Southeast Asia Archives

December 25, 2025 — No Comments

The Rise of Southeast Asia as a Global Manufacturing Hub

By Dejvi Dedaj - South East Asia and Oceania Desk

Introduction

Southeast Asia, once regarded as a periphery to the global manufacturing systems, has quickly become a core centre of the world production. Geopolitical tensions, in particular the U.S.-China trade war, increased labour costs in China, and the experience of the COVID-19 pandemic have made multinational companies reconsider their supply chains, moving production to new ASEAN economies like Vietnam, Indonesia, and Malaysia.

This change is not just a geographic change, but a structural change in the global economy. The integration of the region into international supply chains has been enhanced by competitive labour markets, improved infrastructure and extensive trade agreements such as Regional Comprehensive Economic Partnership (RCEP), which have increased resilience and efficiency. Meanwhile, the growing financial ecosystem of Southeast Asia, including advanced capital markets, green and infrastructure financing, facilitates industrial development and innovation. But the emergence of the region is not without problems. The complex environment companies and governments have to operate in to maintain long-term growth is indicated by infrastructure gaps, human capital constraints, and geopolitical uncertainties.

The Forces Behind the Shift

The shift of the global manufacturing to Southeast Asia is due to several convergent forces. The post-2018 global trade environment has become characterized by geopolitical diversification, which has changed the way multinational companies organize their supply chains. The escalation of tariffs and the growing political tension between the United States and China posed greater uncertainty to the companies that had a high concentration of production in one country. The trade barriers, regulatory uncertainty, and the threat of disruption of supply at any time made companies rethink the stability of their current networks. Companies have responded by diversifying production in more than one country to minimize exposure to geopolitical shocks and safeguard the continuity of their operations. Their strategic location in Asia, comparatively open trade policies and integration into regional trade agreements have made neighbouring economies like Vietnam, Malaysia and Indonesia attractive alternatives. This change is indicative of a larger trend in the global supply chain strategy, where risk reduction and operational flexibility are now as important as cost efficiency in investment and production decisions.

The COVID-19 pandemic further supported the urgency of this diversification strategy. The crisis demonstrated the fragility of over-centralised supply chains and the strategic need of flexible, geographically dispersed production networks. Businesses realised that dependence on one nation, even as productive as China, could bring the world to a standstill. As a result, the geopolitical tensions and the vulnerabilities caused by the pandemic increased the pace of investment in ASEAN economies, as companies tried to establish resilient, diversified, and regionally balanced supply chains.

Moreover, Increasing labour expenses in China have emerged as one of the major reasons that have led to the outsourcing of manufacturing to Southeast Asia. In the last ten years, the wages in the manufacturing centres in China have gone up significantly making the country less competitive in terms of cost in labour intensive industries. Conversely, other Southeast Asian nations such as Vietnam and Indonesia are still providing relatively lower labour costsand thus are viable alternatives to industries such as textiles, electronics assembly and consumer goods. As a result, multinational companies that wish to remain cost effective and at the same time remain near the established supply chains are increasingly shifting production to Southeast Asia where an emerging industrial base is supplemented by favourable labour conditions.

Figure 1: Evolution of China’s Average Wages

Lastly, bilateral free trade agreements and the RCEP have greatly strengthened the regional supply chain connectivity in the Asia-Pacific. RCEP, which encompasses approximately 30 percent of the world GDP, enables the smooth flow of intermediate goods and investment among member economies by harmonising trade rules and reducing tariffs. This structure allows the multinational companies to spread the production to multiple countries in Asia without losing preferential access to the market, which makes it more resilient to geopolitical or pandemic-related shocks. The bilateral agreements like the Japan-Thailand EPA and the Indonesia-Korea CEPA are also complementary and enhance market integration and investment opportunities. Collectively, these institutional arrangements support the transition of the region to interdependent and elastic supply chains.

Financial and Economic Implications

The economic consequences of the manufacturing transformation in Southeast Asia go way beyond the relocation of industries, they are an indication of the new financial geography. Although foreign direct investment (FDI) has declined globally, ASEAN has registered its third year of consecutive growth in the region, while its stock increased by 56% since 2014, reaching $3.9 trillion. The major forces were the increased investors’ interest in finance, renewable energy, electric vehicles (EVs), and the reorganization of the supply chain. Financial sector was the largest inflow, which rose to $92 billion, and R&D activities were increasing rapidly, primarily in Singapore. Even though manufacturing FDI fell a little, it was still significant, representing 66% of all greenfield investments, indicating that ASEAN is still a manufacturing and innovation centre in the world.

