Manufacturing investment in the Association of South-East Asian Nations (Asean) is booming. Asean has become a key target region for multinationals and vitally important in an era of global power competition. The 10-country bloc of more than 660 million people has benefited from the China+1 strategies that accelerated in the wake of the Covid-19 pandemic, where businesses diversified their supply chains into one or more Asean countries to avoid being too focused on China. 

More than $124bn was pledged to greenfield foreign direct investment (FDI) manufacturing projects in Asean in 2022 and 2023, according to fDi Markets, as countries in the region turned the page on pandemic restrictions and became natural destinations for projects that in the past would have likely located within China. While the region had a combined GDP of $3.3tn in 2021, there is an uneven spread of foreign investment across the diverse 10 member countries to the Asean bloc.  

The five largest Asean economies — Indonesia, Thailand, Singapore, Vietnam and Malaysia — accounted for 96.5% of manufacturing FDI pledged to the region in 2022 and 2023. The Philippines attracted $2.6bn in those two years, while the four other Asean members — Cambodia, Laos, Myanmar and Brunei — made up the remainder.

“Asean is very differentiated,” says John Evans, Bangkok-based managing director of Tractus Asia, an advisory firm. Alongside “lower economic tier countries” like Myanmar, Laos and Cambodia, the main competition for investment in Asean outside Singapore is from Malaysia, Thailand and Vietnam, according to Mr Evans. 

The Philippines has been more restrictive to foreign investment, such as limiting foreign ownership to 40% in sectors like telecommunications until April 2023. “While [the Philippines] attracts a little bit of investment, most projects or industries aren’t considering it seriously,” says Mr Evans.

Overtaking China?

The Asean region has recently overtaken China as the destination of choice for manufacturing investment for investors from OECD countries. More than $55bn was pledged by OECD-headquartered companies to build factories in Asean in 2022 and 2023, more than double the $21bn announced in China, according to fDi Markets. This is in stark contrast to 2018, when China attracted $56.8bn of manufacturing, more than twice the amount pledged to Asean.

The build-out of supply chains in Asean was initially driven by companies trying to get around the US tariffs on goods produced in China introduced by former US president Donald Trump and aimed at reducing the US trade deficit with China. This trend was accelerated by the Covid-19 pandemic, when draconian pandemic-related restrictions made it hard for multinationals to operate their Chinese facilities as normal.  

“During Covid, supply chains that were overly reliant on manufacturing in China were completely left in the lurch,” says Andrew Keable, Malaysia-based managing partner of KW Group, an advisory firm. “Over the past five years, Asean has stood on its own as an alternative to China.” 

Chinese FDI permeates

It is not only Western multinationals that have ramped up their Asean investment. A third of the region’s manufacturing FDI in 2023 came from China itself, up from 18.5% before the pandemic in 2019. In fact, Chinese investment was more than treble that from other major source markets like the US, South Korea and Japan, according to fDi Markets.

This comes as little surprise, given that China that has strong diplomatic ties with Asean governments. Much of the diaspora from the Chinese mainland live in Asean countries too. These investments are an effort for “China to create a huge backyard”, says Alicia Garcia-Herrero, Hong Kong-based chief economist of French investment bank Natixis.

Multinationals from China have announced Asean mega projects in several strategic industries. In Vietnam, Chinese companies like lens maker Sunny Optical Technology and electronics specialist Goertek have built out factories. 

Malaysia has drawn in significant semiconductor investment from western firms as well as Chinese companies like Shenzhen HFC. Thailand has attracted Chinese electric vehicle (EV) makers SAIC and BYD. Indonesia has been one of the main beneficiaries of greater Chinese investment, particularly into metals like aluminium and nickel and the broader EV supply chain. 

FDI trends in Asean are in part driven by government interests at a time of heightened geopolitical tensions and trade restrictions in strategic sectors like EVs, semiconductors and critical minerals.

“These FDI trends are largely politically driven,” says Heather Taylor-Strauss, an economist and FDI lead at UN’s Economic and Social Commission for Asia and the Pacific. “There is keen interest from many countries to get more involved with Asean in trade and investment.” 

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This article first appeared in the April/May 2024 print edition of fDi Intelligence.