USA 5.54Singapore 5.65

Myanmar 2.14Laos 2.21Cambodia 2.58Philippines 2.60India 2.88Indonesia 2.92Vietnam 3.11Thailand 3.40Malaysia 3.56China 3.67Japan 4.16USA 4.18Netherlands 4.23Singapore 4.28Germany 4.32

Myanmar3) 13.8Cambodia3) 15.8Laos 16.7Vietnam 24.6India 24.8China 26.7Philippines4) 28.2Indonesia 31.5Malaysia3) 36.0Thailand2) 51.2Japan 61.5Germany 61.7Netherlands 77.3Singapore 81.3United States 94.3

2021

263132353636

4050

7374

7883

86

CambodiaMyanmarLaosVietnamIndonesiaThailandIndiaPhilippinesChinaMalaysiaUnited StatesJapanGermanyNetherlandsSingapore

Overall quality of infrastructure index, 2014

Global competitivenessindex, 2014

Tertiary education enrolment rates1)

Corruption perceptionindex, 2014

1) 2012 unless otherwise specified; 2) 2013; 3) 2011; 4) 2009


40

> From an infrastructure perspective, financial constraints and rough terrain have hindered development; however, governments are proactively planning and engaging private institutions in an effort to improve connectivity.

> On competitiveness, CLMV have performed poorly so far, across institutional, social and financial criteria. But recent openness to the idea of venturing into the global market has prompted improvements in internal markets and infrastructure.

> Enrollment in education has been poor as the population has primarily focused on agricultural activity, dragging young people into the sector. Education reforms are expected to improve the situation, though the timeline and scale are still quite uncertain.

> Corruption is not just a CLMV issue, with other countries in the region not faring much better either. But as the nations gradually open up to global investments, transparency and bureaucracy are expected to improve.

The CLMV states have undergone significant reforms over the last few years in a bid to tackle the above-

mentioned challenges.

> Cambodia is liberalizing its economy gradually and reconciling with its political past. It has led energy development on the Mekong river having approved the building of dams along it, and has also seen significant growth in garment exports and the agriculture, tourism and construction sectors.

> Laos is decentralizing its economy, a process it began in 2011 through the National Socio-Economic Development Plan. It joined the WTO in 2013 and has been proactive in its efforts to guarantee the equal inclusion of women in the workforce. It has seen increasing trade with neighboring countries and has enjoyed improvements in infrastructure and tourism development and the promotion of natural resource-based industries.

> Myanmar has been buoyed by the entry of the National League for Democracy into parliament for the first time, indicating a reconciliation process between a newly elected president and the opposition represented by Aung San Suu Kyi. The country has begun to open up to foreign investment as evident by the recent telecom and banking license auctions that were carried out in a transparent and efficient manner. A large domestic market, accelerating economic reforms and an advantageous geographic location close to China and India augur well for this fast growing nation.

> Vietnam has seen significant reforms in areas like agriculture, oil and services, particularly after having joined the WTO in 2007. After political liberalization within the ranks of the leading Communist party, the country has proactively engaged in international economic integration, normalizing relations with the EU, U.S. and China. It is also now seeing increasing investments from multinationals hailing from around the globe.

All of these reforms seem to have successfully positioned CLMV at the forefront of the region's growth, as

evidenced by encouraging macroeconomic indicators.


41

Figure 56: Selected macroeconomic indicators

Source: IMF, World Bank, ASEAN Stats Database, Roland Berger

Sustaining this growth will depend on how these nations address the important challenges facing their

leaders in the future.