Figure 2: Global FDI Flows, 2021–2023 (Billions of US Dollars and Year-on-Year % Change)

Figure 3: ASEAN FDI Flows, 2021–2023 (Billions of US Dollars and Year-on-Year % Change)

Source: UNCTAD (2024)

These changes are not just operational but reflect more fundamental financial rebalances that have been the basis of the rise of Southeast Asia as a manufacturing centre in the world. The capital markets in the region are also getting more sophisticated, which allows domestic companies to have a wider range of financing options and become more integrated into the global supply chains. The swift increase in green and sustainability bond issuance, including Singapore which leads the ASEAN’s US$7.8 billion green bond market and Vietnam reaching $1.5 billion in 2021, is an example of the growing financial infrastructure that facilitates industrial growth. The fact that Singapore is a regional financial centre also supports the cross-border trade finance and green financing programs, and other countries such as Malaysia and Thailand are also enhancing domestic markets to fund corporate investment. These financial innovations offer the required liquidity, sustainability orientation and capital depth to maintain the industrial and supply chain transformation in the region.

Financing of infrastructure is also very important in maintaining the growth of manufacturing in the Southeast Asia. TheADB and the Asian Infrastructure Investment Bank (AIIB) are development institutions that have increased investments in logistics and energy infrastructure, which has facilitated the industrial transformation of the region. In 2015-2023, ADB and AIIB together invested billions of dollars in transport, power, and connectivity projects in ASEAN. The modernization of the deep-water ports in Vietnam, trans-island logistics corridors in Indonesia and the Eastern Economic Corridor in Thailand are increasing production capacity and intra-regional trade. Such projects do not only improve physical connectivity, but also bring in private capital in the form of public-private partnerships, which forms a basis of long-term supply chain resilience.

The transformation further extends into digital financial systems. Local payment systems are being integrated through regional payment linkages, e.g. the cooperation between Singapore, Thailand, Malaysia and Indonesia to enable quicker, less expensive and more secure cross-border payments. These links lower the transaction costs and contribute to the increase of financial inclusion, particularly among micro, small, and medium enterprises. This financial digitalisation increases the efficiency of trade and is a strong complement to the physical integration which has been attained through diversification of the supply chain.

Difficulties and Structural Constraints

In spite of such achievements, the development of Southeast Asia as a global manufacturing hub is associated with a number of structural issues that may jeopardize its sustainability in the long run. Among the most urgent problems, infrastructure gaps are still present. Although developed economies like Singapore and Malaysia have advanced their global logistics, port, and digital networks, others, especially in the Mekong subregion, such as Cambodia, Laos, and Myanmar, are still grappling with poor transport, energy, and digital infrastructure. According to the estimates of the ADB, ASEAN needs more than $2.8 trillion of infrastructure investment between 2023 and 2030 to address the projected economic and population growth. Persistent gaps in connectivity increase transit times, raise shipping and energy costs, and fragment supply chains that rely on just-in-time production. In addition, the disparity in the quality of infrastructure between the coastal and the inland regions restricts the possibility of industrial diversification outside of the major urban centres, which results in development imbalances that inhibit inclusive growth.

The lack of human capital and skills also limits the long-term competitiveness of the region. With the global manufacturing shifting to more high-value, technology-intensive manufacturing, Southeast Asia is experiencing a shortage of skilled engineers, data specialists, and technicians. Whereas other economies such as Singapore and Malaysia have invested a lot in technical education and research and development, others are lagging behind, with the vocational training systems being out of sync with industry requirements. World Bank and ADB reports indicate that a large percentage of the ASEAN workforce will need to be reskilled by 2030 to meet Industry 4.0 technologies, especially in digital, technical, and high-value manufacturing jobs. In the absence of strategic investments in education, STEM programmes, and workforce mobility, most countries will continue to be reliant on low-cost, labour-intensive production, instead of moving towards innovation-based growth.

