Since the Asian Free Trade Agreement (AFTA) fostered intra-Asean trade in 1992, from 2007 onwards, figures showed little improvement in trade.
While many blame the global financial and economic crisis for this, investment flows had always been trending upwards before the crisis.
The Asean Economic Community (AEC) serves as a platform and a catalyst to further heighten growth especially among member nations of the Asean region.
As an overview, Asean’s economic assets in 2012 included 617 million people, US$2.3 trillion in gross domestic product (GDP), US$2.4 trillion in total trade, as well as US$110 billion in foreign direct investment (FDI) inflows.
Malaysia’s International Trade and Industry Minister Datuk Seri Mustapa Mohamed said in a media report that we are pushing toward 90 per cent completion by the end of 2015 – and that is already a tall order.
“We don’t think we can hit 100 per cent; no country would be able to.”
Nevertheless, he added that “We are keen to see progress in non-tariff barriers, promote the small and medium enterprise (SME) agenda and make sure there are more impactful youth programmes to encourage them to associate themselves as Asean.”
Deputy Prime Minister Tan Sri Muhyiddin Yassin also noted the country’s determination to transform our economy and ensure that Malaysia remains a good place to do business.
And proof of this is in the improvement in our rankings in reports by various international institutions.
“Based on the WEF’s World Competitiveness Yearbook 2014, Malaysia, among 60 countries, is ranked 12th position, an improvement from 15th last year,” he said, adding that the World Bank has also recognised the nation’s efforts, ranking it 6th on the ease of doing business, compared to 12th place last year, among 189 countries.
CIMB Asean Research Institute (CARI) has come out with studies with its research partners for the Asean Business Club, which they call the Lift The Barriers (LTB) reports.
These sectoral studies are essentially a gap analysis of policy pronouncement and actual business experience.
Tan Sri Dr Munir Majid, chairman of CARI said, “As chairman of Asean-Business Advisory Council (Asean-BAC), Malaysia, which takes the chair of Asean-BAC region-wide first thing this year, has a formal responsibility to make private sector submissions to officials, economic ministers and Asean leaders.
“The process of consultation for effective representation has to be more vigorous. At the same time, there are also various concerns which may not always get sufficient attention with Asean-BAC champions: we have working groups on SMEs (small and medium enterprises), on women entrepreneurs and on young entrepreneurs.”
He also highlighted the importance of the private sector in assisting in the AEC by noting, “In undertaking all of them, I hope the work and experience of the private sector will be taken into account before any final report or position is taken.”
Reality check
“There has to be a reality check beyond official input. It is important that the AEC process moves forward with involvement and enthusiasm of all sections of society, including the private sector. The distance between the official level and the people at the bottom has to be narrowed if the process of community building is to become real.”
Despite all the backing from the government, there are still skeptics, which is understandable as it took nearly 50 years for Europeans to put together the European Community during the European integration process.
The Asean way of not interfering with domestic political affairs may cause the non-recognition of joint economic interest.
Some critics have noted that several AEC implementation deadlines have passed and several key initiatives have yet to begin.
For instance, due to financial shortcomings, corruption, poor governance and the inability for governments to manage interdepartmental and international coordination – just 50 per cent of the Master Plan on Asean Connectivity has been put into action.
The largest concern, however, is Asean’s lack of structure to pull the AEC along.
RHB Research Institute Sdn Bhd (RHB Research) also noted that there are many other potential hurdles that stand in the way for AEC to be fully effective highlighting particularly when it comes to the new phase of trade namely, e-commerce.
Internet penetration
The research house highlighted that among the bottle necks that AEC would face is internet penetration whereby with the exception of Singapore, Asean still falls behind developed markets significantly in this aspect.
According to Euromonitor, internet penetration rate is estimated at 31 per cent implying almost 200 million internet users. Higher internet penetration rates as well as faster speed of connections facilitate a larger online population which in turn drives e-commerce activity.
“Even though internet penetration in Asean countries is growing every year, overall it is still lagging behind China’s which has a 49 per cent Internet penetration rate and is growing rapidly,” it said.
Related to this, smartphone penetration also proves to be a hurdle as the proliferation of smartphones and their growing capability has an impact on commerce.
Based on AC Nielsen’s latest global survey, computers are still the favored device for buying online but smartphones are the second ahead of tablets and they are growing quickly in popularity due to its convenience.
This is especially the trend in Asia-Pacific and in developing markets, mobile is often the first device consumers use to access the Internet.