Figure 57: Key challenges facing CLMV

Source: Asia Foundation, Asian Development Bank, Roland Berger

Average real GDP growth, 2005-2014 [%] GDP per capita CAGR, 2005-2014 [%]

FDI CAGR, 2005-2014 [%]Average total trade growth, 2005-2014 [%]

1

3

55

666

888

Bru

nei

Thai

land

Mal

aysi

a

Phi

lippi

nes

Indo

nesi

a

Sin

gapo

re

Vie

tnam

Cam

bodi

a

Laos

Mya

nmar

1

4555

677

89

Bru

nei

Thai

land

Sin

gapo

re

Mal

aysi

a

Phi

lippi

nes

Indo

nesi

a

Vie

tnam

Cam

bodi

a

Laos

Mya

nmar

467

89

11

1517

1819

Phi

lippi

nes

Mal

aysi

a

Sin

gapo

re

Thai

land

Bru

nei

Indo

nesi

a

Cam

bodi

a

Laos

Vie

tnam

Mya

nmar

48

111214

17171818

47

Phi

lippi

nes

Thai

land

Bru

nei

Mal

aysi

a

Indo

nesi

a

Mya

nmar

Sin

gapo

re

Cam

bodi

a

Vie

tnam

Laos

Cambodia Laos

MyanmarVietnam

> Strong discrepancy in life standard between urban and rural environments, combined with strong poverty: 50% of the population lives on <2 USD/ day

> SMEs, the country's main wealth and employment source, face issues in development, due to endemic red tape, corruption, unclear laws, etc.

> Women and certain minorities still face discriminatory laws, combined with blocking socio-economic norms

> Important environmental and social cost accompanying the economic development, particularly for land and compensation disputes, leading to social unrest

> Decreased human rights policy, by shutting down/ restraining the activity of NGOs and other potential political opponents, starting with 2012

> Unclear legislation for opening SOEs to foreign firms, currently in an uncertain "Foreign JVs" state

> Need for redefinition of the military's political and economical role, given that 25% of the Parliament is still allocated by law to the armed forces

> Strong inequality among the different ethnicities, leading to widespread social and humanitarian unrest

> Important issues arising from the overruling of land and property rights for economic development projects, often stained by widespread corruption among the decision-makers

> Inadequate resource allocation between the public and the private sector, leading to strong development inefficiencies: state sector creates 10% of employment and consumes 70% of total investment

> Widespread corruption and crony capitalism among the leaders of the country, leading to many SOEs being debt-stricken or bankrupted by funds leakages since 2012


42

L. Regional integration: is the EU a relevant model?

The European Union (EU) was established in 1993 through the Treaty of Maastricht, while ASEAN came

into existence in 1967, almost a quarter of a century earlier. Both of them have a long history of internal

international collaboration built on the foundation of nations with a similar culture and history. The EU

enjoys a much wider composition of nations than ASEAN (28 vs. 10), but has shown weaker economic

performance as compared to ASEAN member economies. Between 2008 and 2014, the EU's average

annual real GDP growth was only 1.5%, while ASEAN member economies enjoyed 6.6% growth over the

same period. FDIs dropped by nearly 15% in the EU but grew by 12% in Southeast Asia, and while

unemployment in the EU has risen by 6.5% since 2008, it has declined in the Southeast Asian region by

4.5%.

Figure 58: EU level of authority

Source: Desk Research, Roland Berger

The EU has always faced the challenge of aligning countries with different economic backgrounds – 11 of

which had a communist economic system 20 years previously. To this end, it has created a system of

intervention in the policies of each of the union countries by separating competences that remain with the

nations from those which were transferred to the EU level.

Figure 59: Intra-regional performance, EU vs. ASEAN member economies

Exclusive competence Supporting competenceShared competence

HIGH LOWEU level of authority

"The Union has exclusive competence to make directives and conclude international agreements when provided for in a Union legislative act"

> Customs union

> Competition rules for the single market

> Monetary policy for the euro

> Conservation of marine biological resources

> Commercial policy

> Conclusion of certain international agreements

> Single market

> Social policy for aspects defined in the Treaty

> Economic, social and territorial cohesion

> Agriculture and fisheries (excl. marine biological resources)

> Environment

> Consumer protection

> Transport

> Trans-European networks

> Energy

> Area of freedom, security and justice

> Common safety concerns in public health

"Member states cannot exercise competence in areas where the Union has done so"

"Union exercise of competence shall not result in member states being prevented from exercising theirs in…"

> Research, technological development and (outer) space

> Development cooperation and humanitarian aid

"The Union coordinates member states policies or implements supplemental to theirs common policies not covered elsewhere"

