Remember when everything was “Made in China”? Those days have been gone for awhile. The chart below shows that FDI into the ASEAN-5 is set to surpass FDI into China. This is not surprising because trends have alluded to money flowing into ASEAN and out of China for the past few years. Foreign firms have been moving across the border to places such as Vietnam, Thailand and Malaysia.
This shift is primarily driven by lower wages and more favourable demographics in ASEAN, as compared to China where wages have increased and the population is swiftly ageing. Thank you One Child Policy! But hey, give China a break... it's getting wealthier and becoming an increasingly important foreign investor in the process. A breathtaking amount of Chinese money is being invested in ASEAN as a result. It is emerging as the third pillar of growth in Asia, after China and India.
The shift to ASEAN is further enhanced by the China-ASEAN Free Trade Agreement, which kicked in just over four years ago. This has arguably cannibalised Chinese manufacturing in favour of ASEAN. It has reduced tariffs to practically zero on 90% of all goods traded between ASEAN nations and China. Indonesia, Malaysia, Philippines and Thailand now provide cheaper labour and production. Together with rapidly improving infrastructure in ASEAN, this means that manufacturing no longer needs to be based in China to serve the Chinese market.
What this means for the ASEAN startup ecosystem
If you’re looking to invest in Asia, China’s increasingly overpriced. In July 2015, the Chinese Securities Regulatory Commission went so far as to place a freeze on tech IPOs. On the contrary, ASEAN is experiencing explosive growth in investment and development at much lower valuations.
Over the last half decade, there has been over US$1.7 billion invested into startups in the region. The ASEAN startup ecosystem is on the cusp of a meteoric rise. In terms of both deal volume and aggregate value of Series A investments, the region is following the trajectory of India in 2010 and China in 2005. With US-educated engineers returning to ASEAN to start companies and money flowing rapidly into the region, it's exciting to see what lies ahead.
P.S. Whilst digging into the data, I discovered a hilarious piece of trivia. In 2012, the 4th largest FDI source into Singapore was: drumroll.................... the British Virgin Islands.