Think Southeast Asia is taking a backseat? Think again: Singapore, Malaysia and the rest are booming by exporting to China

Chief Executive, The, April-May, 2006 by Assif Shameen

Dell, the world's biggest personal computer maker, recently began building a new plant in Asia on a sprawling site adjoining an existing big plant. The two plants, where 95 percent of Dell's total global notebook PCs are assembled, aren't located anywhere near China. They're actually in Penang, an island in northern Malaysia.

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A few hundred yards away is Intel's biggest facility outside the U.S. It produces more than a third of the world's latest microprocessors, many of which find their way into those Dell computers. Another of Dell's neighbors in Penang is Intel's fierce competitor, AMD.

Just over an hour's drive away, rice paddies near the town of Kulim were cleared last year for semiconductor giant Infineon Technologies' new $2 billion wafer fabrication plant. The German chip giant chose Kulim over Shanghai because of lower overall costs. At Tanjong Pelepas, a southern Malaysian port near Singapore, Flextronics International, one of world's largest contract manufacturers, is building its biggest consumer electronics manufacturing facility--a 1.2-million-square-foot industrial park to complement its half a dozen plants in the country. Flextronics is growing its Malaysian footprint to 25 percent of total global capacity, up from 20 percent, in order to reduce its dependence on China, where 38 percent of capacity is now located. In addition, southern Malaysia's costs are 17 percent lower than around Shanghai.

"Southeast Asia is a key base for global manufacturers like us," says Peter Tan, Asia CEO for Flextronics. "Sure, China is important, but nobody wants to put all their eggs in one basket," says Tan, a Singaporean who has overseen the company's expansion in Asia, including China, for nearly five years.

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Long written off as the backwater of the world's most dynamic economic region powered by the twin engines of China and India, Southeast Asia is re-emerging from the shadow of its giant neighbors. "The emergence of China as the factory to the world, and India as the back office of the world, has somehow created a misconception that Southeast Asia is fast becoming some sort of an economic or manufacturing wasteland," says Chua Hak Bin, an economist with DBS Bank in Singapore. "Far from it. The region is thriving, with economies growing at 5 percent to 9 percent a year."

Forget hollowing out. Surprisingly, the region's biggest new growth driver is manufacturing. "Industrial output in much of Southeast Asia has been growing at near double digits in recent years," says Manu Bhaskaran, Asia director for the Washington, D.C.-based Centennial Group in Singapore. Southeast Asian factories are churning out everything from electronics components and finished goods to chemicals, as well as processing agricultural commodities, thanks in part to growing demand from India and China, recovery in Japan, and new markets in Eastern Europe and the oil-rich Middle East.

Politics Aside, Money Flows

Despite political turmoil in Thailand and the Philippines, Southeast Asia has continued to draw capital and foreign direct investment. In 2004, the region saw the steepest increase in foreign direct investment since before the 1997-1998 financial crisis, with fresh FDI inflows rising 48 percent to $26 billion in 2004 from $17 billion in 2003. Though final data for 2005 hasn't been published yet, preliminary figures show little sign of slowing. China is itself emerging as a big investor in Southeast Asia, with investments of more than $1 billion every year for the past three years.

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Singapore, Malaysia, Thailand, Indonesia and the Philippines have long been among the most open and trade-dependent economies in the world. By linking themselves to the global grid of manufacturing and services, Southeast Asian economies have remained nimble and adaptable parts of a fast-changing international supply chain. Many of Southeast Asia's small and medium-size industrial companies grew out of outsourcing contracts from multinationals such as Hewlett-Packard, Seagate, Intel and Motorola.

Take disk drives, for example. Fifteen years ago when hard drives were just for personal computers and IT gear, Southeast Asia made 90 percent of them. Since then, MP3 players and video iPods have dramatically expanded the market for hard disk drives. Today, nearly 20 percent of the drives go into such consumer products. Singapore, Thailand and Malaysia still account for 80 percent of total global production of hard disks and hard drive media, even as China has emerged as a center where drive makers source some of their low-end components. Most of the components produced in China are actually made by Southeast Asian companies that have built plants in China to stay as competitive suppliers to the likes of Seagate, Maxtor and Hitachi.

Magnecomp, one of the world leaders in suspension assemblies components used in hard drives, is expanding in Thailand. Singapore-based Seksun, which makes covers for hard disk drives at plants in China, Malaysia and Singapore, is expanding in Thailand as well. "As suppliers to the world's top disk drive makers, we make components where they are needed," says Felix Ong, chairman and CEO of Seksun.