Destination South East Asia: A Joint Pathway to Future Growth?

Opportunities for Regional Business Expansion

Contents

Introduction A Guide to South East Asia

The Regional Landscape Top Destinations: Sources of Growth Local Attractions: Building on Complementary Strengths

4 6
6 12 14

The South East Asian Consumer

Social Fabric: Young, Educated, Diverse Evolution of a Consumption Culture

16
16 19

The Road Ahead: Growth Paths for the Region

The Role of the Free Market

22
24

Conclusion

25

Ones destination is never a place but rather a new way of looking at things.

Introduction

Well known for its beaches, rice fields, rainforests, cultural and culinary attractions, South East Asia is not only a popular tourist destination, but a fast evolving economic community. This destination is a showcase of distinct cultural, social and political identities encompassing 10 nations: Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. These 10 countries are formally known as the Association of South East Asian Nations (ASEAN) a region on a journey towards becoming an integrated and prominent economic powerhouse.2 By 2020, the region is expected to be among the worlds 10 largest economies and the fourth largest in Asia. The demographic fabric will consist of more than 650 million people, most of whom will be middle class, educated and aged below 30, with rising disposable incomes and a strong appetite for consumption. A growing consumer market and significant economic integration efforts across the 10 South East

Asian nations is giving birth to a new regional business destination. But will that destination be attractive enough for business expansion and under what conditions? South East Asia remains a heterogeneous region which continues to face several challenges on its journey towards becoming a unified economic powerhouse. In this paper, Accenture explores the attractions of a cohesive South East Asian region as a new source of business opportunities. Our research indicates that several opportunities exist within national as well as regional borders as South East Asian nations continue to build and grow their economies. These range from meeting investment demands in less developed nations or leveraging existing advantages in certain sectors such as high valueadd manufacturing, to opportunities that are driven by increasing consumer demands or complementary strengths across the region.

By recognizing sometimes opposing, yet complementary strengths, the South East Asian economies can seize the window of regional growth opportunity. This paper suggests that the future growth of this buoyant region will be influenced by the appetite of businesses to recognise the potential of rising consumption power, and regional scale opportunities. However, the conditions for expansion of regional and global businesses will vary widely across South East Asian nations and significant improvements will be required to enable stronger free market activity. Market-driven intervention across national borders will play a critical role in furthering economic growth across the region. To accelerate this process, a shared effort between ASEAN governments and businesses to identify, chart and co-develop a joint pathway can potentially act as an important catalyst for regional growth. The journey has already begun: are you ready?

The whole object of travel is not to set foot on foreign land; it is at last to set foot on ones own country as a foreign land.
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A Guide to South East Asia

The Regional Landscape

Established in August 1967, the Association of South East Asian Nations (ASEAN) is a political, economic and cultural organisation of 10 member countries [see table 1]. In recent years, these nations have embarked on a journey towards greater cooperation and integration, recognising that a cohesive region can achieve a higher potential and create a strong economic position in Asia and beyond.

Table 1: ASEAN Member Nations

Brunei Darussalam Cambodia Indonesia Laos Malaysia Myanmar The Philippines Singapore Thailand Vietnam

Accenture analysis indicates that a more cohesive South East Asian region could reinforce its competitiveness amongst the worlds top 10 economies within 10 years. By 2020, the regions real GDP is projected to reach US$1.9 trillion, albeit at a modest growth rate of 5 percent [see figure 1]. The regions economic and business landscape is dominated by Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, known collectively as the ASEAN 6. All nations across the region display healthy growth prospects, and the ASEAN 6 will continue to play dominant roles in driving economic growth in the future. To accelerate the transition to a single market and production base by 2015, the ASEAN Economic Community [see table 2] was formed in 2007 to promote regional cooperation and integration.

Development of a regional economy is a journey of many challenges, most notably the lack of an effective supra-national authority; strong nationalism; persistent political tensions and instability; wide disparity in social-economic progress; and ambiguity in building an ASEAN identity. These challenges will pose significant risks and possibly delay the planned economic initiatives aimed at accelerating regional growth. Greater attention needs to be given to the role of market-driven intervention, and particularly the expansion of business activity in driving future growth across the national borders of the region. Accenture believes the journey to a stronger economic community can be navigated more effectively through increased market liberalisation.

Transitioning high-growth economies

The landscape of this region is like an archipelago a chain of unique islands, each richly inhabited by a complex identity. As one navigates through this landscape, the passage will be marked with high contrasts and many transitions. Each nation is at a different stage of economic development, from less mature markets such as Laos and Cambodia, to developing economies such as Indonesia and Thailand, fast developing Malaysia, and the highly advanced economy of Singapore. [Figure 2] illustrates the current stage of development4 across the 10 economies in South East Asia and the expected growth prospects. Many nations, including Cambodia, Laos, Myanmar, the Philippines and Vietnam, remain at the factor-driven stage, and are highly dependent on natural resources, mainly unskilled labour and capital investments to stimulate growth and increase competitiveness.

