With the ASEAN Economic Community (AEC) due to be established in just over a year, firms should be gearing up for the opportunities that are expected to come along with a single market and production base that touts a free flow of goods, services, investment, capital and skilled labour among ASEAN member nations.
However, a survey by the Institute of Southeast Asian Studies found a sizeable number of firms (55 percent out of the 380 surveyed) across the region who were unaware of the AEC. Singapore companies topped the list with 86 percent who were oblivious to the regional bloc. Meanwhile, a similar survey carried out by the Thai Commercial Bank’s Economic Intelligence Centre found that almost 60 percent of Thai small and medium enterprises (SMEs) were unclear about the AEC.
Nonetheless, of those who knew about the integration, 57 percent were positive about the prospects while more than 85 percent expressed confidence in adjusting their business for the integration. SMEs in the agriculture sector were particularly optimistic about the integration, with 53 percent believing that it could help their products enter the ASEAN market. But for the others, benefits may be less unclear.
The AEC Explained
In 2003, the 10-member nations of ASEAN (i.e. Singapore, Brunei, Indonesia, Malaysia, Thailand, the Philippines, Cambodia, Lao PDR, Myanmar and Vietnam) came together and agreed to establish a single regional market by the end of 2015.
“Under this, there will be free flow of trade in good and services, free flow of investment, skilled labour and freer flow of capital,” said Sunny Koh, MD of Chinatown Food Corp, who also sits on the board of the ASEAN Food and Beverage Alliance (AFBA) as a chairman representing the F&B committee of the Singapore Manufacturing Federation (SMF).
Possessing a nominal GDP of US$5.6 trillion according to International Monetary Fund estimates, Southeast Asia definitely has the ability to exert a significant influence on the global economy. According to a report by Mckinsey titled Understanding ASEAN: Seven things you need to know, the region’s combined GDP of US$2.4 trillion in 2013 made it the seventh-largest economy in the world, and is expected to be the fourth largest by 2050.
It also has the world’s third largest labour force, while 60 percent of total growth since 1990 has been due to productivity gains; both factors are highly beneficial towards GDP growth. Together, five ASEAN members—Indonesia, Malaysia, Singapore, Thailand and the Philippines—also pulled in more foreign direct investments (FDI) than China in 2003.
"The ideal outcome will be a functioning AEC characterised by a single market and production base that is competitive and fully integrated into the global economy with benefits more evenly distributed among the ten members," said Mr Koh.
This will create cross border synergies and facilitate economies of scales and greater efficiencies, allowing local companies and foreign investors alike to tap on the expertise of various countries within one supply chain. In a show of confidence, many investors have entered the region with merger and acquisitions spiking over the past years and eventually peaking in 2014.
This has been, for a large part, spurred by the extent of preparations made by ASEAN nations, where together, the region has already achieved 80 percent of what it set out to do under the AEC Blueprint 2008-2015.
The various countries have also been setting up national committees, which also serve to create awareness and showcase the benefits of regional integration to SMES. To bring preparations up one more level, Mr Koh believes that “the private sector should be fully engaged by the ASEAN governments to ensure the effective implementation of the AEC; such a partnership will also serve as a feedback channel on the operations of the AEC.”
Also believing that the reverse is true, the Philippine Franchisers Association (PFA) is appealing to its government to help strengthen its SMEs in the franchising industry. Bracing themselves for the influx of foreign brands once integration takes place, the PFA wants to aid homegrown brands in being globally competitive lest they get left out.
In particular, they are seeking support in the areas of access to markets, training for branding and efficiency, as well as access to financing. Sharing similar sentiments, Thai SMEs have requested for a fund to help them explore opportunities in other countries.
According to Mr Koh, ASEAN is now looking at the remaining 20 percent of commitments under the blueprint and has worked out a prioritisation for the implementation of these measures, but some challenges remain in the face of full integration. This includes removing non-tariff barriers and facilitating a more harmonised customs regime, standards harmonisation and regulatory convergence.
“ASEAN harmonisation will have a positive effect on the flow of trade in food products providing more products and choices to the consumers at competitive prices,” he said, adding that “A more harmonised environment where international and science based standards will be increasingly used will help to ensure nutritious and safe food.”
In the name of upholding health and environment protection, food and beverage manufacturers have to adhere to additional regulations and standards from local governments before being allowed to enter local markets, be it through imports or setting up a facility. As it is, fulfilling different requirements for various markets is already a resource-intensive affair that tires out even the largest MNCs. This is exacerbated for SMEs, who often have limited resources. For instance, the excessive amount of paperwork required for customs clearance might prevent foreign SMEs in setting up shop.
As SMEs make up the bulk of the F&B industry, it is important that non-tariff barriers such as protectionist policies and regulations are removed so that small firms can compete fairly with large MNCs in an open and free market. Domestic laws and regulations should be tweaked to be in compliance with ASEAN agreements.
According to a white paper published by the AFBA, agri-food is one of the priority sectors that many ASEAN members rely heavily on for economic growth, an area that 38 percent of ASEAN’s 620 million population is involved in. The sector also faces the challenge of meeting changing consumer demand brought on by growing populations and greater disposable incomes, which it can better fufil when harmonisation is underway.
In general, regional cooperation can be enhanced by harmonising production systems through globally recognised practices such as hazard analysis and critical control points (HACCP), good manufacturing practices (GMP) and ISO 22000. Harmonisation would also help to diffuse confusion.
“In terms of specific areas, the industry will like to see ASEAN addressing some of the priority areas for us such as nutrition labelling, pre-market product registration, and import/export certification,” said Mr Koh. Harmonisation in this areas would ensure that manufacturers do not have to tweak packaging details or redevelop products while entering different markets in the region, which help to save costs and boost time to market.
“The concept of AEC is not just about ASEAN, but ASEAN and its partners. ASEAN is building an open and globally connected community,” said Mr Koh. At the core of it, trade integration will be the main beneficiary of the AEC.
Establishing the AEC is not an end-goal by itself, but a means to greater things. According to him, trade between ASEAN and its partners is increasing, as seen with China, Japan, South Korea, the EU and the US, and will continue to do so.
In particular, the inception of the Regional Comprehensive Economic Partnership (RCEP) comprises a free trade arrangement within Asia Pacific (ASEAN nations in addition to China, India, Japan, South Korea, Australia and New Zealand), making it one of the largest economic spaces to operate in and benefit from.
While it seems as though the focus has largely been placed on extra-ASEAN trade, intra-ASEAN trade is also growing at a steady pace. Despite accounting for only 25 percent of total trade in 2011 according to ASEAN Statistics, intra-ASEAN activity is an important driver of economic growth that helps to cushion Southeast Asian nations from the repercussions of global financial crises.
With the AEC looming closer, not only will external trade flourish, but intra-ASEAN trade will also take a greater precedence as the region undergoes integration and rallies together to expand production, enjoy economies of scale, and more importantly, to collaborate with partners across borders for a seamless and efficient supply chain.
For more information on AEC, head over to www.apfoodonline.com/knowledgeseries.