Despite this, smartphone penetration in Asean remains low compared to China and RHB Research expect smartphone penetration in Asean to increase as prices become increasingly more attractive with new entrants like China’s Xiaomi.
Credit Card
After the global economic crisis, there is still lingering distrust for credit cards especially in developing markets. In more mature markets, credit cards and other related payment systems that require credit cards are the primary form of payment for online retailing.
RHB Research opines that the low credit card penetration in Asean is a factor for less online purchases. For example, credit card per person is just 0.6 in Indonesia compared to the 7.7 in Singapore. Transaction value is also low compared to more mature markets.
“We believe that one of the biggest impediments to retail in Asean is the lack of scale for players to operate profitably,” noted the research house adding that based on anecdotal evidence, online retailing is more prevalent for products targeted towards mid-higher end consumers.
“As a real, the real addressable population for online retailing is much lower than the total population of approximately 600 million at the moment, though it is unlikely to get bigger due to robust income growth in the region,” said RHB Research.
E-Commerce
Notwithstanding all the aforementioned factors, Asean’s e-commerce is on the verge of taking off, though this will likely follow different trajectory in each country owing to the different environments, infrastructure and demographics.
Singapore would no doubt be leading the charge, as it is the most mature market in Asean.
It is also home to a large number of e-commerce start-ups while also boasting strong logistics infrastructure due to it being South-East Asia’s business hub as well as prevalent Internet penetration.
Singapore is the most mature and one of the biggest online retail markets in Asean but online retail as percentage of total retail sales is still estimated at three per cent mainly due to the ‘shopping culture’ of Singapore.
One of the key benefits of online shopping is the convenience, which does not apply to Singapore due to the multitude of retail outlets.
Looking back at Malaysia, according to Asia Briefing, Malaysia is estimated to be one of the two largest e-commerce markets in Asean currently along with Singapore.
It also estimates that these two countries account for about half of total online sales in Asean.
With a young, growing population, and a relatively good internet penetration level, Malaysia is seen as a growth market for e-commerce.
“E-commerce activities have been driven up largely by the middle class, with online travel in particular seeing a boom. Compared with Singapore, Malaysia has a more stringent import tax regulations which may increase costs substantially,” it said.
Thailand
Looking at other major players in Asean Thailand, relative to its income levels, the country’s internet penetration is lagging behind other Asean countries with 31 per cent are lower than the Philippines and Vietnam with lower GDP per capita.
It is also a long distance from Malaysia that has a penetration rate of 69 per cent. Even on the mobile front, 3G services was only officially launched in 2013, one of the latest countries in the world.
“Other than the poor Internet infrastructure, we believe one of the key challenges for e-commerce businesses would be the prevalence of the ‘shopping mall visiting; culture,” said RHB Research.
Indonesia
Indonesia is another high growth market for e-commerce with Euromonitor estimating that sales have grown to US$1.1 billion in 2014 from US$151 million in 2009.
It is believed that most of the e-commerce activities are centered on the capital city of Jakarta, which has a population of 10 million people. The city also enjoys a relatively better infrastructure compared with other parts of the country and a higher per capita income.
Indonesia’s nationwide Internet penetration rate of just 17 per cent as well as smartphone penetration of 14 per cent is considered low but are thought to grow quickly. According to studies, majority of online shopping traffic is during ‘office hours’ with slow Internet connection making such access difficult at home.
The low penetration of credit cards is a major issue, with the shortage of payment services restricting e-commerce sales.
The Philippines
The Philippines, one of the biggest users of social media worldwide, has an Internet penetration rate of 41 per cent, which is relatively high in Asean.
The Philippines has the second largest internet users in Asean with 44 million active users. The strong English fluency and cultural affinity to the US make Philippines unique amongst the Asean markets.
Foreign businesses also are able to spend less time and effort in adapting their websites to the local market and as a result, making the Philippines a hotbed for online retailing.
The country already spends a considerable time online, being one of the biggest users of social media worldwide. For example, its Facebook penetration is the second highest behind Brazil.
“Delivery logistics are also in place, with the presence of foreign companies such as FedEx and DHL. We believe the key bottleneck is payment systems, with a low credit card penetration. However, many online businesses are now offering payment on delivery to sidestep this problem,” said RHB Research.
Vietnam
Vietnam has an estimated online population of 39 million users, the third highest number in Asean despite the relatively low-income levels in the country. Its Internet penetration rate of 47 per cent is one of the highest in Asean.
