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EIC | Economic Intelligence Center Monthly/February 2011

Insight Moving forward with the AEC


Moving forward with the AEC What the ASEAN Economic Community (AEC) really means for businesses in Thailand The ASEAN Economic Community or AEC will make ASEAN a more interesting place to do business. The AEC will have an aggregate population of 580 million, more than that in the European Union itself. Given the low levels of income in many of the ASEAN countries, however, the aggregate size of the economy in the AEC is not that large, roughly that of just South Korea. This makes it incumbent on businesses to identify those salient characteristics of ASEAN which should make it of particular interest. For example, aggregate FDI in ASEAN is quite substantial, and it is a top tourist destination, second only to France. But what the AEC will achieve in 2015 will still be quite far removed from the European Union (EU) in terms of achieving a single market. For example, while the AEC has achieved a FTA in the form of the ASEAN Free Trade Area (AFTA), there are no immediate plans for a customs union (charging the same tariff on imports from outside the region). Restrictions on investment and labor will remain more significant than in the EU. Significantly, many of the supranational agencies which will facilitate the emergence of a true single market (e.g., common central bank, competition authority, and the like in the EU) are all but absent in the AEC. The AEC has taken a more consensual, intergovernmental approach, with the expected consequences. Next up in the AEC is the liberalization of trade in services, investment, labor mobility, and greater harmonization of rules and regulations. Liberalization of trade in goods under AFTA was completed in 2010. The AEC also makes the usual calls for greater economic cooperation in such areas as SME networking and joint research. Businesses in Thailand will confront greater challenges from the AEC as a result of (i) the higher percentage of ownership by ASEAN investors in services sectors; and (ii) the greater ability of skilled professionals to move within the region. Ownership limits are raised to 70% for ASEAN investors. The four priority sectors earmarked for such liberalization in 2010 include ICT, tourism, healthcare, and air transport, with others to follow in 2013 (logistics) and 2015 (the rest). The immediate impact of higher foreign ownership may not be that large as ownership levels in many sectors are still below the 49% statutory ceiling. But higher remuneration of professionals elsewhere in the region-e.g., Malaysia and Singapore-may eventually mean greater competition for skilled workers in the 7 professions liberalized to date. With greater challenges come greater opportunities for Thai businesses to expand elsewhere in ASEAN. Thai businesses will benefit from higher investment ceilings in countries such as Indonesia, Malaysia, and the Philippines. (Statutory ceilings are already high elsewhere.) Sectors with particularly high EBITDA margins include retail in Singapore and IT in Malaysia. Despite such greater liberalization of statutory limits, however, businesses need to be aware that many countries still have in place domestic rules and regulations (e.g., on minimum investment and modes of investment) which will continue to discriminate against foreign investment. Taking full advantage of opportunities from AEC will require Thai businesses to focus on those particular areas where Thailand has an advantage (our core competencies) and where ASEAN is particularly distinctive. The AEC will tend to result in a greater concentration of production in the region. But given the limited size of the aggregate market, it is important to identify specific opportunities from Thailand’s and ASEAN’s unique relative strengths. For example, Thailand has a traditional strength as a food producer. Demand for halal food has been growing much faster than demand for food overall. With around 270 million Muslims, ASEAN has the largest Muslim population in the world. Taken together, this suggests an opportunity for Thailand to be a key (if not the key) producer of halal food for the region and beyond.


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What is the AEC and what

changes will it bring? The ASEAN Economic Community (AEC) is not merely about trade liberalization, despite frequent news coverage focusing on tariff reduction agreements among ASEAN Member States as well as between Thailand and other countries. In fact, the AEC involves the economic integration of ASEAN countries. It also covers the liberalization and facilitation of capital movement, labor movement, the harmonization of customs regulations, standards for goods, and economic policies among ASEAN countries. These factors make the AEC more than just a free trade agreement that Thailand has with more than 10 countries. The AEC is one of the three pillars of the ASEAN Community. The other two pillars are the ASEAN PoliticalSecurity Community and the ASEAN Socio-Cultural Community. These components will one day help realize the grand vision of an integrated and united ASEAN Community, like the European Union. Integration towards the AEC will make ASEAN more attractive, with a market larger than the EU in terms of population. ASEAN can play a greater role in the global economy. Despite the moderate size of the ASEAN economy, it is increasingly an investment and tourist destination. Therefore, the realization of the AEC will increase ASEAN’s appeal in many aspects.

Economic Community (AEC) offers greater opportunities 1 ASEAN ASEAN Economic Community*

580 million

Europe Union

1.5 trillion USD

South Korea

Population

GDP size

International trade

1.6 trillion USD

FDI

Compare to‌

50 billion USD

International tourists

65 million persons

6 times Thailand 60% of China ranked 2nd globally next to France

* International trade, FDI and international tourists include intra-region figures Source: SCB EIC analysis based on data from Association of Southeast Asian Nations (ASEAN); China Ministry of Commerce; United Nations Conference on Trade and Development (UNCTAD); and International Monetary Fund (IMF)

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Nevertheless, the completion of the implementation of the AEC Blueprint does not necessarily mean that the goal of a true, integrated economic community has been realized. It just means that the AEC Blueprint has been fully implemented. The Blueprint covers four important aspects of the AEC which are (1) becoming a single market and production base, (2) enhancing regional economic competitiveness, (3) building equitable economic development, and (4) integration into the global economy. The success of the integration process will be assessed by its outputs and outcomes, for instance, whether trade liberalization and tariff reduction have helped bridge price gaps among ASEAN countries; or whether the facilitation of labor flow has increased labor movement to a level that narrows wage differences.