Figure 1: South East Asia Real GDP, 20102020

US$ Bn
$700 $600 $500 $400 $300 $200 1.7% $100 $0 Indonesia Thailand Malaysia Singapore Philippines Vietnam Myanmar Brunei Cambodia Laos 2.8% 2% 1% 0% 5.5% 4.5% 4.8% 4.3% 4.6% 6.8%

2020 South East Asia Combined GDP = US$1,901 Bn

8% 7% 6.5% 6% 4.9%

South East Asia GDP CAGR = 5%

5% 4%

2010 - 2020 CAGR

3%

2010 Real GDP

2020 Real GDP

2010 - 2020 CAGR

Source: Accenture Analysis of data from IHS Global Insights, 2011.

Table 2: The ASEAN Economic Community The ASEAN Economy Community, the ASEAN Political-Security Community and the ASEAN Socio-Cultural Community are the three pillars established by the ASEAN organisation to enhance regional cooperation and integration in building an ASEAN community by 2015. The vision is to create a highly competitive single market that promotes equitable economic development for member states, as well as facilitating their integration with the global community. Key development areas include: A single market and production base Liberalise and facilitate the free flow of goods, services, investment, capital and skilled labour Accelerate regional integration across 12 priority sectors Enhance trade and the long-term competitiveness of ASEANs food, agriculture and forestry products/ commodities Towards a competitive economic region Lay the foundation for competition policy, and consumer protection Strengthen intellectual property rights [IPR] protection Develop transport (maritime, land, air, transport facilitation and logistics services), ICT and energy infrastructure Equitable economic development Develop small and medium enterprises (SMEs) Facilitate effective cooperation and mutual assistance to narrow the development gap of Cambodia, Laos, Myanmar and Vietnam (CLMV) countries Integration into the global economy Negotiate free trade agreements and comprehensive economic partnership agreements with major trading partners
Source: ASEAN Economic Community Scorecard: Charting Progress Towards Regional Economic Integration, ASEAN Secretariat, March 2010; ASEAN Economic Community Blueprint, ASEAN Secretariat, January 2008.

Figure 2: South East Asia Economics Stage of Economic Development, 2010

7.5%

1. Factor Driven
Vietnam

2. Efficiency Driven

3. Innovation Driven

6.5%

Cambodia Laos Myanmar Indonesia Malaysia Singapore

5.5%

Thailand

4.5% Real GDP 2010-2020 CAGR

Philippines Transition from Stage 1 to 2 Transition from Stage 2 to 3

3.5%

2.5%

Bruneis economy is categorised as one in Transition 1-2 due to its dependency on oil and gas. Brunei

1.5% 0 1 2

10

11

12

13

14

15

16

17

37

47

Nominal GDP per capita, 2010 (US$000s)

Note: Stage of economic development is based on World Economic Forums Global Competitiveness Report 2009-2010 Source: Accenture Analysis of data from IHS Global Insights, 2011.

Figure 3: South East Asia Population Growth, 20102020

Mn 300
1.7% 1.6% 1.4% 1.2% 1.6% 1.6%

2.0%

250

1.5%

200

150
0.9%

0.9% 0.8%

1.0%

100
0.5%

2010-2020 CAGR

0.5%

50

0 Indonesia Philippines
2010 Population

0.0% Vietnam Thailand Myanmar Malaysia Cambodia Laos Singapore Brunei

2020 Population

2010 - 2020 CAGR

Source: Accenture Analysis of data from IHS Global Insights, 2011

Malaysia and Thailand have transitioned into the efficiencydriven stage of development, where efforts have been channelled towards developing more efficient processes to improve overall productivity levels for both nations. Singapore, the regions most advanced economy with the highest GDP per capita, is considered to be an innovation-driven economy. It relies on sophisticated production processes and innovation to produce new and unique products so that higher wages and the associated standards of living can be sustained in the long term. A countrys stage of economic development is also reflected by government priorities and investments in specific sectors. For example, in factor-driven economies such as Indonesia, the Philippines and Vietnam, government agenda are focused on investing in infrastructure to facilitate economic growth and directing resources to improve education and health, as well as to reduce poverty. Malaysia has defined 12 economic development areas with a strong

focus on the services sector to shift towards an increasingly efficient economy that would generate higher productivity and income levels. The productivity agenda is strongest in an innovation-driven economy such as Singapore where government spending is focused on continuing education to enhance its innovative capabilities. Greater regional cooperation and integration could aid South East Asian nations in accelerating their voyage to the next stage of economic development. For example, timely intra-regional supply of skilled labour and capital by more mature markets to factor-driven emerging economies could assist in increasing economic output for the region.

continued evolution of a large consumer market and potential labour workforce [see figure 3]. Despite the availability of a large labour force base, particularly in the ASEAN 6 which will be home to 300 million workers by 2020, improving labour productivity will become more critical. The highest population increases are expected in the less developed nations, putting pressure on their ability to improve economic output and competitiveness. For the South East Asian region to maintain its historic GDP growth rate since 2000, the International Labour Organization [ILO]5 estimates that productivity growth needs to accelerate from 3.3 per cent in 20002006 to approximately 4.1 per cent in 20072015. In particular, there is strong pressure on Cambodia, the Philippines, Singapore and Thailand to improve their productivity rates.

