Trade Pacts And Stimulus Greatly Intensify Opportunities in ASEAN; Companies Urged To Plan For Changing Macro Landscape

Legal News & Analysis – Asia Pacific - ASEAN

17 May, 2016


A Baker & McKenzie report released today reveals that companies see huge opportunities in the ASEAN block as mega-regional trade initiatives - the Trans-Pacific Partnership (TPP), the Regional Comprehensive Economic Partnership (RCEP) and China's One Belt One Road (OBOR) - work in tandem to improve connectivity and the overall business environment in the region.

The Report, 'ASEAN Connections', is based on a survey conducted by the Economist Corporate Network on behalf of Baker & McKenzie. The survey asked 144 business leaders of large multinationals for their views on how these mega-regional initiatives are shaping the ASEAN business environment and how they are impacting their business strategy. A copy of the report can be downloaded from here.

These mega-regional initiatives are viewed as ultimately deepening regional integration, with companies rating TPP and RCEP as particularly effective change agents. 85% of the surveyed companies expect TPP and RCEP to boost economic integration in the region, predicting growth with similar proportions in both intra-regional trade (85%) and investment (84%). These predictions are slightly higher than the rates expected from OBOR, which is 63% for both intra-regional trade and investments.

"These mega-regional trade initiatives are complementary in terms of driving growth in the region and ASEAN is certainly set to benefit from increased inter- and intra-regional trade and investments flows, as well as the potential infrastructure investment that China will bring into the region. ASEAN will as a result be ideally positioned to sit in the centre of global value chains. It is therefore imperative that companies start factoring in these initiatives in their business strategic planning. Otherwise, it could mean missed opportunities for some, and for others, eroding market shares," said Eugene Lim, Asia Pacific Head of Baker & McKenzie's Trade & Commerce practice.

Membership to TPP can also afford member countries in ASEAN a competitive advantage over non-signatories in terms of attracting inward investment, according to 69% of the respondents. Countries in Asia, such as Vietnam and Malaysia, are said to gain most from TPP, with Vietnam seeing a possible 8.1% boost to its real national income by 2030, and Malaysia a 7.6% increase by the same year.1 In fact, 74% of the companies expect an increase in Asia's share of the global revenue, while 65% of the firms expect to see an increased demand for their products and services. 56% of the respondents also expect intellectual property rights protection to improve.

While there is some anti-trade agreement sentiment being expressed in some signatory countries, 62% of the companies surveyed predict that TPP will be ratified within the next three years, and close to 95% see the Partnership ratified within five years. Meanwhile, almost 44% believe RCEP will become operational within a three- year period, and around 97% within a five year period. The report highlights that although it may not be until 2021 when TPP will have significant impact on trade, manufacturing companies are already beginning to leverage ASEAN as a single market and production base and locate different aspects of the manufacturing process in places with the most appropriate skills, costs, resources and connectivity2. Further integration, fuelled by these mega-regional initiatives, will also present similar organizational opportunities for companies in the service sectors.


One Belt One Road

Even though OBOR is expected to help draw the region together by creating infrastructure-related investment opportunities that can then facilitate cross-border investments in the manufacturing and service sectors, 80% of companies see that OBOR's greatest impact lies in the extension of Chinese influence throughout the region. In fact, 59% of the surveyed companies expect OBOR to lead to partnerships with Chinese companies, while around 50% of the respondents believe OBOR will increase M&A activities and investments in the ASEAN region.

Of somewhat greater concern, only 26.5% of the companies indicate that OBOR has begun to influence their strategic planning. This trend, however, is expected to change, with 53% of the companies suggesting that OBOR will be of greater relevance to their businesses in the next three years. Around 70% of the companies are already getting ready for OBOR by undertaking initiatives that help to improve their competitiveness. These preparations include building up human capital capabilities; sourcing for project development opportunities; looking for joint venture partners; looking for potential acquisitions and establishing new representative offices.

"One Belt One Road may still seem to be a distant goal for some, but the reality is that many businesses are already taking the initiative upon themselves in order to get ready for the opportunities and challenges that may arise. Competition for talent, especially those with Chinese language skills, networks and experience, is bound to increase, while competition among multinationals for joint venture partnership or acquisition opportunities with Chinese companies will intensify," stressed Bee Chun Boo, Partner at Baker & McKenzie in Beijing.

Ms. Boo further explains, "Chinese and Western companies are different in terms of culture, management models and operating styles. Also adding to the mix is the cobweb of local and international laws to which companies need to comply - not to mention the full spectrum of political, security and economic risks."

As such, she advised businesses wishing to capitalize on the opportunities arising from OBOR to "engage advisors - be it legal or financial - who not only understand the local and international business and regulatory environment, but more importantly, are also able to offer on-the-ground assistance at both ends of the deal and navigate through some of the cultural and business nuance that often arise in cross-border transactions."

In terms of benefitting from OBOR, the Report reveals that companies see infrastructure and construction industries stand to gain the most from OBOR, followed by the manufacturing, e-commerce and logistic sectors. From a geographic perspective, Indonesia stands to be the biggest beneficiary among the ASEAN economies, with approximately US$87.4 billion identified in OBOR-related pipeline infrastructure projects, roughly double the
US$42 billion each that the Philippines and Vietnam will host.

About the Report

"ASEAN Connections: How mega-regional trade and investment initiatives in Asia will shape business strategy in ASEAN and beyond" is based on a survey of 144 companies from a broad mix of industries, with 21.5% of respondents coming from the financial services sector, 12.5% from professional services and 10.4% from IT& software. Respondents generally worked at large companies - 35% came from firms with revenue of more than US$10 billion, while 29% came from firms with revenue of between US$1 billion and US$10 billion. The geography where the respondents' companies are based spread across Europe (37.4%), North America (27.3%) and ASEAN (21.6%) The majority of the respondents (77.1%) worked at companies that are primarily business-to-business (B2B).