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Full implementation of the AEC Blueprint does not by itself mean integration has been achieved

ASEAN Economic Community

73.6%

of target achieved

Single market and production base

Competitive economic region

Equitable economic development

Integration with the global economy

82%

50%

100%

100%

Laying the foundation for competition policy, consumer protection, intellectual property rights, and ratifying transport agreements

Studies and development of SMEs and Initiative for ASEAN Integration Work Plan 2

Liberalization and facilitation of free flow of goods, services, investment, skilled labor, and capital

Entry into force of Free Trade Agreements

Source: SCB EIC based on data from Department of Trade Negotiations, Ministry of Commerce

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Box: What will happen in 2015? Changes arising from the AEC will not be abrupt because the Blueprint towards the AEC has been carried out incrementally, with completion targeted for 2015. For example, tariff reduction, and the increase of investment ceilings in the Priority Services Sector to 70% for ASEAN investors have been in force since 2010. One concrete output of integration towards AEC are the changing rules and regulations. This includes, for example, an increase of the investment ceiling in the services sector to 70% for ASEAN investors, less paper work, and easier goods inspection at checkpoints in ASEAN countries due to harmonized standards. However, in addition to those agreements, some parts of the AEC consist of terms of cooperation which may not yield tangible outputs, including networking among SMEs, networking among ASEAN universities, and promotion of research and technology cooperation in the field of agricultural products, foods, and forestry. Therefore, economic unity within ASEAN after the completion of the AEC building process could be evident, or remain vague in 2015. Many countries still have reservations over parts of the AEC, such as the preservation of some business areas for their nationals, and the free movement only of skilled labor. The AEC in 2015 is unlikely to meet the high expectations of reaching the EU model. There have been discussions that by 2015 the AEC will transform ASEAN economies into a single market and production base like the EU, but a number of different factors affecting the AEC will prevent ASEAN from reaching those goals within that time-frame.

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Features

European Union

ASEAN

1. Becoming a single market and production base - Trade in Goods • Internal tariff rate

- reduced to 0%

- reduced to 0%

• External tariff rate

- all member countries

- each member country

enforcing the same tariff

enforces its own rate

- Trade in services (share ownership)

- 100%

- 70%

- Movement of labors

- free flow of labors

- free flow of only skilled labor

2. Other aspects of integration

- Single currency

- National currency

- European Central Bank : ECB

- Intergovernmental

- Supra-national authorities with

method without clear

central organizations such as:

authority over each

• European Parliament

member state

• European Court • European Legal System • European Competition Commission

The EU was originally determined to build a supra-national authority. It has authority to make decisions on behalf of all member countries within its agreed scope of responsibility, and member countries are bound by these decisions. This supra-national authority has created unity among member countries, and enabled the EU to move forth more easily while ASEAN is struggling with a slow pace and, in some cases, the impossibility of moving forward due to its intergovernmental nature, which means that member countries are still holding their sovereignty above the institution. Consensus is required in stepping forward, yet it is not easily reached. Although there have been ideas and attempts to develop ASEAN into a supra-national institution, ASEAN remains short of a concrete plan of action towards such a goal. Moreover, even the EU itself is facing difficulties in their attempts toward further integration, for instance, from differences in their fiscal policy as evidenced by the ongoing Eurozone public debt problems. The path towards integration followed by the EU may not be an easy one.

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Much more remains to be done to fully realize the AEC vision. If we look at the whole process of AEC building, we have completed only one part of it, which is the reduction of tariffs among ASEAN countries, with the ASEAN Free Trade Agreement already in force. There are other important components requiring ASEAN’s collective effort and time to accomplish. This includes, for example, common external tariffs, which means a single tariff rate to be enforced in all ASEAN countries with their trade with external partners. This tends to be very difficult in practice and, in the end, may result in selective cooperation. For example, it is highly unlikely that Singapore would increase its tariffs from 0% to a higher rate as might be agreed by other ASEAN countries. The harmonization of economic policies among all member countries is another difficult task because so far there are no legal provisions or regulations binding all member countries. This is a major difference between ASEAN and the EU.

works left to be carried out towards realizing the AEC 3 Much Main types of international economic integration Free trade area Customs union

Common market Economic union

Removal of tariffs and quotas Common external tariffs

Only AFTA has been completed

Investment mobility

Labor mobility

Harmonization of economic policies

Source: SCB EIC analysis based on data from David J. Dennis and Zainal Aznam Yusof (2003) 1

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David J. Dennis and Zainal Aznam Yusof (2003), “Developing Indicators of ASEAN Integration - A Preliminary Survey for a Roadmap”, final report to REPSF Project 02-001


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BOX: Illustrative example of tariff reduction under AFTA As one of the steps towards the AEC, every member country is required to cut their tariffs on all goods from ASEAN to 0%, except for those on their sensitive lists. Thailand, Singapore, Malaysia, Indonesia, the Philippines, and Brunei have already eliminated their tariffs since the start of 2010. The rest - Cambodia, Lao PDR, Myanmar, and Vietnam, will work towards 0% tariffs by 2015. (More details regarding impacts on goods can be found in Outlook special issue: FTAs.) In order to assess the positive and negative impacts on businesses, it is not enough to focus only on AFTA because Thailand has at least 10 FTAs in force with 6 trading partners beyond ASEAN2. The combined import value of the six trade partners is as much as USD 53 billion, which is higher than ASEAN’s. Therefore, we will analyze tariff reduction on goods by employing a projection approach to see how every existing FTA and those in the pipeline would affect each business. For example, canned fruits and vegetables will feel a far greater impact from tariff reductions on China, the No. 1 source of imports, in 2010, and India, the No. 2 source of imports, with tariffs falling from 29% in 2010 to around 8% in 2017 than from ASEAN. This will intensify competition in the future.

