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Southeast Asian nations compete to redraw supply-chain map

Thailand and Malaysia roll out incentives to lure investment away from Vietnam

Thailand has rolled out fresh incentives to lure foreign manufacturers. (Photo by Rie Ishii)

BANGKOK -- Thailand and Malaysia are actively courting manufacturers fleeing China to escape the trade war, aiming to become major production hubs as rising labor costs threaten Vietnam's status as an alternative destination.

The two countries are offering tax incentives to lure manufacturers while Indonesia looks to similar measures. Their efforts have the potential to drastically alter the supply chain network in Asia.

Thailand in September approved an incentive package that cuts taxes in half for foreign corporations that promise to invest at least 1 billion baht ($33 million). To qualify, the investment must be made by the end of 2021 and must target key sectors such as high-tech electronics and biochemistry.

Those are the sectors being nurtured in the Eastern Economic Corridor, an industrial revitalization zone being formed on Thailand's eastern seaboard. The EEC is the central piece of a policy agenda that seeks to swiftly upgrade Thailand from a middle-income country to a developed nation.

Construction of an industrial park aimed at Chinese enterprises is due to begin as soon as early next year. CP Land, the real estate unit of Thailand's largest conglomerate, Charoen Pokphand Group, will jointly own the park along with Chinese contractor Guangxi Construction Engineering Group.

Many Chinese enterprises are relocating to Thailand to avoid the impact of the U.S. trade war with China. In April, tiremaker Prinx Chengshan decided to build a $600 million plant there. Chinese corporate investment is expected to rise 30% this year to 71.5 billion baht, government projections show.

Not to be outdone, Malaysia last month signed off on a batch of incentives worth roughly 1 billion ringgit ($240 million) annually over five years. The measures are aimed at major foreign corporations and startups, and are to include tax breaks as well as financial subsidies.

Malaysia will soon select about 60 targeted multinationals, and the government will individually lobby them to set up shop in the country. Chinese and Japanese companies are expected to be part of the contingent.

During the first half of 2019, foreign direct investment in Malaysia roughly doubled on the year to 49.5 billion ringgit, according to government data. The Sino-U.S. trade war was a major factor.

The additional incentives are designed to accelerate the investment and put Malaysia on a path to becoming a developed nation. Malaysian Finance Minister Lim Guan Eng said in October the measure will enrich the supply chain and create roughly 100,000 high-quality jobs over five years.

Indonesia, the most heavily populated member of the Association of Southeast Asian Nations, is also looking to join the fight for direct investments. In late October, President Joko Widodo ordered a vice foreign minister in charge of economic affairs to maximize Indonesia's position amid tensions between the U.S. and China.

So far, Indonesia has not seen much benefit from the trade war. The vision includes deregulation measures including corporate tax breaks.

Vietnam is the country that has benefit most from the trade war so far. Of 33 Chinese companies between June and August that announced plans to shift production abroad, 23 picked Vietnam, a World Bank survey shows.

The rush of investment helped Vietnam's gross national product grow more than 7% in the third quarter from a year earlier. While exports from both Taiwan and Malaysia have faltered recently, Vietnam's exports climbed 7.31% in the third quarter, up from 6.73% expansion in the second quarter.

Part of Vietnam's appeal is its low labor costs. For workers in the manufacturing industry, labor costs in Bangkok were 2.4 times higher than in Hanoi back in January 2014, according to the Japan External Trade Organization. Kuala Lumpur's were 2.8 times higher.

By this past January, however, the gap with Hanoi had shrunk to 1.9 times for both cities. When taking Vietnam's infrastructure into account, it is becoming harder to sell the country as the leading manufacturing alternative to China.

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