> Coordination of economic, employment and social policies

> Common foreign, security and defense policies

> Protection and improvement of human health

> Industry

> Culture

> Tourism

> Education, youth, sport and vocational training

> Civ il protection (disaster prevention)

> Administrative cooperation

"The Union can carry out actions to support, coordinate or supplement member states' actions in…"


43

Source: Eurostats, ASEAN Stats Database, Roland Berger

Despite better control and wide coverage of regional policies, the EU has been less successful at cross-

border integration. The intra-region share of FDIs has plummeted from nearly 80% in 2004 to 20% today,

while ASEAN's grew by nearly 8% annually over a similar period. The share of non-national residents from

within the region is also much higher in ASEAN member economies than in the EU (69% vs. 40%), and the

intra-region share of total trade has declined in the EU while remaining stable in Southeast Asia.

Figure 60: Performance on selected indicators – EU vs. ASEAN member economies


Despite stronger economic performance, marked income disparities between ASEAN member economies

could pose serious socio-economic threats to the region's success in the future. Among the 28 EU

countries, the highest earner is only 5 times higher than the lowest as measured in real GDP per capita,

while the same figure is an astonishing 25 times higher in ASEAN member economies, attributable to

ASEAN

EU

Intra40%

Extra60%

Intra69%

Extra31%

0

20

40

60

80

100

20132004

-1%

0

20

40

60

80

100

20132004

-0.1%

0

20

40

60

80

100

20122004 2014

-15%

0

20

40

60

80

100

20132004

+8%

Intra-region share of FDI, 2004 – 2013 (%)

Intra-region share of non-national residents, 2013 (%)

Intra-region share of total trade, 2004 – 2013 (%)

Real GDP, 2008 – 2014 [USD bn] FDI inflow, 2008 – 2014 [USD bn] Unemployment rate, 2008 – 2014 [%]

20

2012

2011

2010

2009

2008

15

10

5

0

2014

2013

+6.6%

+1.5%700

2010

500

400

300

200

100

0

2009

2008

600

2011

2012

2014

2013

-14.7%

0

2

4

6

8

10

12

2014

2013

2012

2011

2010

2009

2008

-4.5%

+6.5%

ASEAN EU

+12.3%


44

Singapore and Brunei as the outliers. 70% of the ASEAN member economies fall below the average

regional GDP per capita and the income variance is much higher than in the EU.

Figure 61: Real GDP per capita, 2014


As two entities with similar goals in mind, ASEAN member economies and the EU have lessons that can

be learned from each other.

ASEAN member economies should strive to:

1. Find ways to develop and exploit internal capabilities that could be strategically leveraged upon in the long term to avoid economic contraction as markets begin to mature.

2. Improve influence to exert better control over integration initiatives within its purview to override potentially damaging internal agendas of each nation.

3. Evaluate and reduce marked income disparities between member countries to ensure that policies and initiatives adopted can easily be applied across borders.

The EU, on the other hand, should focus on:

1. Rejuvenating the attractiveness of the business environment within the region through reduction of regulations and restrictions for foreign and co-member nations.

2. Developing a sense of inclusivity and "openness" in cross-border migration to promote regional unity and perhaps reduce unemployment rates.

3. Boosting confidence among member countries in the alliance's economy and business environment to improve intra-EU flow of goods, services and human capital.

Ø 23

Cambodia 3

Myanmar 5

Laos 5

Vietnam 6

Philippines 7

Indonesia 11

Thailand 14

Malaysia 25

Brunei 73

Singapore 83

25x

Ireland

Ø 36

Bulgaria 18Romania 20Croatia 21Latv ia 24Hungary 25Poland 25Greece 26Portugal 27Estonia 27Lithuania 27Slovakia 28Slovenia 30Czech Republic 30

Malta 33Spain 34Italy 35United Kingdom 40Finland 40France 40Belgium 43Denmark 44Germany 46Sweden 46Austria 46

Cyprus 31

Netherlands 47

Luxembourg 9249

5x

ASEAN countries EU countries


45

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Disclaimer

This study has been prepared for general guidance only. The reader should not act on

any information provided in this study without receiving specific professional advice.

Roland Berger GmbH shall not be liable for any damages resulting from the use of

information contained in the study.

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46

Documents

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