fruits and vegetables business has to prepare for more intense competition from 2012 onward 4 Canned Weighted average import tariff rate of canning and preservation of fruits and vegetables sector by FTA countries for the period of 2010-2020

_

Unit: %

ASEAN

_

China

_

India

_

Korea

_

Japan

_

Australia

_

New Zealand

35 30

28.7

25

21.8

20 18.0

15

2020

2019

2018

2017

2016

2010

0

2.8 0 0

2015

0.2

2014

4.1

2013

5

7.7

2012

8.4

2011

10

Source: SCB EIC analysis based on data from Revenue Department; Department of Trade Negotiations, Ministry of Commerce; and Office of National Economic and Social Development Board

2

Excluding Peru which the agreement will be effective by second quarter, 2011

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Liberalization of trade in services is on the way. After trade in goods, freer trade in services will follow suit and lead to the liberalization of investment and labor mobility within ASEAN. This report focuses on impacts from freer trade in services. The main topic of interest is an agreement to increase the percentage of share ownership by ASEAN nationals, as the ceiling of shares held by ASEAN nationals in most business will be elevated to 70%.

allow ASEAN investor to hold up to 70% share ownership in services businesses 5 AEC Schedule of liberalization of ASEAN equity participation in services businesses 2006

2008

2010

49%

51%

70%

49%

51%

49%

51%

2013

2015

Priority Integration Sectors

• • • •

ICT Healthcare Tourism Air transport

Logistics services

Other services

30%

Source: SCB EIC analysis based on data from ASEAN

10

70%

70%


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EIC Economic Intelligence Center

Impact of the AEC on

services in Thailand

While the ASEAN Agreement on Trade in Goods (ASEAN Free Trade Area: AFTA) is already in force, liberalization of trade in services, investment, and labor mobility are still on the negotiation table. Services business thus will be increasingly impacted in the near future. In this paper AEC analysis for the most part focuses on the impact of agreements on business rather than the role of cooperation within the AEC framework. The liberalization of trade in services will affect Thai services primarily in two aspects: (1) an increase in shares held by foreigners, and (2) freer mobility of the professional workforce that is an important factor for services businesses. The importance of the latter is underscored by GAT’s defining the 4th mode, “the temporary movement of natural persons�, as a vital component for supplying the services described in Modes 1-3. (see BOX: the liberalization of trade in services within the AEC) Services businesses in Thailand will be affected by the elevation of permitted maximum shares held by ASEAN nationals, including legal consultancy, retail food, packaging services, and hospitality services because these businesses already have a high proportion of foreign share holding, with an average of 39%. If the ceiling is lifted to 70%, there is a high possibility of encountering further foreign investors. On the other hand, some services businesses such as retail apparel, commercial printing, and IT services, have not been popular among foreign investors. The average of foreign equity participation in these businesses is only 4%, despite a ceiling of 49%.

Current foreign share ownership in services business in Thailand* Unit: %

53 Current ceiling = 49%

1

0 Commercial printing

6

Apparel retail

7

Restaurants

Distributor

12 10

Home improvement

Environmental services

Publishing

Construction**

Healthcare

Entertainments

Airlines

16 16 15 15 14 14 14

Advertising

Internet services

Air logistics

21 20 19

Educational service**

Department store

Telecommunication

Marine

Broadcasting

30 30 28 26 24

Hotel & resort

Food retail

Paper packaging

35

IT services

44

Legal consultancy**

6

Food retail, packaging services, and hospitality services tend to be immensely affected

* Weighted average data of 5 largest listed companies by market capitalization in each sector ** Figures based on data from Business Online PCL as they are non-listed Source: SCB EIC analysis based on data from SETSMART

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In fact, foreign investors currently have other channels facilitating greater investment than the AEC. This could mean that the impact may not be as much as anticipated if foreign investors are already using other available channels to increase their investment. For instance, investment promotion in some specific fields by BOI allows a more flexible percentage of shares ownership. Therefore, it is not surprising to see businesses in some areas owned 100% by foreigners. Furthermore, impacts on one sector may help others. The education sector is facing more intense competition from increasing investment by foreigners, but this competition will lead to the development of students who will compose a quality workforce for other businesses in Thailand. Another negative impact is a shortage of professional workers due to greater labor mobility in ASEAN. If we look at the remuneration and cost of living of an accountant, for example, we will find that remuneration in Singapore and Malaysia is about 3 times higher than in Thailand. This could cause brain drainage from Thailand, especially to Singapore, which has a decreasing working age population and the fastest increase of elderly people in ASEAN. It is forecast that the proportion of elderly people in Singapore will reach 30% in 2025 and 35% in 2050, up from the current 16%. This demographical change will double their need to import workers. The impact may not be confined to specific sectors. As pointed out above, differences in the remuneration of accountants will affect every business, as they all require accounting services. Moreover, a shortage of critical professionals like physicians and nurses will not only affect the health care business, but also society as a whole, which could suffer from insufficient medical services.

