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 tari on imports from outside the region). Restrictions on investment and labor will remain more signicant than in the EU. Signicantly, 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 benet 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 specic opportunities from Thailands and ASEANs 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.

EIC Economic Intelligence Center

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 tari 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 ASEANs appeal in many aspects.

Economic Community oers 1 ASEANgreater opportunities (AEC)

ASEAN Economic Community*
Population

Compare to Europe Union South Korea

580 million

GDP size

1.5 trillion USD

International trade

1.6 trillion USD 50 billion USD

6 times Thailand 60% of China ranked 2nd globally

next to France

FDI

65 million persons

International tourists

* International trade, FDI and international tourists include intra-region gures 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 tari reduction have helped bridge price gaps among ASEAN countries; or whether the facilitation of labor ow has increased labor movement to a level that narrows wage dierences.

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

ASEAN Economic Community

of target achieved

73.6%

Single market and production base

Competitive economic region

Equitable economic development

Integration with the global economy

82%
Liberalization and facilitation of free ow of goods, services, investment, skilled labor, and capital

50%
Laying the foundation for competition policy, consumer protection, intellectual property rights, and ratifying transport agreements

100%
Studies and development of SMEs and Initiative for ASEAN Integration Work Plan 2

100%
Entry into force of Free Trade Agreements

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

EIC Economic Intelligence Center

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, tari 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 eld 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 dierent factors aecting the AEC will prevent ASEAN from reaching those goals within that time-frame.

EIC Economic Intelligence Center

Features

European Union

ASEAN

1. Becoming a single market and production base - Trade in Goods Internal tari rate External tari rate - Trade in services (share ownership) - Movement of labors - reduced to 0% - all member countries enforcing the same tari - 100% - free ow of labors - reduced to 0% - each member country enforces its own rate - 70% - free ow of only skilled labor 2. Other aspects of integration - Single currency - European Central Bank : ECB - Supra-national authorities with central organizations such as: European Parliament European Court European Legal System European Competition Commission - National currency - Intergovernmental method without clear authority over each member state

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 difculties in their attempts toward further integration, for instance, from dierences in their scal policy as evidenced by the ongoing Eurozone public debt problems. The path towards integration followed by the EU may not be an easy one.

EIC Economic Intelligence Center

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 taris among ASEAN countries, with the ASEAN Free Trade Agreement already in force. There are other important components requiring ASEANs collective eort and time to accomplish. This includes, for example, common external taris, which means a single tari rate to be enforced in all ASEAN countries with their trade with external partners. This tends to be very difcult in practice and, in the end, may result in selective cooperation. For example, it is highly unlikely that Singapore would increase its taris 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 difcult task because so far there are no legal provisions or regulations binding all member countries. This is a major dierence between ASEAN and the EU.

be carried towards realizing 3 Much works left tothe AEC out

Main types of international economic integration
Free trade area Customs union Removal of taris and quotas Common external taris Common market Economic union

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

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

EIC Economic Intelligence Center

BOX: Illustrative example of tari reduction under AFTA

As one of the steps towards the AEC, every member country is required to cut their taris 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 taris since the start of 2010. The rest - Cambodia, Lao PDR, Myanmar, and Vietnam, will work towards 0% taris 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 ASEANs. Therefore, we will analyze tari reduction on goods by employing a projection approach to see how every existing FTA and those in the pipeline would aect each business. For example, canned fruits and vegetables will feel a far greater impact from tari reductions on China, the No. 1 source of imports, in 2010, and India, the No. 2 source of imports, with taris falling from 29% in 2010 to around 8% in 2017 than from ASEAN. This will intensify competition in the future.

vegetables for more intense from 2012 onward 4 Canned fruits andcompetitionbusiness has to prepare
Weighted average import tari 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 25 20 15 10 5 0
8.4 4.1 0.2 0 0 2.8 18.0 7.7

28.7
21.8

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

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

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

2020

EIC Economic Intelligence Center

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%.

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

2008

2010

2013

2015

ICT Healthcare Tourism Air transport

49%

51%

70%

Logistics services

49%

51%

70%

Other services

30%

49%

51%

70%

Source: SCB EIC analysis based on data from ASEAN

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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 aect 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 GATs dening 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 aected 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%.

Food retail, packaging services, and hospitality services tend to be immensely aected
Current foreign share ownership in services business in Thailand*
Unit: %

53 44 35 30 30 28 26 24 Current ceiling = 49%

21 20 19

16 16 15 15 14 14 14

12 10

6 1 0
Commercial printing

Legal consultancy**

Educational service**

Healthcare

Telecommunication

Environmental services

Home improvement

Paper packaging

Department store

Internet services

Entertainments

Hotel & resort

Construction**

* 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

Apparel retail

Broadcasting

Air logistics

Food retail

Advertising

Publishing

Airlines

Marine

Distributor

IT services

Restaurants

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EIC Economic Intelligence Center

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 specic elds by BOI allows a more exible 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 nd 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 conned to specic sectors. As pointed out above, dierences in the remuneration of accountants will aect every business, as they all require accounting services. Moreover, a shortage of critical professionals like physicians and nurses will not only aect the health care business, but also society as a whole, which could suer from insufcient medical services.

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EIC Economic Intelligence Center

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 inated by headline ination 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 elds, 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 dierences in language, culture, and social acceptance.

