(Yicai) Dec. 24 -- Southeast Asia, a region favoured by Chinese companies expanding overseas, offers unprecedented growth opportunities for expansion while demanding a nuanced approach because of its diverse economic, political, and cultural landscape, according to a new white paper contributed by Cambridge Advisers and the National University of Singapore Business School.

“The ASEAN market presents huge opportunities, but most enterprises are still in an exploratory stage and have encountered various setbacks” as a result of the region’s diversity, said Raymond Moh, a senior adviser at Cambridge Advisers and one of the main contributors to Navigating Into Southeast Asia: A Practical Roadmap to Successful Regional Expansion.

Chinese companies increasingly view the member states of the Association of Southeast Asian Nations, of which there are 10, as favourable locations for offshore production, drawn there by Southeast Asia’s strategic location, the region’s free trade agreements, favorable taxation policies, and lower labor costs among other positive factors.

Chinese non-financial direct investment in SE Asia reached almost USD116 billion in the first 10 months of this year, following USD130 billion last year, demonstrating sustained interest from Chinese firms, even as they grapple with the region’s complexities.

The common pitfalls that businesses expanding into the region encounter include inadequate long-term planning in corporate structure, underutilization of tax incentives and government support programs, and cultural differences leading to operational challenges, Moh told Yicai recently when launching the white paper in the Chinese city of Wuxi. 

“Hidden costs are often overlooked,” he noted. “We aim to help Chinese enterprises minimize risks as much as we can as they expand internationally.”

Navigating Into Southeast Asia offers a six-stage framework with checklist questions and case studies to help companies from thoughtfully planning and refining their strategies before expanding into target countries or investment destinations to ongoing management of operations and setting long term performance indicators.

The roadmap, put together under the guidance of NUS’s Professor Mark Goh, highlights five key ASEAN markets: Singapore, Malaysia, Thailand, Vietnam, and Indonesia. According to the report, each market offers distinct opportunities and challenges for Chinese investors.

Singapore stands out as the preferred hub for regional headquarters in SE Asia, driven by the country’s Singapore +1 strategy. All of the corporate case studies in the guide, including that of Jiangsu Kunge Smart Technology, Merit Metals, and Suna Optoelectronics, note their adoption of the SG+1 approach, which capitalizes on Singapore's strong legal and financial infrastructure for high-end operations while relying on neighboring countries for large-scale manufacturing.

Malaysia's semiconductor industry also stands out, with significant exports to the United States. That is a key reason why one Jiangsu province-based electronics manufacturer, identified in the report as company W, chose to build its first overseas plant there.

Thailand’s well-established automotive industry and expanding electric vehicle manufacturing capabilities make it an appealing destination for Chinese companies in the auto supply chain.

Meanwhile, Vietnam offers significant manufacturing advantages but demands careful attention to cultural nuances. For instance, Kunge Smart Technology established a production base in Vietnam after the US raised tariffs on Chinese goods from 7.5 percent to 25 percent, providing the company with a competitive edge in the global market.

And Indonesia, with its abundant natural resources -- especially the nickel essential for electric vehicle batteries -- offers significant opportunities within the EV supply chain.

Common Challenges

The case studies reveal the recurring challenges faced by Chinese firms operating in Southeast Asia. “Many companies belittle the importance of long-term planning in their overseas corporate structural design, missing opportunities for tax planning optimization and government support programs,” Moh noted.

For instance, Kunge Smart Technology encountered hurdles such as lower tax incentives and unclear land use contracts when setting up factories in Vietnam’s non-industrial zones, which complicated applications for fire safety and environmental permits.

“While wages in Vietnam are lower, productivity is only about 60-70% of China’s, which increases our overall production costs,” the white paper quotes a Kunge representative as saying. To address this, the company took a step-by-step pilot approach, advancing its production plans to evaluate and optimize labor costs and efficiency.

Company W tackled productivity challenges in Malaysia by investing in automation at its Penang facility, despite wages being 40 percent lower than that in China’s Jiangsu province.

The guide stresses the importance of leveraging international pacts, such as avoidance of double taxation agreements, to lower the tax burden on businesses that operate overseas. But there are some limitations. Singapore and Malaysia’s DTAs with the United States restrict tax relief to income generated from air transport and shipping, while Vietnam has signed a DTA with the US that has yet to take effect.

The roadmap also advises businesses to pay close attention to policy changes. Vietnam’s new Personal Data Protection Law, drafted in September 2024, introduces stricter requirements, such as mandatory data sharing with state organizations and cross-border data transfer restrictions. While micro firms as well as small and medium-sized enterprises enjoy temporary exemptions, the law significantly impacts technology firms and data center operators.

Future Outlook

Chinese enterprises are drawn to SE Asia by various strategic goals, including lower taxation, supply chain diversification, and cost management, according to Professor Xu Xiang of Xi’an Jiaotong-Liverpool University’s International Business School. 

Kunge Smart Technology, for instance, set up a factory in Vietnam to optimize its global supply chain and mitigate the effects of high US tariffs. “Due to the increasing requirements of the supply chain, countries are increasingly focusing on the management of the origin of products,” the report said.

Geopolitics is likely to further drive this trend as US President-elect Donald Trump threatens to levy 20 percent to 60 percent tariffs on imports of products from China and worldwide.

Moh emphasized the importance of evolving strategies. ”Companies must look beyond traditional cost advantages,” he said. “The strategy of competing solely on price in Western markets is becoming less effective. Firms need to focus on innovation and product differentiation.” He also stressed the need to build strong local partnerships and relationships with the authorities to navigate markets and mitigate supply chain risks.

Despite the obstacles, ASEAN's economic potential remains robust. Moh pointed out that the group is projected to become the world’s fourth-largest economic bloc by 2030, with a combined gross domestic product of USD4.5 trillion.

Editor: Tom Litting