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Professional workforce tends to move to Singapore and Malaysia Accountant remuneration, purchasing power parity adjusted, 2010* Unit: USD (PPP) per month

5,000 4,000 3,000 2,000 1,000 0 Singapore

Malaysia

Indonesia

Brunei

Thailand

Vietnam

Lao PDR

* From 2001 accountant salary inflated by headline inflation of each country Source: SCB EIC analysis based on data from WEO, IMF; Cost of investing and doing business in ASEAN (2001 edition), ASEAN; and Penn world table

One of the attempts to facilitate labor mobility within the AEC is to develop mutual recognition of professional accreditation. ASEAN has already concluded Mutual Recognition Agreements (MRA) in 7 fields, namely engineering, nursing, architecture, surveying, medicine, dentistry, and accountancy3. Professional workers who are accredited as agreed in the MRAs will be recognized in all member countries, enabling them to more easily work in any member country. Despite mutual recognition, labor movement may not be so easy in practice. Many countries still preserve rules and regulations that may prevent labor mobility from happening. For example, medical personnel who wish to work in Thailand will have to obtain a license by passing an examination, some parts of which are in Thai. There are also other obstacles such as differences in language, culture, and social acceptance.

3

More details of each MRA could be found from Department of Trade Negotiations, Ministry of Commerce

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BOX: The liberalization of trade in services within the AEC The ASEAN Framework Agreement on Services (AFAS) is implemented along the same lines as the General Agreements on Trade in Services (GATS), which means a rather slow process. Instead of employing a negative list approach, GATS uses the positive list approach in negotiation, which leaves room for countries to prioritize specific service sections for negotiation. Countries are also entitled to determine their limitations in terms of minimum quantities and so forth, for each round of negotiation. Moreover, countries are allowed to choose professions for negotiations on liberalization of labor movement. The positive list slows down the liberalization process as it requires many rounds of negotiation, while the negative list approach only allows member countries to select their exceptions instead of their preferences. The liberalization of trade in services among ASEAN countries will be GATS-Plus (additional to that agreed in GATS). Trade in services is categorized into 4 modes of service supply: (1) cross-border supply, (2) consumption abroad, (3) commercial presence, and (4) temporary movement of natural persons. AFAS contains rounds of negotiation where a package of services is to be further liberalized. There will be 11 packages in total, which will be concluded by 2015. The latest concluded package is the eighth of the series. Presently, some ASEAN country members of the WTO are likely to protect their services sector. They have very few agreements on services businesses, especially, professional services. Singapore, which has the greatest number of agreements on liberalizing trade in services within GATS compared to other ASEAN countries, has only opened 7 out of 12 service sectors agreed by WTO members in the Uruguay Round, and has almost no agreements on labor mobility. On the other hand, Vietnam, which has recently joined the WTO, has significantly opened their trade in services. Vietnam’s services sector will be less affected by integration towards the AEC.

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Business opportunities

arise from the AEC

As businesses in Thailand will be affected, the higher ceiling of foreign shares held by ASEAN members will provide opportunities for Thai businesses in other ASEAN countries. Thai businesses will be presented with greater opportunity to increase their investment, especially in Malaysia, the Philippines, and Indonesia. These countries have so far capped the percentage of foreign share ownership at 30%, 40% and 49% respectively. The liberalization of trade in services under the AEC will push the ceiling up to 70% and enhance opportunities for Thai businesses. Singapore, Vietnam, and Cambodia are already largely open towards foreign investors (at least on paper!).

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Thai investors will have greater opportunity for investment in Malaysia, Indonesia, and Philippines Average foreign share ownership limit in services businesses in ASEAN countries

70% in 2015

Example of other domestic regulation

Cambodia

100%

Vietnam

100%

Singapore

100%

Indonesia

49%

Thailand

49%

Philippines Malaysia

40% 30%

• One Cambodian director required in health services • Economic needs test based on criteria such as no. of existing service suppliers

• Not allowed in certain retail operations

• Not allowed in some retail operations • Must reserve at least 30% of shelf space for goods produced by Bumiputera-owned small and medium size industries

Source: SCB EIC analysis based on data from World Trade Organization (WTO) and Asian Development Bank (ADB)

However, the elevation of foreign investment ceilings may be difficult to enforce. In practice, there are many other domestic rules and regulations to be complied with by foreign investors. These rules and regulations will be obstacles or barriers that could impede an increase in foreign investment. The most frequently raised example is the right of foreigners to own land, which remains prohibited in many countries, including Thailand. Some countries have found a way out by allowing long-tern rent instead. Moreover, there are other rules, for example, regarding minimum investment, modes of investment, the composition of a company’s board of directors (which must be local people), economic needs tests, joint ventures, and technology transfer.

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Businesses with high profit margins, to some extent, possess potential and could be a good start in seeking interesting services businesses in ASEAN countries, especially after the agreement on trade in services under the AEC framework enters into force. In terms of profit, it was found that Malaysia and Singapore have many services businesses with a high EBITDA margin. According to statistics, Malaysia and Singapore have the highest average EBITDA margins for 7 and 5 service fields, respectively, out of a total of 21 fields for services sector companies4.

Business Opportunities in the AEC are many services businesses with high EBITDA margin in Malaysia and Singapore 9 There Services businesses with highest EBITDA margin among ASEAN countries

Malaysia

Singapore

Thailand

Philippines

Indonesia

Vietnam

Advertising

Apparel retail

Healthcare

Educational services

Paper packaging

Hotels and resorts

Commercial printing

Computer and electronic retail

Metal and glass container

Leisure facilities

Distributors

Entertainment

Telecommunication services

Department store

Restaurant

Environmental services

Internet softwares and services

Food and staples retail

Publishing

IT Services

Marine

Source: SCB EIC analysis based on data from Bloomberg

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16

This finding was a result of an analysis of limited data which covers only data of listed companies in stock exchange of each member countries collected from Bloomberg. They are categorized into each services field according to Global Industry Classification Standard (GICS) by Morgan Stanley Capital International (MSCI) and Standard & Poor’s (S&P).


