Thriving China forces ASEAN to raise its game

Thriving China forces ASEAN to raise its game

Alan Wheatley, Reuters, Singapore

After spending more than five years and millions of dollars on plans to build a US$550 million power station, Michael Reading knows how hard it it can be to do business in Southeast Asia.

Reading remains confident the project will get off the ground, but his efforts to break into an industry dominated by state-run incumbents have been an exercise in frustration.

"You have new entrants who are trying to come into these markets and are competing against huge government-owned companies that are all related. It's very difficult to compete in that kind of market," says Reading, who is managing director of Island Power Co., a joint venture between Sime Darby Bhd and Intergen, 68 percent owned by Royal Dutch/Shell.

What makes Island Power's hard slogging instructive is that the market it is trying to tap is not communist Vietnam or military-ruled Myanmar but Singapore, which is legendary for rolling out the welcome mat for foreign firms.

If even Singapore, by far the most developed member of the 10- strong Association of South East Asian Nations, is hard to crack, what chance does ASEAN have of stemming the tide of foreign direct investment to China?

Aware of the challenge, ASEAN leaders meeting in the Lao capital, Vientiane, on Monday and Tuesday will endorse plans to make the bloc more attractive to foreign investors by accelerating the pace of market liberalization in 10 priority sectors including electronics, tourism and textiles.

The stakes are high. Whereas China took in net foreign direct investment of $392 billion from 1994-2003, ASEAN attracted just $147 billion, with Singapore alone accounting for $82 billion, according to figures from investment bank Morgan Stanley.

"The likelihood that FDI could be the main motor for change and growth in Southeast Asia is in doubt," said Malaysian economics professor Jomo Kwame Sundaram.

From better infrastructure to cutting red tape, the list of improvements ASEAN needs to make to grab a larger slice of Asia- bound FDI is well documented.

Anwar Nasution, a professor of economics at University of Indonesia, grumbles that it can take six hours to drive 180 km (110 miles) from Jakarta to Bandung because of poor roads. But he says the top priority for new President Susilo Bambang Yudhoyono must be to strengthen the country's unpredictable legal system.

"This is the key to attract FDI. If we can't do anything about this, nobody will come to Indonesia to invest," said Nasution, a former senior deputy central bank governor.

Yudhoyono's election is one of a series of political changes across Southeast Asia that could help the climate for clamping down on corruption and enforcing legal contracts, executives say.

"With all the political turnover in the region in the last year, we're hopeful that there are new mandates to take those problems on," said Walter Lohman of the U.S.-ASEAN Business Council.

In Malaysia, market-friendly noises from Prime Minister Abdullah Ahmad Badawi during his first year in power have gone down well with U.S. firms, which were put off by the sometimes anti-western rhetoric of his predecessor, Mahathir Mohamad.

Boonler Somchit, who heads the Penang Skills Development Corp., said this was one reason why Malaysia still attracted FDI.

"We are holding our own," he said. "China is as attractive as ever. But with the U.S. a little bit apprehensive about putting all their eggs in one basket, that's a plus point for Penang and Malaysia."

Another plus point for ASEAN is a planned free trade agreement with China. The bloc's leaders will sign an accord on Tuesday with Chinese Premier Wen Jiabao to remove tariffs on most merchandise trade by 2010, going a long way toward creating a single market of more than 1.7 billion people.

ASEAN still has mountains to climb.

Businessmen complain bitterly that, while tariffs are falling, non-tariff barriers of the sort faced by Island Power are as formidable as ever and prevent international manufacturers from integrating cross-border operations efficiently.

With Asia's economies more closely intertwined than ever, policy predictability and regional cooperation were vital, according to Japanese cabinet adviser Haruhiko Kuroda.

"Otherwise further deepening of interdependence and sustained rapid growth in the region are unlikely," Kuroda told the Australian National University in Canberra last month.

But optimists say ASEAN is heading in the right direction.

"They're talking, they're looking at their differences and saying 'in order to remain relevant we need to be more integrated'," said John Phipps, senior director at the U.S.-ASEAN Business Council.

"Nobody expected great things when the European Community got together. Everyone said it was impossible. But over time success breeds success and I think you're going to see that also occurring in ASEAN," Phipps said.