Business Outlook in ASEAN Countries and China. Opportunities and Challenges for Foreign Investors

By:

- Dr. Roland Amoussou-Guenou, Director, Vovan and Associes Bangkok, email: [email protected] and

- Aleksandra Agapitova, Development Director, Investeast Thailand, email:

[email protected]

The implementation of the ASEAN Economic Community will come into effect in 2015. This important and promising new economic bloc in Asia is just around the corner. It will mark as major shift of the global activities to Asia in general and ASEAN in particular. Giving the significant impact of this regional integration, the monitoring of the business community is warranted.

The purpose of the present article is to expand the discussion initiated by the FTCC and JCCT with a business outlook of ASEAN countries and China, due to the important interactions of these two economies[3] especially through the China-ASEAN Free Trade Area[4].

The Forecasts and Trends for Southeast Asia, from World Organizations

OECD

According to an OECD projection[5], as a whole, Asian economies are expected to grow by 6.9% per annum in 2014-18.

It is a relatively robust pace, albeit less than the 8.6% registered before the last global financial crisis. This slower rate of growth largely reflects the moderate rates of expansion in China and India.

In the Southeast Asian region, it is projected that growth will remain comparable to the pre-global financial crisis. The real GDP growth rate in the Southeast Asian region is anticipated to average 5.4% per annum between 2014-18, against 5.5% in 2000-07.

WORLD BANK

Form the World Bank’s perspective, despite trimming its 2014 growth forecast, there are reasons to be optimistic. Indeed, the Bank indicates that the region's economies were likely to see steady growth in the next couple of years, helped by a pick-up in global growth and trade.

The World Bank expects the East Asia and Pacific (EAP) region to grow 7.1 percent in 2014 and 2015, down from the 7.2 percent rate it had previously forecast for both years.

Growth in 2016 is also seen at 7.1 percent, staying slightly below the 2013 growth rate of 7.2 percent, according to the latest East Asia and Pacific Economic Update report[6].

INTERNATIONAL CHAMBER OF COMMERCE (ICC)

The ICC/Ifo World Economic Survey polls over 1,100 economic experts, from business and academic institutions, in over 115 countries, to assess current and expected economic developments in their respective regions. It is produced every three months.

The poll of the second quarter of 2014 for Asia indicates that the economic climate has fallen back below its long-time average (1998-2013). The appraisals were downgraded slightly, but the economic outlook for the next six months is far less positive than in the first quarter. According to the ICC, a lack of skilled labour and of confidence on government’s economic policy were cited as the region most important economic problems. Nevertheless, compared with other parts of the world, the stronger growth rates are expected in Asia in general.

Forecasts and Trends for China

Over the last 32 years, Chinese economy has been growing faster than the rest of the world. In 2012, Chinese economy was almost half of US but 4.5 times that of India. Among the BRICS nations[7], Chinese economy has been growing faster than the other members.

While the GDP of US in 2012 was a little over 16 trillion dollars, that of China was a little over 8 trillion dollars. In 2013, the share of Agriculture in Chinese GDP was around 10% with secondary and tertiary industries contributing around 45% each. China continued to hold on number one position in international trade in 2013. It is also ahead of the World average in terms of urbanization rate.

Expenditure on R&D and innovation has been continuously going up since 1990. The challenges facing the Chinese economy include – real estate bubble in China becoming serious; consumption growth in the country going down; and increasing urbanization rate of resident population.

Relevant Sectors of Activities to Consider in the ASEAN

The ASEAN region has been the largest recipient of FDI, relative to gross domestic product (GDP) in Asia Pacific. Singapore accounts for more than half of total FDI to the whole region (52 percent). Thailand ranks the second with 13 percent share, followed by Indonesia with 11 percent, Malaysia 10 percent, Vietnam 8 percent and the Philippines 3 percent.

The European Union, Japan and the Unites States continue to be among the leaders in providing sources of FDI to ASEAN. In particular the European Union contributes to 25 percent share to the total FDI sources, followed by Japan with 13 percent and the United States with 11 percent. It is worth noting that the intra-ASEAN FDI is growing rapidly[8] and FDI in ASEAN has surpassed FDI in China since 2007[9]. Nonetheless the Chinese FDI in ASEAN is also expected to grow very significantly in the coming years[10].

The spheres of activities which are of interest include tourism, business services, manufacturing, construction and energy. Although these are completely different spheres of business, they have in common the obligation to pay for office or industrial buildings, utilities, staff salaries and taxes.

Therefore it is important to look at the criteria for selection.