EIC Economic Intelligence Center

10

EBITDA margin of some services businesses

Publishing

21%

Malaysia

Indonesia

15%

Philippines

19%

Singapore

10%

7%

Thailand

Vietnam

Distributor Department store

9%

n/a

9%

39%

19%

25%

4%

n/a

8%

5%

2%

n/a

n/a

4%

11%

5%

IT services

26%

n/a

10%

17%

8%

Computer Internet retail software

21%

25%

12%

7%

16%

19%

7%

8%

0%

21%

17%

Food and staples retail

22%

n/a

17%

9%

Commercial printing

n/a

5%

7%

15% 21%

n/a

7%

Source: SCB EIC analysis based on data from Bloomberg

Potentially attractive services businesses in Singapore are those related to trade, such as retail apparel shops, computer and electronics shops, distributors, and department stores. In Malaysia, IT services and internet software services tend to make high profits. From the data collected for this analysis, we have also found interesting trends; for example, in ASEAN, low-cost airlines have almost twice the EBITDA margin than general commercial airlines; and there is only one human resources services company registered in an ASEAN stock exchange, and its profit margin is as high as 40%.

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EIC Economic Intelligence Center

4

Sector in Focus: What is the impact of

AEC on the hospital sector? ASEAN countries attach great importance to the hospital sector as it is one of the four Priority Integration Sectors. Thailand has an advantage given her international reputation and profitability in services. Integration towards the AEC will open competition which, on the other hand, also presents a greater opportunity for Thailand to exercise her existing advantages in seeking more benefits, but the country will need to find the right opportunities. The liberalization of the hospital sector under the AEC will significantly affect the sector in Malaysia, the Philippines, Thailand, and Indonesia because of the elevation of the percentage of foreign shares ownership of ASEAN nationality to 70%. The hospital sector in Singapore, Vietnam, and Cambodia will experience a smaller impact as they do not limit foreign shareholding.

opens a window of opportunity for further investment in healthcare services in Indonesia, Thailand, the Philippines and Malaysia 11 AEC Current foreign share ownership limit of healthcare services in ASEAN countries

Singapore

100%

Vietnam

100%

Cambodia

100%

Indonesia

67%

Thailand

49%

Philippines Malaysia

40% 30% AEC = 70%

Source: SCB EIC analysis based on data from Jutamas and Fink (2007) 5

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Jutamas Arunanondchai and Fink, Carsten (2007), “Trade in Health Services in the ASEAN Region�, World Bank Policy Research Working Paper 4147, March 2007


EIC Economic Intelligence Center

The hospital sector in Thailand may not feel that much impact from a bigger proportion of foreign shares because currently there is only an average of 15% foreign share ownership of hospitals in Thailand. The greatest percentage is 40%, which is lower than the current limit. This could mean that ASEAN investors had little interest in equity participation up to the limit. Therefore, an increase in the ceiling may not necessarily result in more investment as the constraint or ceiling on investment is not a binding one at present. Thus, the opening up to a greater proportion of foreign shares in the hospital sector may not seriously affect the hospital sector in Thailand. The more significant impact may come from greater competition for health care professionals. This is due to the limited number of professional workers in the field of healthcare, especially physicians. Only Singapore, the Philippines, and Brunei have physicians above the average of lower-middle income countries. This will affect investment and lead to further social problems such as inequitable access to medical services because hospitals will bear greater costs in attracting and employing medical personnel. Medical service fees may increase as a result.

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Inadequacy of healthcare professional workforce in ASEAN Lower-middle income countries

Country

Nursing and midwifery personnel

Physician

Pharmaceutical personnel

Unit: per 10,000 population

Singapore

15

Philippines Brunei Malaysia

44

12

61

11

61

7

Vietnam

6

Myanmar

4

3

18

6 1 1

8 10

3 <0.5

Thailand

3

Lao PDR

3

10

2

8

<0.5

8

<0.5

Cambodia Indonesia

1

14

1 n/a

Source: SCB EIC analysis based on data from World Health Statistics 2010, World Health Organization (WHO)

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EIC Economic Intelligence Center

In terms of business growth opportunities, demand for healthcare services in ASEAN look quite positive, with an increase in the aging population as a major driving factor. The United Nations has forecasted that the proportion of aging population (people above the age of 60), will jump from 11% in 2010 to 15% in 2025 and 22% in 2050. Singapore will rank first among ASEAN, with a proportion of 30% in 2025 and 35% in 2050, increasing from the current ratio of 16%. Thailand will come in second with an increase from the current 12% to 27% by 2050.

for healthcare services in ASEAN is on an upward trend 13 Demand Proportion of population aged over 60 in ASEAN countries Unit: %

Singapore

Thailand Vietnam Indonesia Malaysia Philippines

Source: SCB EIC analysis based on data from United Nations

Business opportunities for hospitals in ASEAN, Indonesia, the Philippines, Lao PDR, Cambodia, and Myanmar appear attractive compared with other countries. The ratios of the number of hospital beds to population in these countries are below the average of lower-middle income countries. They also spend less on healthcare compared with Malaysia, Singapore, and Thailand.

