Asia’s New Corridors For F&B Manufacturing
Monday, November 6th, 2017
Asia is already a manufacturing hub, but there are still a number of underutilised areas within ASEAN’s developing countries that manufacturers can take advantage of. By Michelle Cheong
The ASEAN region is thriving healthily today—GDP is forecast to increase from US$2.4 trillion in 2015 to US$5.2 trillion in 2025, according to Frost & Sullivan. Drivers of this growth are the increasing economic development and rapid urbanisation of cities in developing countries, and the growing middle classes with their rising disposable income.
Countries such as Indonesia and Vietnam will be instrumental for Asia’s growth, with the expeditious development they are seeing today. Frost & Sullivan particularly highlights Indonesia in this, projecting it to be the largest market in ASEAN by consumer expenditure in 2025, contributing to a whopping 39 percent of the region’s consumer expenditure.
With their large populations coupled with the abundance of space, Indonesia and Vietnam do indeed present interesting prospects as manufacturing hubs of the future.
SEA’s Manufacturing Hub Potentials
Indonesia boasts a huge population—currently standing at the fourth largest in the world with over 260 million—and experts foresee it will be the sixth largest economy in the world by 2030. Along with its robust agriculture and fishery sectors, Indonesia will make an ideal operating environment for the food and beverage segment.
The segment’s relevance for Indonesia is apparent, not only in its role of providing sustenance for the country’s growing population, but also for its significant contribution to the economy—food and beverage manufacturing accounted for 5.6 percent of GDP in 2015, according to the Bank Indonesia.
Recognising the importance of this industry from both a qualitative and quantitative standpoint, the government continues to prioritise food and beverage operations. In fact, they have included the food industry as one of the 10 priority industry groups designated for accelerated development in the Master Plan of National Industry Development 2015-2035.
Despite the significant amount of investment and increased production capacity already achieved over the past decade, there is room for continued expansion, particularly in serving the domestic market. The amount of imports entering the country has increased substantially over the years, driven by population growth and a rising appetite for new and higher-end foods and beverages. Although the growth rate of these imports has mostly stabilised since 2010, the opportunity to capitalise on the US$4 trillion import market by providing locally manufactured import replacement products remains.
Vietnam, the third most populous country in ASEAN, also presents opportunities for the manufacturing industry with its youthful population, among other factors. The median age of its 94.5 million inhabitants in 2016 was 30.8 years. Though this is due to increase over time, Vietnam still stands ahead in terms of being able to contribute a larger younger working force for a longer period of time—a boon for manufacturers considering relocating their facilities to the country.
The country is known for its strong agriculture sectors, especially for rice and coffee—both for which Vietnam stands among the top three in the world today. It is also large in the fishery sector, holding fourth place among the ASEAN countries for imported fish and seafood products.
To attract foreign investors to the country, the government offers attractive tax incentives and has placed an importance in providing more optimal conditions, such as channelling public investments into building roads, ports and power generation facilities to improve the basic infrastructure. They have also recently concluded negotiations for Free Trade Agreements with many important trading partners, including ASEAN, RCEP, EU and AEC.
With disposable incomes rising and performance of the economy improving, Vietnamese are allowing themselves to trade up to higher quality brands and products. Further, with time becoming more valuable as with life becomes busier, consumers are seeking more convenient options which drive the growth of convenience stores, hypermarkets, and international grocery retailers.
Moving Beyond The Crowd
Central Java: Indonesia’s New Economic Frontier
Indonesia, presenting sophisticated infrastructure and low labour cost, has drawn many international companies to set up facilities there. A majority of them have however set up base in Jakarta, the country’s most populous capital city; it is now overcrowded with little room for expansion in existing manufacturing facilities.
A lesser-known (but otherwise comparable in all aspects) alternative for manufacturing in Indonesia is Semarang, the capital city of the Central Java province. Its international airport connects the city directly to the domestic and international markets, and being relatively close to Jakarta (55mins by flight), it holds the potential to benefit from its spill over investments. It also features a population of 1.57 million people, most of them young and skilled, with a competitive labour cost vis-à-vis West Java (i.e. Jakarta) and East Java (i.e. Surabaya; another city where international companies also operate from to date).
