Continuing to browse our website indicates your consent to our use of cookies. For more information, see our Privacy policy.

How to use it

De-risking, but where to? ASEAN as an alternative to China

Published 06 August 2024

"De-coupling" or "de-risking" economic engagement with China has become an imperative in recent years. Is it possible to diversify production away from China, and are the emerging economies of ASEAN a potential substitute? The Konrad Adenauer Foundation provides an analysis for companies on how and whether to move production to alternative countries.

Here’s how to use the report entitled De-risking, but where to? The Emerging ASEAN countries as an alternative to China.

Why is the paper important?

As pressures to "de-risk" supply chains and reduce reliance on China as a consumer market grow, companies are asking whether emerging economies in Southeast Asia, particularly Indonesia, Malaysia, Thailand, the Philippines, and Vietnam, can serve as alternative locations for production or as markets for exports. This report importantly provides a brief but helpful analysis of factors to consider as companies diversify their businesses and contemplate the markets of the “Emerging ASEAN” countries. The report also looks at the factors that continue to make China central to the current manufacturing landscape.

What’s in the report?

The report includes four principal sections:

Page index

De-risking, but where to? The Emerging ASEAN countries as an alternative to China

Download Report

How to find the key insights

Introduction; There is no way around China

  1. The German government aims for an economic de-risking from China “to promote the diversification of economic relations…[and] continue to participate in China’s economic development while reducing … dependence in critical sectors”; diversification is hard for Germany because it is more intertwined with China than any other EU country; Indonesia, Malaysia, Thailand, the Philippines, and Vietnam (“Emerging ASEAN”) offer a seemingly promising alternative but economic data shows that their diversification potential is limited; Emerging ASEAN cannot replace China but can complement it. (p. 4) 
  2. China is the second largest economy in the world and will contribute more than 20 percent to global economic growth over the next five years even with current economic challenges; the IMF predicts that by 2028, China will have a larger GDP than the entire EU; the global economic share of other emerging Asian economies like India or Emerging ASEAN remains significantly behind that of China, so there is no way around China in the coming years. (p. 5, Figure 1) 

Figure 1: Estimated share of global GDP growth 2023 - 2028

  1. China is the EU’s most important trading partner; China’s economy is especially significant for Germany with almost half of all EU exports to China attributed to German companies; Germany’s foreign trade volume with China was US$229.5 billion in 2022, compared to US$47.8 billion with Emerging ASEAN. (pp. 5-7, Figures 2-3) 
  2. For Emerging ASEAN to be considered a real alternative to China, it would need to catch up economically and demonstrate a significantly higher growth momentum than China; growth forecasts for China and Emerging ASEAN provide little reason for hope; China is expected to extend its lead in GDP growth over Emerging ASEAN in the next five years, growing by more than the projected economic output of all ASEAN economies combined. (pp, 7-8, Figure 4) 
  3. German and EU diversification efforts will be challenged by the fact that China is the sharpest economic competitor in the ASEAN region; China is the most important economic partner for ASEAN countries as the volume of trade between China and Emerging ASEAN has nearly doubled in the last five years and China-ASEAN trade relations benefit from the ASEAN-China trade area and RCEP participation; China is also increasingly specializing in sophisticated industrial goods and directly competing with German and European companies. (p. 8)
  1. Diversification away from China has not materialized so far; German direct investments in China have also increased massively in recent years; for many companies, China is irreplaceable both as a production location and as a market; Emerging ASEAN can play an important role in China plus one strategies as these countries are located along important trade routes and in close proximity to major markets; Emerging ASEAN are members of regional and bilateral trade agreements; these countries can serve as regional production centers servicing markets outside of China including ASEAN markets; even pursuing this strategy presents challenges for German and European companies. (pp. 8-10, Figures 5-6)

How to apply the insights

  • This section gives a sobering perspective about the centrality of China as both a market and a manufacturing center for European, and especially German, companies.

  • With basic economic data it presents the importance of China and relative insignificance of ASEAN economies, and gives policymakers an informative view about the actual possibility of "de-risking" supply chains to become less reliant on China.

The potential of the Emerging ASEAN as a production location

  1. Emerging ASEAN’s potential appears enormous even though these countries are significantly smaller than China; advantages include large populations and correspondingly large labor forces (4 of 5 are among the top 20 most populous in the world) and significantly lower labor costs; the populations of most Emerging ASEAN countries are still relatively young with working-age populations expected to significantly increase. (pp. 11-12, Figures 7-8, Table 1) 
  2. The Philippines, Malaysia, Indonesia, and Vietnam are expected to benefit from a demographic dividend from a large reservoir of young labor generating above-average growth rates; this dividend could be disappointed if young people lack the necessary levels of education and training, a particular risk for the Philippines and Indonesia; Emerging ASEAN still ranks relatively low on student assessment scales and the World Bank’s Human Capital Index; according to the ILO, labor productivity is relatively low in these countries. (pp. 12-14, Figure 9, Tables 2-3) 