Labour workforce productivity

The region is projected to support a combined population of over 650 million by 2020, accounting for 8.6 per cent of the global populace. Population growth is expected across all South East Asian nations, signifying

Figure 4: South East Asia Foreign Direct Investments

Source Country Breakdown (3yr Cumulative FDI Stock) 30% 25% 20% 15% 10% 5% 0% Europe NAM South East Asia Japan ME and Africa South Korea China ANZ Taiwan India Hong Kong Rest of the World

2004-2006

2007-2009

Source: Accenture Analysis of data f rom f Di Markets, 2011.

In response to this need for greater labour productivity, South East Asian governments have been investing heavily in education in recent years. Most notably. education spending accounted for one of the largest budget expenditures in 2010 across the ASEAN 6.

Capital investment
Capital investment is a key driving factor in expediting economic growth. Over the last decade, the region has capitalised on its highly productive labour force to attract foreign direct investment, particularly in the manufacturing sector. One way to reduce the regions exposure to investment fluctuations arising from global economies performance is to stimulate intra-regional capital flows. Such investments have more than doubled in contributing to the overall foreign direct investment inflows into the region, from 6 per cent during 2004 2006 to 16 per cent during 2007-2009 [see figure 4].

Greater capital availability in the region would help expand highpotential industry sectors. Accenture believes that the regions more developed economies could become central investment engines for neighbours that rely on capital inflows. Already, Malaysias foreign direct investments in neighbouring nations has grown to account for more than half of the total intra-regional investment inflows during 20072009.

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The real voyage of discovery consists not in seeking new landscapes but in having new eyes.
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Figure 5: South East Asia GDP Breakdown

In US$ Mn
$1,200 $1,000 $800 $600 $400 $200 $0 1970 1980 1990 2000 2009

GDP Household Consumption Expenditure Investment Government Consumption Expenditure Net Exports Source: Accenture Analysis of National Accounts Main Aggregates Database, United Nations Statistics Division, 2011.

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Top Destinations: Sources of Growth

To achieve economic growth across the region, the South East Asian nations need to collectively address the development gaps between larger and smaller economies. Instead of treating differences as a hindrance, the region could seek out and leverage complementary strengths to potentially accelerate regional growth prospects. An integrated South East Asian economy is heavily dependent on consumption to drive economic growth, more so than its counterparts in other economies globally. In 2009, consumption accounted for 58 per cent of the regions GDP, compared to 23 per cent for investment, 11 per cent for government expenditure and 8 per cent for net exports [see figure 5]. However, in the past 10 years, the role of investment and trade in stimulating economic output has become increasingly prominent. Since 2003, the region attracted foreign

direct investment at pace with China, the worlds top destination for foreign capital. Despite suffering a dip during the 2008-2009 global financial crisis, foreign direct investment levels have slowly rebounded in 2010, reflecting global confidence in South East Asian economies growth prospects.

The region can further boost economic resilience by leveraging geographic proximity to increase intra-regional trade and maximise the free flow of goods, services, investment and talent between nations. Initial regional integration efforts by the ASEAN Economic Community have already facilitated the ASEAN Free Trade Agreement [AFTA] that is critical in increasing trade flows within the region. Notably, intra-regional exports have increased over the last decade, accounting for 34 per cent of total South East Asia exports in 2009 compared to 23 per cent in 2001. Import trends also reflect an increasing dependency on neighbouring countries in the region [see figure 6]. While tariff levels are decreasing, the region has to be vigilant and prepared for potential hindrances to the integration process, for example following through on commitments to agreements, the use of nontariff barriers and independent actions of individual nations to protect national interests.

Inter-connectedness
Trade has been integral to South East Asia since the beginning of the Spice Trade in Asia. The region has enjoyed trade growth over the last decade and showed relative resilience during the recent financial crisis. However, there is a strong reliance on imports driven by consumption demand. While the larger South East Asian economies contribute the most to total trade value, there is potential for exportdriven growth from the resource-rich smaller economies. Facilitating trade agreements between ASEAN as a single unit with major trading partners could strengthen the negotiating power of these individual nations.

Figure 6: South East Asia Exports and Imports

South East Asia Export Destination Breakdown
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2001
Extra-regional Exports Intra-regional Exports

South East Asia Import Source Breakdown

100% 90% 80% 70% 60% 50% 40% 30%

23%

34%

20% 10% 0%

20%
2001

24%

2009

2009
Intra-regional Imports

Extra-regional Imports

Source: Accenture Analysis of data from Euromonitor International, 2011.