Lastly, the geopolitical uncertainty is looming large over the rise of Southeast Asia. The same dynamics that have driven its expansion, U.S.-China competition and the global drive towards supply chain diversification, are also the ones that put it at risk of volatility. The trade restrictions, technological decoupling, or regional tensions in the South China Sea could disrupt production networks and deter foreign investment. The strategic neutrality of ASEAN and the enhancement of its collective voice in the multilateral forums will be critical to the stability and investor confidence. The effects of global fragmentation can be reduced through initiatives that strengthen transparency, supply chain security, and financial resilience.

Conclusion

The rise of Southeast Asia as a manufacturing hub in the world is an indication of a strategic repositioning of production, finance, and innovation. The geopolitical tensions, increasing costs in China, and vulnerability to the pandemic have increased the pace of investment in the region, whereas trade agreements, infrastructure, and financial development contribute to the growth. However, there are still obstacles, such as skill shortages and infrastructure differences, and geopolitical risks. The long-term success will involve aligned policies, strong supply chains, and human and physical capital investments.

June 4, 2025 — No Comments

China and Taiwan’s competition in Southeast Asia and Oceania

In this espisode, Dr. Simona Grano discusses the geopolitical implications of Chinese and Taiwanese influence in Southeast Asia and Oceania, and how this influence is being perceived and addressed by regional actors.

This podcast analyses how China is applying its strategic initiatives to influence infrastructure development and economic integration in Southeast Asia and Oceania examining Taiwan's counterbalancing efforts. It also investigates how regional nations navigate their relations with both China and Taiwan, the function of regional organisations, and the security ramifications of China's growing military might and a potential AUKUS alliance during the Trump era.

Dr. Grano is a distinguished expert in China and Taiwan issues. Dr. Grano serves as the Senior Fellow on Taiwan at the Asia Society Policy Institute's (ASPI) Center for China Analysis (CCA). She is also currently a Senior Lecturer and Director of the Taiwan Studies Project at the University of Zurich.

Interviewer: Kristina Kovalenko - Southeast Asia & Oceania Desk

December 9, 2024 — No Comments

China’s Belt and Road Initiative: A Double-Edged Sword for the Pacific Region

by Dejvi Dedaj - SouthEast Asia & Oceania Team

Introduction

The Belt and Road Initiative (BRI) is an initiative adopted by China in 2013 to strengthen connectivity and cooperation among Asia, Europe, and Africa – and even extending to some regions in Latin America and Oceania – making its influence felt as the reinvigorated and wider Silk Road. The BRI establishes an extensive network of infrastructure projects to facilitate international trade and accelerate economic growth. Ranging from railways, highways, ports, and electricity power plants, the initiative is committed to rendering the movement of goods, services or resources more efficient.

The BRI stands upon two fundamental pillars, namely the Silk Road Economic Belt, which uses railways, roads, and pipelines to connect China to Europe via Central Asia, and the 21st Century Maritime Silk Road, a maritime route that links China to Southeast Asia, South Asia, Africa, and Europe via strategic ports and shipping lanes.

Notably, under the BRI, China allocates funding to the countries participating in infrastructure projects, mostly in the form of loans. Accordingly, notwithstanding the general interest in the BRI initiative, the project has attracted considerable criticism. Although proponents of the BRI assert that it boosts development, employment, and trade within participating countries, critics counter that BRI projects may elevate some countries into high debt levels, thus increasing their economic dependence on China and raising issues of sovereignty and environmental impact and sustainability. Indeed, the BRI is often viewed as a double-edged sword, both filling gaps in infrastructure and improving trade routes, but also positioning China as a leading financier in the global arena.

BRI Economic Benefits in Southeast Asia and Oceania

The BRI has provided a forum for investing in improving infrastructure, which, in turn, enhances connectivity and the interchange of goods among Southeast Asia and Oceania. For example, the China-Laos Railway—completed in 2021 and spanning 1000 km—facilitates the cheaper export of goods by connecting Laos to China’s southern Yunnan province, helping to spur economic growth in Laos by improving its access to international markets. In addition, the deep-water port in Gwadar, which is part of the much-discussed BRI despite being located in Pakistan, is relevant for Southeast Asian and Oceania trade as it significantly boosts maritime linkages with the Indian Ocean.

In addition, BRI investments have provided employment and stimulated sectors such as construction and manufacturing in developing regions. For instance, BRI projects such as the Jakarta-Bandung high-speed railway, in Indonesia not only bring new transportation possibilities but also foster job creation and knowledge transfer that advances and reinforces local industries while expanding economic capabilities.

