ASIA - Here’s a ‘heads up’: When you do business in South East Asia from January 2015 you are going to have to come to grips with a new TLA (Three Letter Acronym). It is called the AEC – short for ASEAN Economic Community.
When it comes into force, the AEC will be vaguely familiar to Europeans of a certain age who remember the EEC, before it was Unionised, politicised and monetised, and abbreviated to EU. In a nutshell it will be a ‘common market’ comprising the 10 South East Asian countries that make up ASEAN (Association of South East Asian Nations): Indonesia, Malaysia, Philippines, Singapore and Thailand, Brunei, Vietnam, Laos, Burma (Myanmar) and Cambodia.
AEC is based on four pillars: A single market and production base; a highly-competitive economic region; equitable economic development; and full integration into the global economy.
The objective is to transform South East Asia into a single competitive market and production base with free movement of services and investment capital among the member countries.
Key AEC areas of cooperation include human resources development and capacity building; recognition of professional qualifications; closer consultation on macroeconomic and financial policies; trade financing measures; enhanced infrastructure and communications connectivity; development of electronic transactions through e-ASEAN; integrating industries across the region to promote regional sourcing; and enhancing private sector involvement for the building of the AEC.
In short, the AEC will transform ASEAN into a region with free movement of goods, services, investment, skilled labour, and free-flow of capital. But, significantly, there has been no suggestion of a common currency.
It is tempting to think that this is all due to formally happen in 2015, but there will be a period of adjustment while countries get their act together. So what does this have to do with packaging and why bother about it now?
The answer to that lies a bit further north, in China.
The China crunch
Since the start of the global financial crisis, Asian countries - and China in particular - have been refocusing their economies to replace declining exports to Europe and the USA, with an increase in domestic spending.
To increase domestic spending the Chinese worker has to earn more; a wages hike. These days a local Chinese packaging engineer in Shanghai, Guangzhou or Beijing expects, and gets, annual salary increments of up to 30 per cent. It is a similar situation on the factory floor, with minimum annual salaries of US$2,250 per capita. In terms of total salary including welfare payments, China’s workers are now amongst some of the best paid in Asia, after Malaysia and Thailand.
The same worker in Vietnam earns $1,152 per year, in Indonesia $1,085, while in Myanmar a factory worker is lucky to earn $401.
This has not gone unnoticed by major fast moving consumer goods (FMCG) manufacturers who have been implementing a ‘China +1’ policy for years; in a nutshell this means ‘Invest in China, but hedge your bets and maintain scalable capacity in one other Asian country … just in case!’
Behind the bureaucratic talk of a ‘single market and production base with free movement of services and investment capital’ and the ‘four pillars of cooperation’, the AEC opens the door to trans-border corporate expansion within the 10-country ASEAN grouping.
AFTA and AEC
In the 1990s, before China joined the WTO, South East Asia had attracted almost half of the total capital investment in developing countries. Interest rates were high and attractive to foreign investors looking for a high rate of return. Labour costs were low.
The region’s economies received a large inflow of ‘hot money’ and experienced a dramatic run-up in asset prices, mainly property. The bubble burst in 1997 when the Asian financial crisis hit the currencies of Thailand, Malaysia and the Philippines, which dropped by 40 per cent, while the Indonesian Rupiah lost more than 80 per cent of its value, bringing the country close to bankruptcy.
Badly shaken, the ASEAN leaders saw a need for a more robust defence against any further economic threats. The result was the creation of a tariff-free zone covering all 10 member countries of the ASEAN bloc.
Designed to act as an incentive for the member states to increase the volume of trade between countries by eliminating intra-ASEAN tariffs, the solution was AFTA - or ASEAN Free Trade Area.
AFTA came into full force in January 2010, effectively creating a duty-free zone for more than 7,500 products. Intra-ASEAN trade grew from $470 billion in 2008 to $519.7bn in 2011, equivalent to 25 per cent of the total $2.04 trillion trade between ASEAN and the rest of the world.
The region remained largely immune to the current global economic crisis that began in 2008, and despite the chaos in the US and Europe, all of the ASEAN countries showed positive GDP growth rates throughout 2010-2012, according to the OECD, and this trend is expected to continue through to 2015.
Under the umbrella
The Free Trade Area ring-fences the 10 member countries to reduce their trade tariffs while maintaining high barriers on imports from outside the AFTA umbrella.
Unlike the European Union, AFTA does not apply a common external tariff on imported goods and each ASEAN member imposes its own tariffs on goods entering their country from outside ASEAN: Indonesia has an average 20 per cent import duty on consumer goods from outside the ATFA zone.
For goods originating within ASEAN, the tariff rate ranges between zero and a maximum of five per cent, according to a mutually-agreed schedule, known as the Common Effective Preferential Tariff (CEPT).
ASEAN members do have the option of excluding some products from the CEPT, none of which are remotely related to packaging: Products considered necessary for the protection of national security, public morals, human, animal or plant life and health, and articles of artistic, historic, or archaeological value.
To define ‘Country of Origin’, the basic rule is that local ASEAN content must be at least 40 per cent of the Free On Board (FOB) value of the finished product – it is a fairly simple formula (see table).
The local content can be cumulative, allowing the value of Components produced in different ASEAN member countries to be combined to meet the 40 per cent requirement.
So for example, a multinational CSD brand based in Singapore could have the syrup imported from the US and mixed in the plant there. The bottle could be blown in Thailand and the label printed in Malaysia and both could be shipped to Singapore for filling. The finished product could then be shipped to Indonesia duty free since, according to the Rules of Origin, only the syrup has been imported from outside ASEAN.
Impact on packaging
As FMCG manufacturing in ASEAN continues to increase there has been a parallel increase in packaging demand from (and here’s the important point) packaging producers located inside the AFTA umbrella.
Japanese brands such as Ajinomoto and Nissin have been capacity building inside ASEAN, supporting Japanese integrated packaging manufacturers such as Oji, Toyo Seikan, Toppan and Dai Nippon, all of whom now have plants in Thailand and are setting up in Vietnam.
ASEAN has a combined population of more than 600 million and a 2012 gross domestic product of more than $1.17 trillion. The AEC changes the game, with new players emerging and cross-border manufacturing growing.
In short, as a packaging industry player - whether you are a packaging producer or a supplier of equipment, materials or consumables - if you are not under the AFTA umbrella, you are condemned to being 20 per cent more expensive than the local competitor – and that will hurt.