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A man travels the world in search of what he needs and returns home to find it.
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Shifting sector advantage

With the exception of Singapore, the South East Asian nations have traditionally relied on their rich natural resources to drive economic growth. The relative size of these sectors (i.e. agriculture, mining and utilities) in certain economies, such as Brunei Darussalam, Cambodia, Laos, Malaysia and Myanmar will continue to offer opportunities for investors. The push for infrastructure improvement region-wide to improve ease of doing business and productivity will also drive investments, particularly in construction, transport and communications. Our analysis reveals that the region is increasingly shifting its comparative advantage from the primary sector towards export manufacturing and high value-add services [see figure 7]. The potential of the regions manufacturing sector, across the ASEAN 6 nations, positions it as an alternative production destination

to China for regional and global businesses. Given the regions varying levels of manufacturing sophistication, we expect to see a build up of an ecosystem in which certain economies will continue to focus and improve their core manufacturing capability while others will continuously advance towards higher value-add manufacturing. In parallel, Malaysia, the Philippines and Singapore are building a strong services sector by driving investments and business activities in industries such as financial services, information technology, tourism and business services. The increased focus and facilitation for specialised manufacturing hubs and regional services industries could enable South East Asia to diversify its future economic growth model.

Figure 7: South East Asia GDP Sector Value-add Contribution

6% Sector Value Weight Change 1989-2009 (as % of GDP) 4% 2% 0% -2% -4% -6% -8% -10% 0% 5% 10% 15% 20% 25% 30%
Agriculture, Hunting, Forestry, Fishing Construction Mining, Utilities Wholesale, Retail, Restaurants, Hotels Other Activities (Financial & Business Services

Transport, storage, communication

Manuf acturing

2009 Sector Value-add Contribution to GDP (%)

Size of Bubble 2009 Value-Add Contribution (US$) Source: Accenture Analysis of National Accounts Main Aggregates Database, United Nations Statistics Division, 2011.

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Sub-regional growth clusters

Taking into consideration the relative sector strengths and development priorities across the 10 economies, Accenture has identified several growth opportunities at the subregional level. Three sectoral growth clusters deserve attention:

2. Manufacturing
Establishing a single production base across the ASEAN 6 could strengthen the regions manufacturing capabilities. The manufacturing sector accounts for at least 25 per cent of Thailands output in 2009 and contributes to around 20 per cent of Indonesia, Malaysia, the Philippines, Singapore and Vietnams GDP. Intra-regional collaboration presents opportunities for utilising manufacturing complementarities, e.g. inputs for specialised manufacturing can be produced and supplied by low-cost locations within the region. Reliance on imports from outside of the region could be significantly reduced.

Local Attractions: Building on Complementary Strengths

South East Asian businesses and global multinational corporations with interests in the region do not have to venture far to find high potential new destinations. Several complementary strengths exist across South East Asian economies that provide a foundation for strong economic growth, and thus potential for increased business activity: 1. Continuing cooperation between South East Asian nations will further drive intra-regional trade, facilitate capital flows and strengthen economic reciprocity, all of which are crucial to the regions development. Labour productivity, in particular, will determine the speed and ease of regional economic advancement. 2. Adopting a diversified economic growth model would strengthen the regions long-term competitiveness. A collective view and focused effort in stimulating potential sectoral growth clusters across specific economies provide joint development opportunities that can accelerate regional growth prospects. 3. The region is clearly aware of its potential as an emerging economic powerhouse, with governments actively pursuing a regional integration agenda that will clear a path to a single market. The South East Asian macro-economic landscape provides vast opportunities for regional business expansion, which are expected to fuel private consumption a key economic driver. But the true potential lies in the highly diverse and rich social fabric of this region that signifies a continued evolution of a large consumer market. Understanding this complex market is a pre-requisite for businesses to assess the benefits of future consumerism in South East Asia for business growth.

1. Agriculture
Opportunities for joint intra-regional development could involve taking advantage of growth clusters across specific economies. For example, transforming South East Asias four smallest economies (Brunei, Cambodia, Laos and Myanmar) into the regions agricultural hub could increase export capacity, while improving long-term food security across the region. Furthermore, the Brunei DarussalamIndonesia-Malaysia-Philippines East ASEAN Growth Area (BIMP-EAGA) initiative will be implemented in mid-2011 to strengthen collaboration in agriculture and fisheries across the four countries. As part of this initiative, the countries will consider trade facilitation measures and food regulation and control standards to help reduce the cost of food products and increase intraregional trade in agriculture. If productivity trends remain at 2008 levels, the region is expected to produce US$27 billion in additional agricultural output by 2015. However, if average annual growth in agricultural labour productivity were to accelerate by just 1 per cent over 200715, the region would generate an additional $10 billion per year by 2015. A boost in agricultural productivity would contribute to economic growth, lower food prices and improvement in rural incomes.7

3. Services
Other intra-regional growth opportunities exist in the mature services markets such as Singapore, Malaysia and to an extent, the Philippines. These economies are building strong financial and business services industries, and will offer opportunities for greater specialization that can be exported to the rest of the region. For example, Singapore, with its strong education and biotechnology hubs, can provide training and R&D expertise across the region. The region could also leverage the Philippines strength and economies of scale in the provision of outsourcing services. The examples of sectoral growth clusters across specific economies provide opportunities for joint development that can be applied to advance the regional economic development journey.

