GBA Enterprises Targetting the ASEAN Market

HKTDC Research, in collaboration with United Overseas Bank Hong Kong, conducted a questionnaire survey and in-depth interviews with enterprises in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) in the third quarter of 2021 to gather their views and opinions on trading with and investing in the ASEAN, as well as the opportunities, difficulties and challenges facing them in that market. The survey aimed at gaining an understanding of the role played by Hong Kong in promoting trade and investment between the GBA and ASEAN, as well as to identify GBA enterprises’ demand for Hong Kong services.

ASEAN as Target Market

ASEAN comprises 10 Southeast Asian economies, each of which has its own characteristics and positioning. The present survey was conducted to gather the views of GBA enterprises on the markets of various ASEAN member countries. Survey respondents were asked to describe the current distribution of their business in the ASEAN market and any expected changes over the next three years. According to the survey, there are four ASEAN countries in which more than half of the GBA enterprises which have already entered the ASEAN market are operating - Singapore (cited by 58.8% of the respondents), Vietnam (56.1%), Malaysia (55.9%) and Thailand (52.3%). Other ASEAN members with a sizable presence of GBA companies are Indonesia (33.5%) and the Philippines (30.5%); while the GBA presence in Cambodia (17.8%), Myanmar (12.5%), Laos (10.6%) and Brunei (8.9%) is rather small. Over 80% of the surveyed enterprises have not yet started any business activities in the latter four ASEAN countries. The business footprint of GBA enterprises in the ASEAN coincided with the trade flows between the mainland and the ASEAN. In 2020, the mainland’s trade with Singapore, Vietnam, Malaysia and Thailand accounted for three-quarters of the mainland’s total trade with ASEAN.

The survey found that ASEAN is currently an important sales market for GBA enterprises. Over 80% of respondents are selling to the ASEAN countries where they have business operations, with the exceptions of Cambodia and Myanmar. However, ASEAN has yet to develop into a production or sourcing base. 30.8% of the GBA enterprises which have entered Myanmar are engaged in production or sourcing activities, followed by Vietnam (20.2%), Indonesia (20.1%) and Cambodia (18.9%). Among enterprises which have established a presence in ASEAN, just a small proportion of them have set up regional offices there, with Singapore (6.7%) and Malaysia (6.3%) being the most favoured locations. At present, ASEAN only plays a minor role as a financing or R&D centre for GBA enterprises.

Respondents were asked to indicate the likelihood of them expanding into or further expanding trade, investment or business operations in various ASEAN countries over the next three years. Respondents were asked to rate this on a 10-point scale, with 1 representing ‘very unlikely’ and 10 representing ‘very likely’. The findings showed that Singapore (with an average rating of 6.89), Malaysia (6.86), Vietnam (6.76) and Thailand (6.56) are the most popular trade and investment destinations for GBA enterprises in the short term, with nearly half of respondents giving them a rating of 8 to 10. In other words, it is likely that they would expand into or further expand business in these countries in the next three years. The next most popular are the Philippines (5.77), Indonesia (5.70) and Cambodia (5.27). Laos (4.98), Myanmar (4.93) and Brunei (4.63) are currently the least preferred trade and investment destinations for GBA enterprises.

As far as business operations are concerned, GBA enterprises are still most interested in selling to the ASEAN market. Over half of the surveyed enterprises said they expect to launch sales in Singapore, Malaysia and Vietnam in the next three years. More than 10% of the respondents indicated that they expect to carry out production or sourcing activities in Vietnam and Thailand over the next three years, compared to 7.2% and 4.6% respectively at present.

The sector that is the most eager to expand further in the ASEAN market is industrial goods, with the likelihood of investing in ASEAN scoring an average rating of 6.56 among enterprises in this sector, and the likelihood of investing in Malaysia, Thailand, Singapore and Vietnam in particular scoring more than 7. Chung Yuk Ming, Director of a Hong Kong industrial equipment manufacturer L.K. Machinery International Ltd, mentioned that as China-US trade friction intensified in recent years, some manufacturers have, at the request of their clients, moved their production facilities out of mainland China, indirectly accelerating the development of ASEAN countries. In order to stay close to its clients, L.K. Machinery has been actively expanding into the Southeast Asian market. The next keenest sectors were real estate, hospitality and construction (6.21) and business, professional and financial services (5.71), while consumer goods (5.45) and technology, media and telecoms (5.33) were not so enthusiastic.

According to the survey, the business distribution of GBA enterprises in the ASEAN market is unlikely to undergo too many changes in the next three years, with trade and investment activities still very much concentrated in Singapore, Vietnam, Malaysia and Thailand. However, it is estimated that the market penetration rate of GBA enterprises in ASEAN will grow markedly. Enterprises wanting to invest in ASEAN can also pay more attention to developments in Indonesia and the Philippines.

Huge Market Demand

The survey also gauged the views of GBA enterprises on the attractiveness of ASEAN as a trading partner or investment destination, with the aim of providing useful information to industry players looking to enter the ASEAN market. It found that many enterprises are attracted to ASEAN by its favourable business environment. The respondents said that the cost-effectiveness of operations in ASEAN was an important advantage, with 29.1% of them viewing this as one of the top three attractions of the ASEAN market, while 28.2% cited abundant resources as a crucial attraction. 28.3% of the respondents pointed to the importance of ASEAN being a huge market for goods and services, with 11.3% of them rating this as ASEAN’s top attraction. These responses reflect that GBA enterprises entered the ASEAN market not only because its business environment is conducive to production, but also because ASEAN has a huge demand for goods and services. GBA enterprises could take advantage of ASEAN’s ideal business environment to develop the market and supply products and services meeting local demands.