Figure 9: Annual output per worker in US dollars

  1. European companies seek competitive industrial sectors and suitable legal and infrastructure frameworks; with respect to industry competitiveness there is a considerable gap between China and Emerging ASEAN; these countries lag far behind China on the UNIDO’s Competitive Industrial Performance Index, suffering from low integration into global industrial supply chains and low industrial value-added and productivity; in terms of institutional quality, the overall picture for Emerging ASEAN excluding Malaysia is very weak, given weak rule of law and extensive corruption in these countries. (pp. 14- 16; Tables 4-6) 
  2. Conditions for cross-border trade in Emerging ASEAN are central to assessing diversification potential; uncomplicated rules for importing intermediate goods and exporting finished products are crucial if European companies are to relocate production to the region; the International Trade Barrier Index paints a mixed picture, with Malaysia having a higher ranking compared to China and other countries in Emerging ASEAN; companies also consider the quality of existing infrastructure, particularly transportation and logistics; in terms of the World Bank’s Logistics Performance Index, accounting for transport infrastructure and quality of customs clearance and international shipments, Malaysia and Thailand perform relatively well, while the Philippines, Vietnam and Indonesia lag behind. (pp. 16- 17; Tables 7-8)
  1. An important criterion for deciding whether to relocate production is determining whether doing so would actually lead to diversification away from China; the share of intermediate goods imported from China by Emerging ASEAN shows that China dominates industrial supply chains with an enormously high share of all intermediate goods imports; establishing production sites in Emerging ASEAN would only partially reduce dependence on China; European countries might still rely on a high proportion of Chinese intermediate goods in their factories in Emerging ASEAN; this strategy would ultimately be little more than diversification in terms of geography but not in terms of supply and value chains. (pp. 17-18, Figure 10)

How to apply the insights

  • This section examines the criteria necessary to persuade European companies to relocate production from China to Emerging ASEAN.

  • Using internationally recognized rankings and analysis, the report finds that in many key areas, most of Emerging ASEAN lags far behind China’s capabilities, leading to the conclusion that China will not be easily replaced, even in a China plus one strategy.

  • These are important concepts for companies to keep in mind when developing de-risking strategies.

The potential of the Emerging ASEAN as a market for European products

  1. China is one of the world’s most important markets for the German and European economy both for exports to China and European goods made in China for the Chinese market; for many European companies, the market in China is becoming increasingly challenging due to growing domestic competition and lost market share to Chinese companies; diversification is important not only for risk reduction but also to tap into alternative markets with growth potential for European products over the long term. (p. 19) 
  2. At first glance, Emerging ASEAN offers large potential markets with a growing middle class population and private consumption as one of the key drivers of growth; dynamic economic growth and the increasing interest of international industrial companies in the region is leading to rising demand for industrial goods and intermediate inputs. (pp. 19-20, Figure 11)

Figure 11: Consumption spending as a share of GDP

  1. Factors hindering Emerging ASEAN as a production location also create challenges in terms of market diversification, including lengthy and complicated customs procedures, inadequate port capacities, and protectionist rules; a lack of trade agreements or involvement in RCEP or CPTPP putting European companies at a disadvantage, especially compared to China; even with better market access European companies will be challenged to prevail against China’s competitive advantage in offering low prices, which gives it particular success in countries with relatively low per capita incomes including Emerging ASEAN; the market potential for European products in Emerging ASEAN, except for Malaysia’s small market, is limited. (pp. 19-21, Figure 12) 

How to apply the insights

  • The section finds that the Emerging ASEAN is limited in its ability to serve as a new or alternative market for European goods, considering per capita incomes and trade and infrastructure barriers.
  • This discussion provides another set of data points for companies and policymakers to consider in advocating for relocation to Emerging ASEAN markets in an effort to de-risk from China.

Policy recommendations

  1. For European companies there is currently no way around China – it is too important as a production location and trading partner – though stronger diversification is an imperative; despite limitations, Emerging ASEAN offers promising diversification potential; the greatest uncertainty is Chinese influence in the region, raising the risk of pseudo-diversification from China while remaining highly reliant on Chinese dominated value chains; Emerging ASEAN also has its own interest in diversifying away from China given the high economic dependence of the region on China. (pp. 22-24) 
  2. Of the Emerging ASEAN countries highlighted in this analysis, Malaysia is the best performer in all categories in the regional comparison and has the most potential for diversification efforts by high-tech European companies in the short term; Vietnam could become the country with the greatest diversification potential, showing significant improvement in all areas in recent years and having the advantage of a cheap yet well-educated workforce, rapidly improving industrial competitiveness, and a trade agreement with the EU; Thailand shows less promise given low economic growth, income, and productivity combined with an ageing and shrinking population; Indonesia and the Philippines both offer dynamic economic growth and a large, low-cost workforce, with Indonesia offering a growing middle-class, large market, and large commodity production, yet both countries have challenging regulatory environments, high levels of legal uncertainty and corruption, and protectionist barriers. (p. 23)
  1. The EU should decouple non-trade demands from trade policy issues in its trade negotiations with Southeast Asian countries and use other instruments to support social development or climate protection; the European Commission and German government should provide stronger support to European companies in their diversification efforts; political support for the engagement of European companies in Emerging ASEAN should be expanded; the EU should adopt a more pragmatic policy towards Southeast Asian countries to avoid being left behind in favor of other potential trading partners. (pp. 24-25) 

How to apply the insights

  • This section provides a practical overview of the pros and cons of diversifying to each Emerging ASEAN country, as well as very pragmatic steps the EU and German government can take to enhance engagement with Emerging ASEAN now before more opportunities are lost.
  • This section is an important read for European companies and policymakers considering how to implement "de-risking" strategies.

Conclusion

The report provides a concise and informative analysis for companies considering diversifying production and sales away from China and towards specific ASEAN markets. It is a must read for anyone evaluating how to de-risk away from China.

Download report

Complementary reports and analysis

Hinrich Foundation

External Resources

© The Hinrich Foundation. See our website Terms and conditions for our copyright and reprint policy. All statements of fact and the views, conclusions and recommendations expressed in this publication are the sole responsibility of the author(s).

BACK TO TOP