As employee wages is a common concern to business owners when moving their operations overseas, the low minimum wage of the Java region is one attractive factor to draw businesses there. The area of Kendal in central Java features a minimum wage of Rp 1,774,867 (US$133 per month).
In townships like Park by the Bay (Kendal Industrial Park), the advantages for the investing companies are multiplied. Featuring industrial clusters like Fashion City, Food City and the Furniture Hub, the park offers international standard infrastructure such as ready-built factories, electricity, water and waste-water treatment systems, and executive housing with full-fledged amenities and well-managed worker dormitories.
It is also located along the Pantura highway that connects Jakarta to Surabaya, and is only 30-minute drive to the international Tanjung Emas Port and the international airport, which further compounds business opportunities.
Kendal Industrial Park, also known as Park by the Bay, is a 2,700-hectare integrated township in Semarang developed by Indonesia’s PT Jababeka Tbk and Singapore’s Sembcorp Development Limited. Hardly a year since the ground-breaking by Indonesia President Joko Widodo and Singapore Prime Minister Lee Hsien Loong in November 2016, there are already 32 confirmed tenants with committed investments worth US$475 million.
Urbanising The Lesser Cities
When one thinks of Vietnam, the major cities Hanoi, Danang and Ho Chi Minh come to mind. We know less of other areas—Bac Ninh, Hai Phong, Hai Duong, or Binh Duong. Still, these cities and provinces are being developed rapidly today and may soon become the future for manufacturing in Vietnam.
Zooming in, the Bac Ninh province is located in the Red River Delta of the northern part of Vietnam. Sitting close to Vietnam’s capital city Hanoi—about 30 km or a 30-minute drive via highway, and within a 40 km distance from Hanoi International Airport—the province is easily accessible for domestic and international parties. It also lies 120 km away from the Hai Phong Port, which handles 90 percent of the import/export activities going to the north. This could be attractive for companies looking to do business through sea freight, and is also a strategic springboard to China as the city is just 200 km from the Chinese border at Yunnan.
Binh Duong today is yet another attractive site for manufacturing. Situated in the nucleus of Vietnam’s dynamic southern economic zone, the Binh Duong Province is the most favoured and attractive area for many foreign investors. Lying within an hour’s drive from Ho Chi Minh City and with easy access to the international airport and major ports, the province is one of the top three Foreign Direct Investment (FDI) destinations with a GDP growth rate surpassing other major cities in Vietnam.
The Vietnam-Singapore Industrial Park (VSIP) joint venture has done much to develop these provinces. With a portfolio of seven parks across the country, the project attracts both international investors as well as small and medium-sized enterprises, for which the latter can lease ready-built factories instead of buying large plots of land.
Not only are Vietnam’s lesser cities and provinces attractive because of their geographical location, but as a whole, the country presents a low-cost location for investment with their low minimum wages. Table 1 presents the minimum wages for Vietnam’s cities by tier.
As one would expect, tier 1 cities include the major cities Hai Phong, Hanoi, Ho Chi Minh City, Can Tho and Da Nang, but also the city Thu Dau Mot of the Binh Duong province. Not far behind are the provinces of Bac Ninh and Hai Duong that are ranked Tier 2. As of this year, minimum wages of Tier 1 cities and provinces is VND3.75 million (US$165) and Tier 2’s is VND3.32 million (US$146). These minimum wages are certainly attractive enough to draw investors and business owners to the country.
Helmed by a Vietnam state-owned enterprise and a consortium led by Singapore’s Sembcorp Development, the VSIP project initiated by the Prime Ministers of Singapore and Vietnam in 1994 has made much headway in developing Vietnam’s provinces, in terms of providing industrial lands, ready-built factories, integrated townships, and more. Covering a total land area of 6,600 hectares and encompassing 750 tenant companies from 22 countries and territories, the VSIP project has attracted US$9 billion FDI to date and presents an export value of US$32 billion.
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