While the lack of credit card penetration has hindered online retailing, companies have worked around this by offering cash on delivery and bank transfers with online retailing sales mainly dominated by local e-commerce companies.
In terms of demographics, Vietnam has a relatively young population, with a median age of 30. The country is also the largest online games market in Asean, with more than 13 million video game players and is growing rapidly.
On-line Retailing
With the lack of modern retailing option, the online retailing sector could take off with its more superior range of options with one of the country’s largest real estate companies, Vingroup, is also starting a massive e-commerce operation.
Looking at it from a broader view, based on Nielsen’s global survey done in August 2014, consumers are more likely to browse and purchase non-consumable products online, especially in categories such as clothing, accessories and shoes.
Electronic equipment ranks high on browsing intent, though low on actual purchase intent thus making traditional SMEs most at risk.
With the exception of Singapore, the population below the age of 35 forms the majority of Internet users in Asean. In particular, the 15-24 age category accounts for the largest percentage of users.
Furthermore, research from comScore also shows that users under the age of 35 are more likely to be heavier users, and substantially so in Vietnam, Thailand and Singapore.
Analysts also believe that with the advent of online retailing as well as the increased trade connectivity from the AEC, traditional brick and mortar businesses such as departmental stores and small SMEs are at risk from disintermediation as they are likely to face competition from brand principals, which may now be able to directly sell to consumers through online channels.
The inter-connectivity also allows online businesses to be more competitive as they do not have to pay rental overheads enabling them to lower costs.
Despite most businesses in the region have already started their e-commerce platform, it is understood that the traction has not been very strong as many of these platforms are still elementary at this moment with limited range of products and a lack of delivery options.
Inventories are also often separately accounted for and not an integrated operation with their traditional counterparts.
Understandably, most companies have not been actively marketing their e-commerce platform as management may view it as a form of sales cannibalization. Furthermore, e-commerce still accounts for just a small percentage of the overall market sales.
The concern is that when e-commerce hits an inflection point, traditional brick and mortar players may find themselves playing catch up against dedicated e-commerce operators who would have built up stronger expertise, experience, invaluable users data and a loyal consumer base that may be hard to pry away.
Community Caucus
Asean community-building, has not continued with developing its essence but with piling up its content.
In essential definition, Asean is at most an association, not a community, even with all the content being piled up, and even if all that is piled up fulfills the 2009-15 blueprints.
The capacity of progress is against an action plan. But, even this way, there is a lack in progress. What member states say they have done – and therefore gets a tick in progress measurement – is not always what is experienced on the ground.
In reality, there are non-tariff measures (NTMs) in place where tariffs have been reduced, there have been no enabling measures to secure domestic accord with Asean commitment and there have even been disablement measures which reverse what had been agreed to at the Asean level.
This tug and pull is not unexpected or unheard of in the society of nation-states. But when a group of them is embarked on a planned convergence of intention, it would not help if, even before the magic point of community announcement, there is already backsliding and a flight from reality.
The stock-take Malaysia undertakes must therefore be vigorous and not take another kind of flight – a flight of fancy. And when it comes to the NTMs and other measures, it must also be grounded in hard fact and reality to reach the point of name and shame.
Dynamics of AEC
Munir said, “Now to the businesses and numerous concerns on their future with the onset of the AEC. There is a paradox here given what we have observed about the gaps in its fulfillment.
“Surely there must be demonstrable progress towards the AEC if there is fear of its full arrival. Actually, this is so. We just have to observe what has been taking place, for example companies setting up operations in one or other Asean countries and sourcing parts in the supply chain from others – thus setting up an Asean production base and taking advantage of the removal of intra-Asean tariffs.
“SMEs have to up their game and become more competitive while also trying to take advantage of that potential. They are not helpless but some want help. But they must be ready to help themselves even when they get help. In regard to the often-mentioned access to finance, while this could in some ways be addressed, important point is how the SMEs use available finance to become more competitive.”
He added that, “They are the backbone of the Asean economy on various measures but their productivity is generally low. Restructuring of economies and movement up the value chain are constant facts of economic and business life.
“Asean also needs to think more strategically post-2015. It has up to now not sufficiently taken into account the shifting geo-political and geo-economic regional environment, and keeps harping on about Asean centrality.
“This is dangerous wishful thinking. There are serious issues about the changing balance of power, which Asean must address to remain a credible actor, which, it often asserts, is possible because the Asean whole is greater than its parts. But, before Asean can even act together, it has to think together.”