Criteria for Selection

Selecting the location that offers the best advantages in the ASEAN, depending on the type of business will always be a good business decision. For example, the manufacturing industry has been favoring Thailand, while the garment industry prefers Vietnam and Cambodia and the financial and service industry has a liking for Singapore.

Besides the appropriate location other key business indicators can also make a difference. These indicators are updated in the World Bank’s annual “Doing Business” report[11] which covers the following topics:

- Starting a business

- Dealing with construction permits

- Getting electricity

- Registering property

- Getting credit

- Protecting investors

- Paying taxes

- Trading across borders

- Enforcing contracts

- Resolving insolvency

In this article we will only focus on some key issues for foreign investors in ASEAN which are taxation, minimum wage, cost of renting premises and the investment climate.

Taxation

This is an important criterion to take into consideration to choose the best location for investment or business in the ASEAN. Because of the limited format of this article we will not to get into the details of the tax system.

Corporate income tax

- Brunei: 20%

- China: 25%

- Cambodia: 20%

- Indonesia: 25%

- Laos PDR: 24%

- Malaysia: 25%

- Myanmar: 25%

- Philippines: 30%

- Singapore: 17% to 19%

- Thailand: 15% to 20% (depending on the situation)

- Vietnam: 25%

Value-added tax

- Brunei: 20%

- China: 17%

- Cambodia: 10%

- Indonesia: 10%

- Laos PDR: 5%

- Malaysia: 6%

- Myanmar: 5 to 30%

- Philippines: 12% or 7% or 0% (in some cases, foreign investors are zero-rated)

- Singapore: 7%

- Thailand: 7%

- Vietnam: 10%

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Minimum wage (maximum rate for the capital and the central regions)

The minimum wage can make a significant difference for the final cost of an investment.

- Brunei: N/A

- China: 1,600Yuan (260 dollars per month)

- Cambodia: 336 000 riel ($ 80) per month.

- Indonesia: 2,200,000 rupiah ($189) per month

- Laos PDR: 626,000 Lao kip ($79) per month

- Malaysia: 900 RM ($280) per month

- Myanmar: 2,000 kyat (2.1 USD) per day.

- Philippines: 466 Pesos ($10.68) per day

- Singapore: N/A

- Thailand: 300 baht ($ 10) per day for Thai nationals. For foreigners, depending on the nationality of the minimum wage is between 35 000 to 50 000 THB per month.

- Vietnam: 2 350 000 VND (113 USD) per month

The Average Cost for Renting Business Premises (in the capital)

The ASEAN offers a very contrasting landscape regarding the rental cost of business premises.

- Brunei: $20 per square meter

- China (Beijing): 163 USD per 1 square meter

- Cambodia: $ 20 per 1 square meter

- Indonesia: $22.52 per square meter

- Laos PDR: $15 per square meter

- Malaysia: $21.34 - $33.79 per square meter

- Myanmar (Yangon): USD 78 per 1 square meter

- Philippines: $13.73 – $20.59 per square meter

- Singapore: USD 88 per 1 square meter

- Thailand (Bangkok): USD 28 per 1 square meter per month

- Vietnam (Hanoi): USD 42 per 1 square meter

The Investment Climate.

Each of the ASEAN countries has a strategy to attract foreign investment by improving the country's doing business climate and making investment conditions attractive. A variety of incentives, concessions and privileges are offered.

- Brunei:

Tax incentives are generously offered to foreign investors with the production of foreign goods and services benefiting from indefinite tax breaks. There can be 100% foreign ownership except for sectors involving natural resources and national food security where the FDI is capped at 70% equity.

- China:

Preferential income tax rate of 15%, exemption from payment of the tax for up to 2 years, a reduction of the tax base by an additional 50% of the cost of research.

- Cambodia:

This country offer tax exemption from payment of income tax for up to 9 years. Also there is exemption from payment of import duties on raw materials and equipment, special depreciation rate of 40% for equipment used for production purposes.

- Indonesia:

The government provides a tax incentive program for projects conducted in national high-priority sectors which encompass 128 different fields. Businesses may only apply for one tax incentive: either the tax holiday or the tax incentive program.

- Laos PDR:

Laos allows 100% foreign ownership of investments as a way to promote foreign direct investments to boost the development of the economic growth. It provides incentives for foreign investments depending on the sectors and zones of investment promotion.

- Malaysia:

Malaysia reaches out to targeted industries and negotiates incentive packages to attract foreign direct investments. They provide a number of incentives especially in export-oriented high-tech industries and “back office” service operations. However, some sectors maintains restrictions and limits on investments.