Azman Jaafar
Partner and Head of
Corporate Practice
RHTLaw Taylor Wessing
azman.jaafar@
rhtlawtaylorwessing.com
A: Six Battery Road #10-01,
S ingapore 049909
T: (65) 6381 6868
F: (65) 6381 6869
W: www.rhtlawtaylorwessing.com

In the Bali Summit of October 2003, the ASEAN leadership declared the ASEAN Economic Community (“AEC”) as the “realization of the end-goal of economic integration”. This simple declaration has led many to believe that the AEC’s single objective is to amalgamate the ASEAN economies into one homogenous union. Too often, the AEC has been the subject of unfair comparison to the European Union. We know that our motives are different and at the time of the AEC’s inception, the leadership certainly appreciated the diversity and inequality that already existed within ASEAN. The AEC is a journey that has only begun.

ASEAN is situated in an economically vibrant part of Asia. The establishment of the AEC reflects the importance placed on ASEAN’s continued relevance in the global economy. ASEAN is not homogenous in terms of its people and economies but the AEC’s diversity is its strength. Economic integration is the endgame, but this is not a hop and a skip away in the near future. With 600 million people and a growing middle class, the AEC is not only intended to develop into a serious regional trading hub that can rival the larger global economies, but the AEC also has a burgeoning growth market from within. The four pillars which define the AEC play a very important role in accelerating economic integration and alleviating the inequality between member states.

There are new opportunities which arise from the creation of the AEC:

(a) the attraction of external investors into AEC;

(b) the ease of regionalization within AEC and the growth of intra-ASEAN trade; and

(c) the need for increased connectivity within ASEAN to facilitate trade activities within AEC.

According to a recent survey, less than one-fifth of ASEAN businesses are actually prepared to meet the challenges and opportunities presented by the AEC. With closer economic integration, we can expect greater competition from our ASEAN neighbours.

With the AEC, ASEAN will become a more important marketplace for Singapore SMEs. The integration will bring about new threats and increased competitiveness. This would be a good time for Singapore SMEs to review their capabilities and evaluate their competitive advantage. To stay competitive in the larger global economy, Singapore SMEs must move their businesses up the value chain. With the attraction of new foreign investments into the AEC market, there will also be new opportunities for Singapore SMEs to plug themselves into a more integrated global marketplace. New investments can help them move up the value chain. Organic growth can be a slow and painful process and in today’s world, this may not be an option for many domestic businesses. Overcoming these challenges will ensure the long-term survival and sustainability of their businesses.

The lowering of trade barriers will facilitate the regionalization of Singapore SMEs. In the long run, with smoother customs processes and freer movement of human capital, services and finances within ASEAN, Singapore SMEs can expect greater predictability and transparency when exporting goods and services within the AEC. With the rising cost of doing business in Singapore, it would be timely for Singapore SMEs to look into relocating parts of their operations to lower cost jurisdictions. The increased connectivity between member states also makes regional expansion an easier task. Singapore SMEs must gear up to meet these challenges, as regional expansion requires resources and thoughtful planning.

In a typical scenario, a Singapore SME can choose a country like Vietnam as its manufacturing and production base. It can then take full advantage of the AEC by importing components manufactured in Thailand and Indonesia; and employing its engineers and skilled technicians from the Philippines. It can outsource certain services to a company in Malaysia and borrow working capital in Singapore. A regional play will require a Singapore SME to examine its internal processes to ensure that it is sufficiently robust to meet the demands of its regional operations.

The expected increased connectivity within the AEC also contemplates increased investments in infrastructure beyond just transport and logistics services. Connectivity within AEC is all encompassing and refers to the underlying connectivity in infrastructure and people. This level of connectivity will also encompass technology, communications, as well as energy. As we become more interdependent with each other within the AEC, we can also expect an increase in projects that facilitate and promote intra-AEC connectivity.

More efficient cross-border transport is a challenge given ASEAN’s geography. The capital cost for transportation connectivity can be expected to exceed US$ 500 billion. Whether it is the ASEAN Single Window project, Jakarta Monorail project, the Singapore-Malaysia High-Speed Rail Link project; or the Hydroelectric power projects in Laos, all these projects will contribute towards increased connectivity expected within the AEC. Singapore SMEs are well-positioned to take advantage of these opportunities.

The AEC is a diverse ecosystem which is in the process of being integrated. While the diversity of the AEC as a single market and production base is probably its greatest advantage to investors, the key to its success lies in its ability to enhance connectivity within ASEAN. There is an abundance of new opportunities presenting itself under the AEC. Singapore SMEs should embrace the diversity in AEC and play a more pivotal role in intra- ASEAN trade under the AEC.