When looking at the different attitudes displayed by Hong Kong and mainland GBA enterprises in the survey, it was found that Hong Kong companies tended to attach more importance to the huge size of the ASEAN market, with 35.7% of them marking this as one of ASEAN’s top three attractions. Only 26.3% of their mainland GBA counterparts held the same view. Meanwhile, mainland GBA enterprises tend to pay more attention to trade relations between China and ASEAN (with 25.5% of them citing this factor) than Hong Kong enterprises do. Perhaps because Hong Kong adopts a free trade policy, only 18.9% of the Hong Kong companies held the same view as their mainland GBA counterparts on this issue.

Other attractions of the ASEAN market include the presence of attractive local government incentives in ASEAN countries (cited by 27.4% of respondents), the availability of credible local partners (25.7%), and increasing intra-ASEAN co-operation and connectivity (25.1%). Since GBA enterprises mainly see ASEAN as a sales market, it is unsurprising that the trade and investment agreements between ASEAN countries and other major markets do not seem to be very important to them, with only 20.1% citing it as a factor.

When asked about the difficulties and challenges encountered in trading with, investing or operating in ASEAN, 31.2% of respondents cited poor and inadequate infrastructure, followed by difficulties in finding the right local partners (29.8%) and the rising cost of doing business (29.7%). Another 28.2% cited intense local competition as a challenge, with 10.5% rating this as the greatest challenge in doing business in ASEAN.

Enterprises which have not yet entered the ASEAN market were most concerned about the conditions of local infrastructure (34.7%), followed by rising cost of doing business (31.4%) and intense local competition (30.2%). Enterprises which are already operating in the ASEAN market said that their main challenges included difficulties in finding the right local partners (30.1%), poor and inadequate infrastructure (29.2%) and non-transparent regulatory regimes (28.9%). While larger-scale enterprises were concerned about ASEAN’s regulatory regimes, with 31.6% of those with business revenue exceeding US$10 million citing this as one of the top three challenges, only 26.7% of smaller-scale enterprises held the same opinion.

Hong Kong companies are more concerned about market fragmentation in ASEAN than their mainland GBA counterparts are, with 32.2% of them ranking this as one of the top three challenges in doing business in ASEAN. However, Ambrose Lee, Chief Strategy Officer and Head of Capital Markets/Corporate Finance of a Hong Kong-based large gen-set system integration provider, VPower Group Holdings Limited, pointed out that Hong Kong companies work flexibly, and are capable of providing high value-added and customised solutions. The fragmented and diverse markets in the ASEAN region also bring opportunities for local enterprises. By contrast, since China is a vast country and an enormous market, mainland GBA enterprises are more used to serving a diversified market. Hence, only 23.7% of the mainland GBA enterprises found this a big challenge. However, mainland GBA enterprises are concerned than those in Hong Kong about the rising cost of doing business in ASEAN, with 31.7% citing it as a main challenge, as opposed to 22.4% of their Hong Kong counterparts.

In conclusion, while ASEAN has different attractions for different industry sectors, the difficulties and challenges encountered by the various industry sectors in doing business in the region are more or less the same.

Since the consumer goods sector serves end-users directly, it must have good knowledge about local market characteristics, sales channels and consumer buying behaviour. As such, this sector relies heavily on local partners. Compared with other industry sectors, a markedly higher proportion of respondents in this sector (32.4%) said the availability of credible local partners in ASEAN was one of the top three attractions of doing business in that market. However, some respondents pointed out that it was not easy to find the right local partners, with 15.3% of them naming this as the greatest challenge in doing business in ASEAN while another 15.3% cited the low efficiency of local service suppliers.

Industrial goods manufacturing is a cost-intensive industry requiring large production inputs. Because of this, this sector is clearly more interested than others in the cost of doing business in ASEAN. 36.9% of respondents reckoned that costeffectiveness was an advantage of operating in ASEAN, with 12.6% of them citing this as ASEAN’s greatest attraction. However, the respondents were concerned about the rising cost of doing business (33.3% citing this factor) and poor and inadequate infrastructure (32.4%).

Compared with other industry sectors, the requirements of business, professional and financial services for factors of production other than talent are lower, and as such they attach more importance to the local market conditions. 32.4% of respondents pointed out that ASEAN offers a huge market for goods and services, with 14.2% of them citing this as the greatest attraction of this market. Attractive local government incentives in ASEAN countries (cited by 31.1%) are also a great attraction for this sector. However, many were concerned about the poor and inadequate infrastructure (34.5%) and intense local competition (32.4%) in ASEAN.

Compared with other industry sectors, the real estate, hospitality and construction sector is obviously more interested in the availability of resources in ASEAN, including those involving land and tourism. 31.0% of respondents reckoned that ASEAN has abundant resources, with 15.2% of them naming this as the greatest attraction of the ASEAN market. However, many were concerned about the poor and inadequate infrastructure (33.1%) and non-transparent regulatory regimes (33.1%) in ASEAN.

The technology, media and telecoms sector is similar in nature to the commercial, professional and financial services sector, and it is similarly interested in the local market conditions. 31.7% of respondents rated ASEAN’s huge market for goods and services as the region’s most attractive feature. Compared with other industry sectors, the technology, media and telecoms sector tends to attach more importance to increasing intra-ASEAN co-operation and connectivity, with 28.2% of respondents citing this as one of the top three attractions of the ASEAN market. However, this sector was concerned about the rising cost of doing business (33.8%) and difficulties in finding the right local partners (32.4%).

Note: This article forms part of a joint study conducted by HKTDC Research and UOB: “Trade and Investment Between GBA and ASEAN and the Roles of Hong Kong”.

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