Financial Challenges and Debt Risks

The biggest challenges faced by the BRI are debt vulnerabilities. Most of the projects involved are financed by loans, imposing significant burdens to smaller economies. Indeed, massive Chinese loans used to fund contemporary megaprojects have landed entire countries in a debt trap—Laos today stands burdened by a substantial debt relative to the country’s GDP. Similarly, in Malaysia, the East Coast Rail Link raised doubts about the viability of Chinese loans, causing the Malaysian government to renegotiate project terms amidst worries they would not be able to pay back such large loans, thus reducing the country’s financial strain.

Besides, the reliance on Chinese financing for BRI projects has created economic dependence of some Southeast Asian and Oceanian countries. Such dependence threatens to undermine the countries’ political and economic independence and sovereign control over their infrastructure and natural resources, as they become more and more beholden to Beijing. Fears emerge that these nations may become even more entangled with Chinese interests, thus helping China to gain more control over their policy decisions. For instance, Papua New Guinea faces akin challenges, since reliance on Chinese-funded ports and mining ventures, could make the country highly vulnerable, if revenues generated from these investments are not as expected.

*Picture by Joe Shlabotnik, "Cargo Ship*" - *https://creativecommons.org/licenses/by/2.0/*

Strategic and Geopolitical Implications

The establishment of Chinese capital is remaking strategic and geopolitical realities in Southeast Asia and Oceania, as countries increasingly align their economic policies with Chinese interests. Nowhere has this been truer than in countries that rely on BRI investments as the primary conduit for infrastructure financing. Among the more prominent beneficiaries are Indonesia, home to some of China's most considerable BRI investments—as well as Pakistan, a key player in the initiative through its participation in CPEC and various infrastructure projects spanning energy and transportation. Laos, Kenya, and Sri Lanka are other countries that have raised substantial amounts via BRI-financing, which has supported necessary development in areas such as transport and energy, but this has come at the cost of taking on sizable levels of debt to the Chinese government.

The newly emerging Chinese presence is therefore regarded as a counterbalance to the US’ traditional influence, subsequently shifting the scale of power in an area usually perceived as fostering and perpetuating the conventional paradigm of the status quo. Indeed, several local communities have objected to BRI-related projects owing to the fear of ceding sovereignty over resources and strategic assets.

For example, the East Coast Rail Link in Malaysia has raised serious alarm about the possible adverse impact on the habitats along the coastline, as well as the control exerted by China over sensitive infrastructure. In Indonesia, critics have condemned Chinese-funded mining projects in Sulawesi due to environmental degradation, illegal logging, and displacement of locals. Sri Lanka’s leasing of Hambantota Port to a Chinese firm as a way of repaying a debt has likewise fuelled such fears that China could gain strategic leverage in the region. These cases show a hidden conflict between the general benefits that some countries get from infrastructure investments and threats to national sovereignty concerns.

Although BRI has also led to closer collaboration between Southeast Asian nations and China on shared infrastructure projects, promoting regional integration, it can also create tensions, as countries compete for Chinese investments or respond to public pressure to resist perceived Chinese overreach. For instance, Malaysia, Indonesia, and Thailand are negotiating BRI projects cautiously, trying to strike a reasonable balance between economic benefits and potential national security risks.

Conclusion

Evidently, the impact of the BRI has been substantially felt across Southeast Asia and Oceania, with the participating countries witnessing critical improvements in connectivity and infrastructure. Indeed, BRI projects have presented unique economic advantages, especially in the fields of transportation and employment in developing areas. That said, financial and geopolitical difficulties stemming from funding such BRI projects cannot be dismissed. Heavy economic reliance on Chinese investments poses a significant challenge to national sovereignty and long-term fiscal sustainability for several countries such as Malaysia, Laos, or Papua New Guinea, whose dependence on the Chinese Government has been conducive to burdensome debt-induced obligations and foreign interference with local affairs. What is more, China’s ever-growing presence on the global scene has remodelled the geopolitical landscape, challenging the conventional Western influence in the region.

This intricate relationship between the sought-after economic development in the region and the associated sovereignty risks has often led to local resistance to some BRI projects. However, such nuanced navigation of interstate relationships, particularly with China, is the only way forward to ensure sustainable, independent growth in today’s rapidly globalising, interconnected world. Indeed, should these economic and geopolitical challenges not be effectively addressed, then the BRI’s success cannot be guaranteed.