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The great difference between voyages rests not with the ships, but with the people you meet on them.
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The South East Asian Consumer

Social Fabric: Young, Educated, Diverse

The South East Asian region is a rich and highly diverse collection of distinct cultural values and national identities, both of which will influence the development of a new consumer mindset. Consumers will play a critical role in driving economic growth in the region. Demographic shifts, including rising purchasing power, a younger, better educated population and increased urbanisation, will create a consumer market with distinct needs and strong buying power. The fusion of different social fabrics will open the door for new business opportunities.

Youthful population
The regions population is projected to reach more than 650 million people by 2020, half of which will be aged under 30 [see figure 8]. Although family-oriented social structures will continue to dominate the South East

Asian landscape, an increasing number of people will choose to form a family at a later life stage. The regions large younger population will have profound impact on future consumption across the region.

Figure 8: South East Asia Population by Age Group

120,000 100,000 80,000 60,000 Thousand People 40,000 20,000 0

0-9 Years old

10-19

20-29

30-39

40-49

50-59

60-69

70+

2000

2010

2015

2020

Source: Accenture Analysis of data f rom Euromonitor International, 2011.

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Income class transitions

Expected future growth in consumer expenditure indicates increasing maturity of the consumer market across South East Asia. Consumer expenditure growth will substantially exceed historical levels, reaching US$1.5 trillion by 2020. Disposable income levels are expected to increase but the relative gap across the economies will remain. Transition of households from low to middle class10 income segments will be the catalyst for future domestic consumption [see figure 9]. The relative size of the middle class will help create aggregate purchasing power that will exceed that of the smaller premium income households. By 2020, middle class households across South East Asia will have an aggregate purchasing power of at least US$0.75 billion as compared to US$0.5 billion offered by households with greater than US$75,000 in annual disposable income. Despite the healthy growth of the middle class, low-income households will continue to be the backbone of the regions economy. This dominant segment represents business opportunities that may be realised by adopting innovative and simple

business models similar to those that have proven to be successful in other emerging markets (e.g., China, India). The growing affluence of the upper-middle class in more mature economies such as Malaysia and Singapore will become increasingly important for the region in driving demand for highvalue products and services.

expenditure category across South East Asia. Those aged below 20 will drive demand for primary and secondary education. More than 380 million people are expected to attain at least primary education by 2020, boosting literacy standards across the region. An increased number of adults in the region are also expected to pursue higher education. The prevalence of larger households (four to five people) will continue to drive demand for essentials such as housing, transport and food. With over 40 per cent of the regions population continuing to live in rural areas, there will be a higher demand for mobile communications, although poor infrastructure in rural Indonesia, the Philippines, Thailand and Vietnam may constrain wired connectivity. Consumers are also expected to invest in health and financial security due to the lack of a strong social security system in some countries. In summary, consumers in developing economies will direct a large portion of their disposable income towards improving general living standards, whereas mature markets will show a growing propensity to save and build wealth for the future [see figure 11].

Distinct purchasing needs and expectations

With their growing purchasing power, consumers across the region will have a greater appetite for education, household goods and services, communication and entertainment [see figure 10]. Demand for premium products and services are expected to be driven from consumers in more mature markets due to their higher income levels. For example, consumers in Malaysia and Singapore have a higher affinity to spend on high-end consumer electronics and household durables, medical and healthrelated products, higher education, entertainment and travel. A large young population will make education the fastest-growing

Figure 9: ASEAN 6 Number of Households by Annual Household Disposable Income

60,000 50,000 40,000 30,000 20,000 10,000 0
>US$100,000 >US$10,000 >US$15,000 >US$25,000 >US$35,000 >US$45,000 >US$55,000 >US$65,000 >US$75,000 >US$1,000 >US$2,500 >US$5,000

Middle Class Income Segments

Number of Households (000s)

Annual Household Disposable Income Category

2000 2010 2015 2020

Source: Accenture Analysis of data f rom Euromonitor International, 2011.

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Figure 10: Consumer Expenditure by Category, 20002020

US$ Bn
$400 $350 $300 $250 $200 $150 $100 $50 Food and Beverages $0 2010-2020 CAGR: 8.2% 2010-2020 CAGR: 6.5% 2010-2020 CAGR: 10.2%

2010-2020 CAGR: 6.6%

Health Goods and Medical Services

Financial Services

Household Goods and Services

Communications

Clothing and Footwear

Alcohol and Tobacco

Leisure and Recreation

Hotels and Catering

Education

Insurance

Transport

Housing

2000

2010

2015

2020

Source: Accenture Analysis of data f rom Euromonitor International, 2011.

Figure 11: ASEAN 6 Savings Ratio relative to Expenditure Growth, 2020

9% 8% 7% 6% 5% Vietnam Indonesia Malaysia Thailand 3% 2% 1% 0% 5% 10% 15% 20% 25% 30% 35% 40%
Size of Bubble Average Household Disposable Income (US$)

Expenditure Growth (10Y 2020 CAGR)

4%

Philippines

Singapore

Savings Ratio, 2020 (Percentage of Disposable Income)

Source: Accenture Analysis of data from Euromonitor International, 2011.