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EIC Economic Intelligence Center

healthcare services are needed in Indonesia, the Philippines, Lao PDR, Cambodia and Myanmar 14 More Hospital bed in 2000-2009 Unit: per 10,000 population

753

22

Thailand

136

18

Malaysia

12

Lao PDR

Philippines

58

26

Brunei

Myanmar

1,148

28

Vietnam

Cambodia

Unit: USD at average exchange rate

32

Singapore

Indonesia

Per capita total expenditure on health in 2007

6

307 27

Lower-middle income countries = 18

42

n/a 6

36 7

5

Lower-middle income countries = 80

63

Source: SCB EIC analysis based on data from World Health Statistics 2010, WHO

Despite greater opportunities in the hospital sector, businesses will face other barriers, such as domestic rules and regulations. For example, in Indonesia, foreigners can only invest in hospitals with more than 200 beds and can only work as consultants. The Indonesia government intends to prevent money flowing out of the country from Indonesian patients using health services abroad. In addition, every hospital must provide 10% of their total services as third-class services to poor people, in order to enhance their accessibility to services in quality hospitals. Nonetheless, the hospital sector in Indonesia remains tempting because of an increase in the number of people in the middle and upper classes, as well as cheap labor. During 1993-1999, the National Investment Coordinating Board authorized foreign investment in 12 projects worth about USD 234 million. Most of the investors were Singaporean or Australian. The Philippines has an advantage in possessing a large number of nurses who can communicate in English and are qualified by US standards. The number of nurses from the Philippines working abroad accounts for 25% of the total number of foreign nurses around the world. In the US alone, nurses from the Philippines account for 83% of total foreign nurses. Their salaries are as high as USD 5,760 a month. On the contrary, working in the Philippines will earn them only USD 175 a month. This could lead to difficulty for hospitals in the Philippines as many nurses will flow out of the country.

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EIC Economic Intelligence Center

Investment in healthcare services with a focus on cardiology could present a good opportunity in ASEAN because heart disease, especially, ischaemic and hypertensive heart disease, are among the top causes of death in ASEAN. Therefore, an investment in the hospital sector in ASEAN with a focus on cardio centers would attract more attention and will see greater demand.

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Expertise in cardiology could render great opportunity

Top five causes of death of ASEAN population Rank

Thailand

Singapore

Malaysia

Philippines

Indonesia

HIV/AIDS

Ischaemic heart disease

Ischaemic heart disease

Lower respiratory infections

Ischaemic heart disease

Ischaemic heart disease

Lower respiratory infections

Cerebrovascular disease

Ischaemic heart disease

Tuberculosis

Cerebrovascular disease

Cerebrovascular disease

Lower respiratory infections

Tuberculosis

Cerebrovascular disease

Diabetes mellitus

Trachea, bronchus, lung cancers

Chronic obstructive pulmonary disease

Hypertensive heart disease

Lower respiratory infections

Road traffic accidents

Colon and rectum cancers

Hypertensive heart disease

Perinatal conditions

Perinatal conditions

Source: SCB EIC analysis based on data from World Health Statistics 2010, WHO

In conclusion, the hospital sector in Thailand may not be seriously affected by an enlarged foreign shares ownership limit for ASEAN nationals. Currently the average level of total foreign share ownership in hospital business in Thailand is 15%. The largest percentage is 40%, which is lower than the current limit set forth by law. But the sector could be affected by the inadequacy of needed health care workers because most of the ASEAN countries, with the exception of Singapore, the Philippines, and Brunei, have an insufficient number of healthcare workers. Nonetheless, Thailand can exercise her strength and reputation in healthcare services to extend investment to Indonesia, the Philippines, Lao PDR, Cambodia, and Myanmar, where there is a positive demand trend, while trying to focus on heart disease as it is at the top of the mortality lists in ASEAN.

22


5

EIC Economic Intelligence Center

How should

businesses adapt?

Full leveraging of core competencies will be key in maximizing benefits from emerging opportunities in the ASEAN market under AEC.

16

Full leveraging of core competencies will be a key

4 potential ASEAN

3 trends in AEC • Concentration of production • Non-tradables to tradables • ASEAN expatriate class

market

+

• Intra-region tourism • Biggest Muslim population • Growing middle-income class • Aging population

Leverage core competency Example Healthcare services +

aging population =

real estate for retiree

Hotel management +

ASEAN tourists

=

Thai brand hotel management

Food processing

muslim

=

center of halal food

+

Source: SCB EIC analysis

Thai businesses must step out by using the ASEAN market as a starting point in strengthening themselves before possible further market integration like ASEAN+3, where we will see even more intense competition from businesses in China, Japan, and South Korea. We need to start by fully leveraging and rolling out our core competencies or strengths as well as seeking out opportunities from trends arising from the AEC and the salient features of the ASEAN market.

23


EIC Economic Intelligence Center

BOX: What about the sectors where we have traditionally been strong? The AEC will bring forth greater opportunities for advantageous and strong Thai businesses such as the hospitality, automotive and auto-parts manufacturing, and food processing sectors. Hospitality and spa sector The Thai hospitality sector earns more income from foreign tourists for Thailand in comparison with other ASEAN countries. During the time when tourism was not affected by the global economic crisis, Thailand made about USD 18 billion from foreign tourists, 20% higher than second place Malaysia. Thailand also has advantages, as it has many renowned tourist destinations. Thus, it is likely that Thailand will benefit from the growing popularity of tourism in Asia. The World Tourism Organization (UNWTO) forecasts that in the next 10 years, the proportion of tourists travelling to Asia-Pacific will increase from the current 20% to 27%, while the proportion of tourists travelling to Europe will drop from 52% to 46%. ASEAN integration towards a single market will top-up opportunities for the Thai hospitality sector to earn additional income. For example, the organizing of package tours throughout ASEAN instead of only in Thailand by networking with travel agencies in other ASEAN countries or establishing branches abroad. Thailandâ&#x20AC;&#x2122;s reputation will help attract tourists to the country. On top of this, travel agencies will have an opportunity to advertise and try to sell their package tours to other ASEAN countries. Manufacturing sector: food processing and automotive & auto-parts Food processing and automotive & auto-parts manufacturing tend to receive bigger benefits arising from comparative advantages in manufacturing and trading. Thailand holds the largest proportion of exports, with a percentage of 77% in food processing and 61% in automotive and auto-parts manufacturing. The automotive and auto-parts industry will especially benefit from Thailand being a big production base due to infrastructure, knowledge, and labor capacity. This will further push Thailandâ&#x20AC;&#x2122;s benefits in a bigger market with more intense competition, and in future automotive trends. An obvious example is the growing popularity of eco-cars, of which investment worth 34 billion baht is planned in Thailand. Indonesia, which is the second largest automobile manufacturer in ASEAN, is promoting investment in eco-car manufacturing but has not yet had clear criteria and specification for such eco-cars. This business in Thailand will have an excellent chance to benefit more from the integration towards a single market. There is also increasing consumption in ASEAN, especially in Indonesia and Lao PDR, where food consumption is increasing as a result of the growing number of middle and high income populations. Demand for durable goods, including cars, will also increase in parallel.