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

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EIC Economic Intelligence Center

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 specic 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 signicantly opened their trade in services. Vietnams services sector will be less aected by integration towards the AEC.

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EIC Economic Intelligence Center

Business opportunities

arise from the AEC

As businesses in Thailand will be aected, 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!).

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
Cambodia Vietnam Singapore Indonesia Thailand Philippines Malaysia

Example of other domestic regulation 100% 100% 100%

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

49% 49% 40% 30%

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 difcult 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 companys board of directors (which must be local people), economic needs tests, joint ventures, and technology transfer.

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EIC Economic Intelligence Center

Businesses with high prot 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 prot, 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 elds, respectively, out of a total of 21 elds for services sector companies4.

Business Opportunities in the AEC

are many services businesses high Singapore 9 ThereEBITDA margin in Malaysia andwith
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

Environmental services Distributors Internet softwares and services Entertainment Telecommunication services

Department store

Restaurant

Food and staples retail

Publishing

IT Services

Marine

Source: SCB EIC analysis based on data from Bloomberg

This nding 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 eld according to Global Industry Classication Standard (GICS) by Morgan Stanley Capital International (MSCI) and Standard & Poors (S&P).

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EIC Economic Intelligence Center

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EBITDA margin of some services businesses

Publishing

Distributor Department store

Computer Internet retail software

IT services

Commercial printing

Food and staples retail

Malaysia

21%

10%

9%

n/a

26%

25%

22%

8%

Indonesia

7%

17%

10%

5%

25%

n/a

12%

0%

Thailand

15%

8%

2%

4%

21%

7%

21%

5%

Philippines

19%

n/a

n/a

n/a

17%

17%

n/a

7%

Vietnam

9%

8%

n/a

4%

16%

19%

15% 21%

n/a

Singapore

39%

19%

11%

5%

9%

7%

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 prots. 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 prot margin is as high as 40%.

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EIC Economic Intelligence Center

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 protability 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 benets, but the country will need to nd the right opportunities. The liberalization of the hospital sector under the AEC will signicantly aect 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.

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

Singapore Vietnam Cambodia Indonesia Thailand Philippines Malaysia

100% 100% 100% 67% 49% 40% 30% AEC = 70%

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

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

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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 aect the hospital sector in Thailand. The more signicant impact may come from greater competition for health care professionals. This is due to the limited number of professional workers in the eld of healthcare, especially physicians. Only Singapore, the Philippines, and Brunei have physicians above the average of lower-middle income countries. This will aect 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

Physician

Nursing and midwifery personnel

Pharmaceutical personnel

Unit: per 10,000 population

Singapore Philippines Brunei Malaysia Vietnam Myanmar Thailand Lao PDR Cambodia Indonesia

15 12 11 7 6 4 3 3 2 1 8 10 14 10 8 8 18

44 61 61 1 1

3 6

3 <0.5 1 n/a <0.5 <0.5

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 rst 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.

ASEAN is on an upward trend 13 Demand for healthcare services in

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

services are needed in the Philippines, Myanmar 14 More healthcareLao PDR, Cambodia andIndonesia,
Hospital bed in 2000-2009
Unit: per 10,000 population

Per capita total expenditure on health in 2007

Unit: USD at average exchange rate

Singapore Vietnam Brunei Thailand Malaysia Lao PDR Indonesia Cambodia Myanmar Philippines

32 28 26 22 18 12 6 n/a 6 5 7 63
Lower-middle income countries = 18

1,148 58 753 136 307 27 42 36

Lower-middle income countries = 80

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 owing 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 qualied 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 difculty for hospitals in the Philippines as many nurses will ow 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 ve 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 trafc 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 aected 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 aected 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 insufcient 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.

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EIC Economic Intelligence Center

How should

businesses adapt?

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

Full leveraging of core competencies will be a key

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

4 potential ASEAN

+
= =

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

market

Leverage core competency

Example Healthcare services + Hotel management + Food processing + aging population = ASEAN tourists muslim real estate for retiree Thai brand hotel management 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.

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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 aected 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 benet 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-Pacic 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. Thailands 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 benets 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 benet from Thailand being a big production base due to infrastructure, knowledge, and labor capacity. This will further push Thailands benets 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 specication for such eco-cars. This business in Thailand will have an excellent chance to benet 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.

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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 exemplied 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 benet 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, beneting related businesses. In addition, there may be a natural resource-based advantages. For instance, Indonesia has ample marine resources, especially, tuna sh and shrimp, and is the biggest overseas shery. 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 benet 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 conned 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 Singapores 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 Thailands leading hospitals.

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%.

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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 childrens education. More time is spent on vacation. People tend to spend for satisfaction and pleasure over utility. Obvious examples are the competition in the eld 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-specic factors. For example, in Singapore, agricultural elds account for only 3% of the total land in the country and can only produce 3 kinds of goods which are (1) seafood (sh), (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 nd 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 Thailands 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.

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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 fth largest exporter of Halal food globally and the rst in ASEAN. From now on, the main difculties faced by businesses may not necessarily be in nding 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 conned 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 rst to enter the market and imprint Thai brands at the ASEAN level to progress further in the global level in the future.

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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

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

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

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.

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SCB Economic Intelligence Center

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 afliates, 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 recipients information only. It does not represent or constitutes an advice, oer, 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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