Others

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Figure 12: ASEAN 6 Consumer Attributes

Attributes
Expenditure Growth Income Growth Average Disposable Income Size Propensity to save Household Income Distribution Potential Market Size Age Education Mobility Connectivity Urbanisation

Indonesia

Malaysia

Philippines

Singapore

Thailand

Vietnam

Relevance

High

Low

Source: Accenture Analysis

Evolution of a Consumption Culture

With the continuing role of consumption in driving economic growth across South East Asia, it is critical to gain a better understanding of the common consumer attributes across the region. Understanding these attributes will assist businesses in tailoring their products and services to meet the expectations of different consumer segments, and test the extent to which similar segments can be targeted using a common business model. Based on common demographic and lifestyle shifts observed across the region, Accenture has identified a distinct set of attributes that can be used to describe the South East Asian consumer of the future. These attributes include age, education, mobility, connectivity, urbanisation (where they live), income growth, average disposable income size,

propensity to save, expenditure growth, household income distribution and potential market size expected by 2020 [see figure 12]. Based on these attributes, we predict the evolution of seven key consumer segments in the region by 2020:

Givers
Givers are aged 35-50, uppermiddle class consumers with a busy professional life. They tend to be married with young children with lives revolving around work and family. Most of their leisure time is spent with family and their spending too is focused on the long-term welfare of the family. They focus on saving for the future. This sizable segment with high disposable income is represented across ASEAN 6 nations by 2020, with relatively higher concentration in Malaysia and Indonesia.

Premium Silvers
They may be aged 60+ and retired, but Premium Silvers are still leading full, healthy lives. Their high disposable income allows them to cultivate new hobbies and stay active in the community. They may be affluent but they spend their money wisely, preferring to buy things that offer good value. As they get older, Premium Silvers are increasingly reliant on medical services and products. Though small in size, this segment has high disposable income. Well represented across ASEAN 6 nations by 2020, and particularly in Singapore and Malaysia.

Opportunists
Opportunists belong to the hard working, above 35 years of age consumers who live in rural or city fringe areas. Most of them are married and have children. With low / no education, they tend to rely on lower incomes (<US$5,000 per annum) and may need to depend on social system support at times. They have limited spending power and will focus on meeting their families' essential needs.

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By 2020, the Opportunists will remain the dominant segment across ASEAN, with high concentration in Indonesia, the Philippines and Vietnam.

Young Connectors
Technology dominates the lives of Young Connectors and they spend a considerable portion of their income and time on entertainment and media. As students aged 15 to 24, this money comes from allowances or part-time jobs. They use mobile devices to connect to social networking sites so they can stay connected with friends. This sizable segment is largely dominated by Indonesia, the Philippines and Vietnam given their higher concentration of younger population of these countries by 2020. Increasingly, large businesses in the region are tailoring their products and services to meet the needs and expectations of the South East Asian consumer. For example, Malaysianbased bank CIMB has provided an avenue for consumers such as the Givers and Value Seekers to start saving and investing for the future. Without the Sharia-compliant banking products, the Muslim communities in the region were not able to participate in banking activities for commercial and religious reasons previously. To meet the growing demand for affordable air travel amongst the young and sophisticated travellers such as the New Royals, Air Asia launched its low-fare, long haul proposition in 2007 with great success. The companys continued focus on customer needs and value creation is becoming more relevant to the South East Asian consumers as they seek to enrich their lives by exploring new travel destinations within the region. This is only the beginning: the evolving consumer power and identity across the region provide attractive opportunities for businesses that are ready to understand the differences and leverage similarities of the South East Asian consumer of the future.

New Royals
These are young singles earning a healthy income from their high-flying, white collar jobs. New Royals are aged between 20 and 35 and well educated. Their independence allows them to seek new experiences through travel or employment opportunities. Personal enrichment is a significant buying motive with high brand affinity and latest introductions. Given their propensity to spend, this premium segment will be significant by 2020. New Royals can be found across ASEAN 6 nations by 2020, with relatively higher concentration in Indonesia and Malaysia.

Consumer profiles and behaviours are very similar across certain ASEAN countries, for example, between Laos and Cambodia, and Singapore and Malaysia. We have similar tastebuds and a strong eating out culture.
Lerssak Boonsongsup, Group Director of Global Supply Chain Management, Minor Food Group

Trend Seekers
Trend Seekers are young singles who are brand conscious and aspire to be part of the in-crowd. With an average-paying job but high propensity to spend, they may have to rely on credit to fund purchases at times. Aged between 20 and 35, they tend to place importance on following the latest fashion trends. Even with a lower income threshold, Trend Seekers will be an attractive segment given their relative size. Though dominant in Indonesia, this segment has fair representation across Thailand, Malaysia, the Philippines and Vietnam as well.