24


EIC Economic Intelligence Center

A single market and production base in AEC will likely foster at least three key trends worth keeping an eye on: (1) the concentration of production to new bases with potential in terms of raw materials and markets, like the evolution of pick-up truck manufacturing in Thailand, (2) the age of new service products where non-tradables (services) become more tradable, e.g. organizing wedding events in Thailand for foreign couples, and (3) the emergence of a new ASEAN expatriate class, resulting from labor mobility in ASEAN, as exemplified by the increasing number of Singaporean executives in Lao PDR and Cambodia. Production will be increasingly concentrated to new bases with market advantages and natural resources, and can benefit from production networks and regional logistics webs in ASEAN. This is similar to the expansion of pick-up truck manufacturing in Thailand, which started with their popularity among Thai people and continuously developed until Thailand became a regional pickup center, benefiting related businesses. In addition, there may be a natural resource-based advantages. For instance, Indonesia has ample marine resources, especially, tuna fish and shrimp, and is the biggest overseas fishery. Although not specialized in food processing, Indonesia intensely promotes foreign direct investment, which attract many international food processing companies6. Non-tradables will increasingly become tradable in ASEAN. For example, patients can choose their hospital in other countries; the retired can decide to live in a place with appropriate services; and couples from overseas might come to Thailand to have a grand wedding ceremony at a cheaper price. Thai tourism can build upon these new service products which, in turn, will bring greater competition in tourism and will lead to the creation of new tourist attractions and recreation developments like Marina Bay in Singapore. Wedding ceremonies and celebrations by foreign multimillionaires in Thailand, which have made the news recently, furnish examples of new service products for which borders have been expanded. Additionally, the hospitality and tourism sectors will benefit from wedding couples and guests spending extra time in Thailand. The promotion of and support for the Malaysia My Second Home Program (MM2H) is another example of a new way of generating income from services for retired people, formerly confined to the domestic market. The focus has now shifted to an aging foreign population with high purchasing power. This leads to the development of related businesses, such as real estate and healthcare services. Another example is Singaporeâ&#x20AC;&#x2122;s big step beyond her land limitation. She overcomes the limit by investing in schools and institutions in Thailand as well as developing curriculum in accordance with her standards to accommodate both local students and Singaporean students in the future. A new class has emerged from freer labor mobility in countries, especially those that lack skills and need highly skilled labor. For example, companies investing and locating in Lao PDR, Cambodia, and Vietnam need executives and managerial expertise from more developed countries like Singapore. This has created a new class and market with higher purchasing power than locals, as we can see from the customers of Thailandâ&#x20AC;&#x2122;s leading hospitals.

6

Indonesian law stipulates that 70% of marine creatures caught in Indonesian water must be uploaded at Indonesian ports for distribution or process in the country. For foreigners, food processing business must be in a form of joint venture with Indonesian nationals. The maximum percentage of foreign shares held is 80%.

25


EIC Economic Intelligence Center

While the AEC is facilitating the creation of a single market, businesses should hasten to tap these new markets in order to establish market share. Emerging opportunities will come form at least three areas. 1. Behavioral changes in ASEAN. Greater importance is given to children’s education. More time is spent on vacation. People tend to spend for satisfaction and pleasure over utility. Obvious examples are the competition in the field of education in Singapore that has policies underscoring human resource development, and the increasing number of Lao students in Thailand. Regarding time spent on vacation, intra-ASEAN travelling has grown at an average of 7% per annum during the last 8 years compared to global travelling, which has only risen an average of 5% a year. In addition, the group of consumers who are willing to pay for their satisfaction and pleasure has expanded, as we can see from the spawning of expensive restaurants in many cities. 2. Demographic changes in ASEAN. The working population is on the decrease while the aging population is increasing. The size of the middle-income class that has a modern lifestyle i.e. using mobile phones, living in condominiums, and spending most of their time in shopping malls, is growing. 3. Country-specific factors. For example, in Singapore, agricultural fields account for only 3% of the total land in the country and can only produce 3 kinds of goods which are (1) seafood (fish), (2) eggs and, (3) vegetables accounting respectively for 4%, 23% and 7% of total consumption. Indonesia has the largest Muslim population, who composes an important market for Halal food, while the Muslim population in Malaysia has the third highest purchasing power among Muslim populations, following Saudi Arabia and Turkey. Full leveraging and rolling out of core competencies or strengths seems to be a good start to expanding business in the ASEAN market in the age of the AEC, which will create a critical mass of consumers in the region that all businesses can access. Each business needs to find its core competencies. For instance, Thailand has reputation and strength in the area of healthcare services, including hospitals and personnel. It will be a great opportunity to tap the retired population of ASEAN, of which the proportion will increase from the current 9% to 12% in the next 10 years. Both Thailand and Malaysia are voted the top 2 destinations out of 30 to spend post retirement years. We in turn begin to see the development of real estate aiming at attracting this market both in Bangsaen, Hua Hin, Chiang Mai, and Phuket. Brand building in Thailand’s hotel management is another example of expanding business from strengths and advantages. It will also create more ASEAN brands, in addition to the “Red Bull” that is the only ASEAN brand ranked in the world top 100 most valuable global brands 2010 according to Millward Brown. Regional hotel management brands tend to have an advantage over international brands given the increase in intra-ASEAN travel. It is forecasted that intra-ASEAN travel will increase at an average of 8% yearly for the next 20 years, while travel between ASEAN and other regions will increase by 6% on average. Even though international hotel chain brands gain more recognition regarding uniform standards and excellent customer databases, the increasing number of customers who are willing to pay will be a good opportunity for Thai brands.