Even in respect of economic regional groupings, there needs to be a reflection of where the AEC falls in between the larger TPP states and the far larger FTAAP (Free Trade Area of the Asia Pacific).
Question now remains; does Asean negotiate as the AEC or hang separately? Another question is that how are Asean’s obligations incorporated or absorbed in wider regional arrangements?
On top of all this, in the post-2015 AEC world, it should be remembered there are other ways and concerns in building a community for the future than strict adherence to blueprint action plans. Specific projects should be pursued, even on a bilateral basis, whose success would have a demonstration effect, which would inculcate and expand the habit of cooperation.
For Malaysians, AEC also means employment opportunities, especially for engineers, technicians, financial analysts, accounts and in other specialised skills, as Asean companies expand into Malaysia and vice-versa.
About 27 per cent of Malaysia’s global trade of RM374.7 billion in 2013 was with Asean while foreign direct investment inflows from Asean into Malaysia amounted to US$6.2 billion.
These figures cannot be ignored for they prove that Malaysia’s economic fortunes via Asean is inextricably linked which means it should be pursued with greater vigour for Malaysians to maximise and reap its benefits.
As such, the perception that regional firms would come and rob Malaysians of their business, investments, employment opportunities and take away our privileges do not hold water as an expanded economy rakes in greater benefits.
Such a debate also rages on in other Asean countries but “this is the nature of global trade” as aptly pointed out by International Trade and Industry Minister Datuk Seri Mustapa Mohamed.
Concerns that there would be free movement of labour is also a misconception as under the AEC, the agreement is for freer movement of skilled workforce.
Given Asean’s wide agenda, it would be prudent for leaders meeting for the summit in April in Kuala Lumpur to decide that the secretariat be empowered as its staff strength is only 300 now compared to the EU’s 300,000.
Malaysia’s hosting of the Asean ministerial meetings and summits is both timely and crucial for it will set the stage for what could potentially be the emergence of a single market and a regional economic superpower via the AEC.
Despite the AEC not yet in place, the impact is already there.
Seamless Travelling
AirAsia recently introduced the AirAsia Asean Pass and the AirAsia Asean Pass+ in an effort to boost travel by making traveling within the region a seamless experience.
AirAsia co-founders Tan Sri Tony Fernandes and Datuk Kamarudin Meranun announced the development of this product during the Asean Business Advisory Council Malaysia Conference held in Kuala Lumpur in November last year.
Fernandes said, “As a truly Asean airline, we are extremely proud to introduce the AirAsia Asean Pass, which is a product specifically designed to further liberalise and encourage travel among the Asean community.
“The pass allows us to bridge communities and attract more foreign tourists to the region. It’s the perfect instrument to promote Asean integration.”
Development Assistance
Japan pledged to disburse official development assistance (ODA) grants of two trillion yen to Asean countries over five years at the Japan-Asean Commemorative Summit 2013 mainly for enhancing connectivity and narrowing the development gap towards Asean integration this year.
ODA is broadly divided into bilateral aid in which assistance is given directly to developing countries and multilateral aid, which is provided through international organisations.
“This is what we intend to do now and in the near future. Assisting Asean member countries is one of our top priorities. Japan, by far, is top in disbursing assistance to Asean although funds are now limited,” said Ritsuko Suzuki, assistant director, First Country Assistance Planning Division, International Corporation Bureau of the Ministry of Foreign Affairs, Japan.
She said some member countries do not really need large financial assistance from Japan given their respective Gross Domestic Product (GDP) per capita income.
“For instance, Malaysia and Thailand, we are not really offering much assistance in terms of yen loan or grants because these two countries have achieved high GDP growth,” she said.
“But for CLMV nations (Cambodia, Laos, Myanmar and Vietnam), we are placing importance to them,” she said during a briefing for Asean journalists who participated in a programme organised by the ministry in Tokyo recently.
For enhancing connectivity, Japan would introduce high-quality and resilient infrastructure by way of mobilising Japan’s expertise and technologies.
To enhance integration, Mustapa said that two AEC post 2015 studies are being undertaken.
“One study is being done by the Economic Research Institute of Asean and East Asia, while the other is done by Rajaratnam School of International Studies in Singapore and the Institute of South East Asian Studies.
“These studies are being undertaken to facilitate Asean in drawing up the post 2015 economic integration initiative. These studies will provide valuable inputs to Asean in further enhancing its position as a competitive economic region.”