Value Seekers
The Value Seekers are aged 35-60 consumers who live in rural or city fringe areas, rising up to become the new middle class. Most of them are married and have children. Although not highly educated, they are determined to provide a better life for their children. With some disposable income on hand, they tend to look for bargains and good value for money purchases. The second largest segment by 2020, Value Seekers can be found mainly in Indonesia, Thailand, Vietnam and the Philippines.

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If you want to succeed you should strike out on new paths, rather than travel the worn paths of accepted success.
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The Road Ahead: Growth Paths for the Region

Youve done the grand tour of South East Asia and seen the major regional attractions. As a seasoned traveller, what you really want to do is uncover the hidden gems the sights and experiences that are yet to be discovered by the masses. In business as in travel, the key to success is the ability to recognise opportunities and capture those faster than competitors. Two emerging forces are set to shape the future of economic growth in the South East Asian region: market focus and economic development imperatives. Market Focus - Economic growth in the region can be spurred by improving individual nations global competitiveness through further investments and specialization in the respective economies. In parallel, a market focus that transcends national borders will enable South East Asia to build regional competitiveness by leveraging on complementary strengths.

Economic Development Growth priorities differ based on each South East Asian nation current stage of economic development. Less mature markets need to focus on building basic infrastructure and institutional frameworks to lay a strong foundation for sustainable growth. The growth agenda is applicable for more developed nations where increasing productivity and efficiency will enable the respective economies to progress.

ASEAN businesses are likely to expand to meet Chinas demand needs. Strong oil and commodity prices offer other stimulants for region-centric or niche expansion. Political and economic stability for countries in the region is a precursor for ASEAN business expansion.
Alan Hamzah Sendut, Chief Strategy Officer, Sime Darby Berhad

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Based on these forces, four growth paths are projected [see figure 13].

2. Domestic specialisation
This growth path involves leveraging mature sector capabilities to increase exports and improve competitiveness against other Asian counterparts. For example, Singapore is likely to leverage a highly skilled workforce to continue developing a high value-add manufacturing sector. The Philippines could build on its business process outsourcing capabilities to become the regional hub for these services. Opportunities exist in low-cost and specialised manufacturing, oil and gas, refineries, and IT services. Success depends on a commitment to technology investments and on-going innovation; access to labour with specialised skills (either by building domestic talent or importing skills); and improving labour productivity to create cost advantages within the domestic economy.

3. Regional scale
Regional scale requires building deeper ties with neighbouring economies through investment in complementary capabilities to improve productivity. An example of this is the implementation of the BIMP-EAGA in mid-2011 to strengthen collaboration in the agriculture and fisheries industries across relevant countries. Regional scale opportunities exist in agriculture and manufacturing. For these opportunities to come to fruition, there must be true economic reciprocity based on intra-regional strengths; a commitment to building a regional industry support network; and a commitment to joint technology investments and on-going innovation.

1. Investment accumulation
Investment accumulation involves accelerating infrastructure development and social welfare investments to increase economic and social stability. For example, Vietnam and the Philippines are looking to build basic social services for the poor, while Indonesia requires infrastructure to improve transportation and communication. Opportunities exist in construction, transportation and logistics, basic healthcare, education and financial services sectors. Critical success factors include access to foreign capital; a commitment to building well-developed transportation and communications infrastructure; investments in the provision of basic education and health services; and the establishment of a stable and quality institutional environment.

4. Consumerism
An opportunity exists to leverage the purchasing power and common needs of consumers to fuel regional domestic demand, while investing in services to strengthen regional comparative advantage. Key developments in this area include the implementation of a cross-border trading platform for retail investors in Singapore, Malaysia, Thailand and the Philippines; and the development of a common tourism curriculum and competency standards for tourism professionals. Opportunities exist in tourism, financial services and telecommunications. However, there needs to be a commitment to servicing the ASEAN consumer as a single market; and liberalisation of the services sector to encourage more market competition. Accenture believes the future economic growth of the South East Asian region will require measures to strengthen domestic consumption; improve the investment climate and social infrastructure; develop the financial system; and deepen regional integration and cooperation.

Figure 13: Future Economic Growth Paths for South East Asia

Grow

Domestic Specialisation

Consumerism

Domestic

Regional

Investment Accumulation

Regional Scale

Build

Source: Accenture Analysis

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The Role of the Free Market

We believe the regional growth trajectory will be influenced by the appetite of businesses to recognise the potential of rising consumption, and scale opportunities across national boundaries. Depending on businesses growth models, the business expansion potential varies across the four growth scenarios. Businesses can play prominent roles in driving economic growth across the South East Asian region. For example, the Japan-based Fuji Seal Group has decided to strengthen its presence in South East Asia by capitalising on Vietnams low-cost manufacturing environment. The companys estimated US$15 million investment validates Vietnams increasing competitiveness as a manufacturing hub. Beginning March 2012, its manufacturing and sales base in Vietnam will be wellpositioned to respond to the growing

demand for shrink labels, packaging materials and packaging machines in Vietnam and across the region. Of course, the diversity of the region means conditions for expansion will vary widely [see figure 14]. The ASEAN 6 offers the best opportunities, albeit at different risk points, due to their mature economic, political and social structures. Regional expansion will require active enablement, particularly in the areas of talent availability, political and social stability and pro-business policies, to name just a few. Businesses looking to expand in South East Asia will have several growth paths to consider. While some may choose to focus on a particular economy initially, we expect to see a regional footprint to be developed over time.