26


EIC Economic Intelligence Center

The expertise in the food processing sector and being a source of raw materials are advantages for moving towards becoming a center for Halal food. There are 270 million Muslims in ASEAN. Moreover, the growth rate of the global trade value of Halal food remains higher than the total food trade. In 2005-2009, the trade value of Halal food increased by 18.2% annually, higher than total food trade value, which increased by only 10.4%. Furthermore, the export of Halal food from Thailand is growing, and Thailand is now the fifth largest exporter of Halal food globally and the first in ASEAN. From now on, the main difficulties faced by businesses may not necessarily be in finding markets, because the AEC will help create a critical mass of consumers for many businesses. From traditional service products, there will be new products which become more tradable. For example, the wedding event organizing business, which was formerly confined to the domestic market, will now attract foreign clients. The next step for Thai businesses will be to penetrate markets and businesses in which we are competitive and can fully leverage our core competencies to be the very first to enter the market and imprint Thai brands at the ASEAN level to progress further in the global level in the future.

27


EIC Economic Intelligence Center

Contributors Vithan Charoenphon vithan.charoenphon@scb.co.th (662) 544-2478

Vithan received his BA in economics with honors from Chulalongkorn University and his MSc Economics from Thammasat University. Prior to joining Siam Commercial Bank, Vithan has previously held positions with Ministry of Finance (Fiscal Policy Research Institute) and the Stock Exchange of Thailand.

Ekasit Kanchanapinyokul ekasit.kanchanapinyokul@scb.co.th (662) 544-3085

Metinee Jongsaliswang Head of Research metinee.jongsaliswang@scb.co.th (622) 544-3259

Ekasit received his Bachelor of Economics with honors and MA in International Economics and Finance (international program) from Chulalongkorn University.

Metinee received her BA in accounting (international program) with Gold Medal from Thammasat University and her MBA as Fulbright scholarship recipient from Kellogg School of Management, Northwestern University. Prior to joining Siam Commercial Bank, Metinee has previously held positions with McKinsey & Company, PricewaterhouseCoopers and the Stock Exchange of Thailand.

28


EIC Economic Intelligence Center

SCB Economic Intelligence Center Sethaput Suthiwart-Narueput

Bunyanuch Niltakoch

Chief Economist sethaput.suthiwartnarueput@scb.co.th (662)544-4996

Executive Assistant bunyanuch.niltakoch@scb.co.th (662)544-5644

Research Metinee Jongsaliswang

Ekasit Kanchanapinyokul

metinee.jongsaliswang@scb.co.th (662)544-3259

ekasit.kanchanapinyokul@scb.co.th (662)544-3085

Pornthep Jubhandhu

Mantana Lertchaitawee

pornthep.jubandhu@scb.co.th (662)544-3066

mantana.lertchaitawee@scb.co.th (662)544-6760

Pranida Syamananda pranida.syamananda@scb.co.th (662)544-2705

Paradee Vivatanaprasert paradee.vivatanaprasert@scb.co.th (662)544-2475

Vithan Charoenphon vithan.chareonphon@scb.co.th (662)544-2478

Witchuda Chummee witchuda.chummee@scb.co.th (662)544-1644

Kampon Adireksombat kampon.adireksombat@scb.co.th (662)544-1463

Research Networking Darakorn Pipatanakul darakorn.pipatanakul@scb.co.th (662)544-4006

Pinattha Aruntat pinattha.aruntat@scb.co.th (662)544-2953

Vipasara Arpaskundait vipasara.arpaskundait@scb.co.th (662)544-6566

Jiraporn Kritsadarak Executive Assistant jiraporn.kritsadarak@scb.co.th (662)544-6759

Akarapat Charoenpanich akarapat.charoenpanich@scb.co.th (662)544-5602

Disclaimer : The information contained in this report has been obtained from sources believed to be reliable. However, neither we nor any of our respective affiliates, employees or representatives makes any representation or warranty, express or implied, as to the accuracy or completeness of any of the information contained in this report, and we and each of such persons expressly disclaims any and all liability relating to or resulting from the use of this report or such information by the receipt and persons in whatever manner. Any opinions presented herein represent the subjective views of ours and our current estimated and judgments which are based on various assumptions that may be subject to change without notice, and may not prove to be correct. This report is for the recipientâ&#x20AC;&#x2122;s information only. It does not represent or constitutes an advice, offer, recommendation, or solicitation by us and should not be relied as such. We or any of our associates may also have an interest in the companies mentioned herein.

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