Figure 14: South East Asia Business Expansion Opportunity Landscape

5

Myanmar Cambodia Thailand Vietnam Indonesia Brunei Philippines Laos

Increasing risk for doing business

Malaysia

Risk Rating

Singapore

10

30

50

70

90

110

130

150

170

190

Ease of Doing Business Ranking

Increasing regulatory complexity of doing business

Note: Myanmar not GDP included in the Size of Bubble is Real 2020 (US$ Billion) Ease of Doing Business ranking and is given the lowest ranking for the purpose of this exercise due to its unclear regulatory framework. Source: Accenture Analysis of Individual Country Reports, IHS Global Insight, 2011; Ease of Doing Business, The World Bank Group, 2011.

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Conclusion

The South East Asian region is at crossroads: by taking the right path now the region will be well on its way to becoming a formidable economic powerhouse by 2020. Early indicators are promising: stable real GDP growth; substantial (and growing) consumer markets; strong labour forces; and steady economic and market transitions across its 10 economies. Accenture believes the growth of the region will be a function of deeper regional cooperation and integration from a policy perspective, and marketdriven intervention by businesses that aspire to expand their footprint across the national borders. Our analysis indicates that South East Asian nations can and should leverage complementary strengths to accelerate growth, shift comparative advantage, and make the best use of capital and labour resources. The preparations for this journey have already begun. The South East Asian nations have initiated taskforces such as the ASEAN Economic Community to facilitate regional integration activities. Cross-border initiatives
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such as the BIMP-EGA agriculture development program and the ASEAN Trading Link platform are further evidence of the regions commitment to intra-regional development. Governments are also directing expenditure to those areas that are critical to their nations economic and social development. The South East Asian nations also need to focus on establishing a central production network that leverages the intra-regional strengths in labour productivity, technology and knowledge transfer. Furthermore, if the services sector is liberalised, business activities are expected to accelerate and there will be substantial impact on domestic consumption in the mediumlong term. The regions growing consumer market and emerging intra-regional productivity strengths should be of great interest to businesses that are: Looking to target under-penetrated consumer markets

Ready to expand the offerings and capabilities across the national borders Aiming to improve cost and operational efficiencies Diversifying their portfolios by expanding into new growth areas. To realise the opportunities that exist across the borders of South East Asian nations, businesses must play a proactive role in planning and embarking on their own journey. Expanding in South East Asia today could accelerate regional economic development and create a strong community where regional consumers are served by regional businesses. Regulators need to enable regional business expansion by further opening domestic markets to market-driven interventions, to increase regional development and growth in the future. Its often said that the future belongs to those who can imagine it. Businesses on a growth journey would do well to consider South East Asia as their next growth destination.

References
1

Henry Miller, author, 18911980.

5 Labour and Social Trends in ASEAN, 2008, International Labour Organization 6

2 For the purposes of this paper, Accenture refers to these 10 countries as members of a future integrated economic community (ASEAN), not only countries that are geographically classified as South East Asia. 3

Marcel Proust, novelist, 18711936.

7 Labour and Social Trends in ASEAN, 2008, International Labour Organization

G.K. Chesterton, author, 18741936.

George Augustus Moore, novelist, 18521933.

9

4 The World Economic Forums Global Competitiveness Index defines three distinct stages where individual economies can be categorized based on Nominal GDP per capita and Factor Driven Measurement (determined by the share of mineral goods in total exports, where countries with over 70% of total exports in a 5-year period are mineral products, can be classified as strongly factor-driven). Please reference World Economic Forum The Global Competitiveness Report 2010-2011 for more details.

Amelia Barr, novelist, 18311919.

Euromonitor defines the middle class income segment as households with annual disposable income of US$5,000-15,000.
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10

John D. Rockefeller, industrialist, 18391937.

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About the Authors

Grant Powell Managing Director, Accenture Management Consulting Innovation Centre, Singapore grant.powell@accenture.com Dr. Vedrana Savic Head of Research, Accenture Management Consulting Innovation Centre, Singapore vedrana.savic@accenture.com Amy Chng Manager Accenture Research, Singapore amy.chng@accenture.com

About Accenture Management Consulting Innovation Centre

The Management Consulting Innovation Center serves as a research hub where industry experts debate, develop and publish insights with specific relevance to the Asia Pacific region to help organisations innovate and outperform their competition. The Centre also brings Accentures thought-leadership and ideas to life through highly interactive and facilitated workshop experiences. These experiences help organisations explore solutions and develop a course of action for their most important business issues that will accelerate their path to higher performance.

About Accenture
Accenture is a global management consulting, technology services and outsourcing company, with more than 215,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the worlds most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.6 billion for the fiscal year ended Aug. 31, 2010. Its home page is www.accenture.com.

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