The Most Globally Competitive Industries In our Target Markets (2015-2020)
Identifying competitive clusters in Singapore, Malaysia, Indonesia, Thailand and South Korea
East Asia’s GDP grew at a phenomenal 13% per annum over the last four decades, powered by export-led growth through various investment promotions and industrial targeting policies as well as domestic-led consumption in the larger economies.
In this article, we apply competitive cluster mapping techniques to identify the most competitive industries globally for each country. We highlight potential acquisition opportunities in our countries of interest – Korea, Singapore, Malaysia, Indonesia and Thailand.
Electronics and IT (US$108b, 11% of global exports)
Electronics and IT is Singapore’s largest export cluster, based mainly on two sub-clusters - 1. Electronic Microcircuits and 2. Crystals and Electronic Components. Both sub-sectors have gained global export share of 7% and 12% respectively, putting Singapore in a good position to capture the fast-growing semiconductor market in Asia.
Although the strengthening Singapore Dollar and recent labour market tightening measures have adversely affected the export competitiveness of local firms, we see an opportunity in higher value added electronics manufacturing, particularly within fast-growing semiconductor and hand-held devices sub-clusters such as hand-held devices and tablet PCs.
Oil and Gas (US$60b)
Singapore is home to world-class facilities with a total refinery capacity of 1,395 thousand barrels per day (1.5% of global capacity). This has led to downstream benefits, with Singapore’s fast growing Chemicals cluster achieving 3% of world export share. Singapore is also the global export leader in oxygen-function amino-compounds, accounting for 23% of the global export share.
While the Oil & Gas and Chemicals clusters are dominated by large MNCs, we see spill-over opportunities for local mid-market firms in related clusters such as Logistics, Offshore & Marine and Waste Management.
Transport and Logistics (US$33b, 4.8% of global exports)
Singapore government has committed over SG$42m over five years to improve the productivity of Transportation and Logistics industry in order to enhance the supply chain management expertise of industry players. Within Transport and Logistics, we prefer to focus on companies that cater to fast-growing sectors such as Chemical Logistics.
Aerospace ($5b, 3.2% of global exports)
Singapore is currently the global leader in Maintenance Repair and Overhaul (MRO), accounting for 6% of global shares. More than 100 international firms carry out MRO activities in Singapore, establishing Singapore as a preferred one-stop solution provider for MRO needs.
In 2012, Rolls Royce also opened a $500m plant to manufacture Trent blades and assemble them into its Trent engines. This is seen as a strategic long-term investment in the fast growing Asian aerospace market. We see a further upside in the Aerospace Engineering cluster, with governments in Asia looking to upgrade ageing fleets.
Malaysia is the world’s biggest palm oil exporter, accounting for 44% of total world exports. It also has strong export positions in partly processed vegetable & animal oil and natural rubber, where it accounts for 50% and 12% of global exports respectively.
The strong export competitiveness of rubber products in Malaysia makes it a good candidate for buyouts. However, the cyclical nature of the industry requires a selective approach when considering buyouts in this sector.
IT (US$53b, 6% of global exports)
IT is the largest export sector in Malaysia. However, Malaysia’s global export share has been on a slight decline over the last decade due to increasing competition from China, Vietnam, Singapore and Taiwan. Malaysia’s electrical and electronics industry is also not at the technological forefront.
Therefore, we are selectively optimistic on fast-growing niche markets such as LED and solar power as the government aims to promote these sectors. We also believe that Malaysia remains competitive in Communication Services, which saw the greatest improvement in global export share over the last decade. The investment climate remains conducive, with tax incentives and availability of the necessary infrastructure.
Tourism is considered the key thrust in the economy. Malaysia is one of the top 10 most visited countries in the world. Medical tourism is one of the fastest growing contributors to tourism receipts, recording double-digit growth annually due to its lower exchange rates and high standard of medical equipment and health professionals. A treatment in Malaysia would cost 65-80% of what it would in the US. The government sees potential in this industry with promotion efforts including full tax exemption for private healthcare provides.
The government envisages rapid industrialisation will be a further boost to the sector. The plans include development of the Greater Kuala Lumpur region to transform Kuala Lumpur into a Top 20 most liveable metropolis, with a new Mass Rapid Transit and over 15 new hotels.
The construction industry also drives many other industries in Malaysia. Most of the construction materials produced for exports are related to rubber such as compounded rubber and vulcanised rubber. We see opportunities to invest in rubber-based construction materials.
Indonesia is the world’s largest Palm Oil producer and the second largest exporter. It is also a dominant export player in several agriculture and forestry areas. The abundance of natural resources, low cost labour, and low technological sophistication has resulted in firms producing goods lower down the value chain.
However, we see opportunities in companies embracing technology to take advantage of the country’s natural resource endowment to produce higher value goods, such as automotives or processed seafood.
Mining and Quarrying (US$107b)
The mining and quarrying industry has been growing at 20% per annum. The rapid development of the mining sector over the past decade was largely due to high coal prices driven by burgeoning demand from a rapidly developing China. However, the demand of coal has fallen due to debt-laden Chinese companies expanding output in a bid to stay afloat. Moreover, China’s proposal to cut low-quality coal imports to combat pollution is likely to have an adverse effect on Indonesia’s coal exports.
We suggest a highly selective approach in finding opportunities in the sector due to the high degree of cyclicality exhibited by commodity prices.
The construction industry is growing rapidly at a CAGR of 23%. Most of the materials needed for the construction industry can be found within the country, giving it a distinct advantage.
Moreover, Indonesia’s 15-year economic masterplan, known as MP3EI, which involves Rp4,000t investment, will be a massive project as the government seeks to urbanise other cities and improve connectivity of the islands.
Transport Equipment (US$51b)
This cluster has been fast transforming from a purely export-oriented manufacturing hub into one with a greater focus on the domestic consumer market. Recent proposals to increase the price of fuel could affect the sale of cars. However, as income of Indonesians are predicted to grow rapidly, we believe that on the whole, domestic demand for cars will stay high, and opportunities will lie in the automotive segment, especially local firms supplying parts to major carmakers.
IT (US$27b, 3% of global exports)
Thailand’s IT sector is primarily at the lower end of the value chain, focusing on assembly and testing, and faces difficulties in scaling the value chain. As data storage progresses up to cloud servers, Thailand would face significant challenges to its data storage sector.
Overall, the prospects for Thailand’s IT sector look bleak, as the country does not seem to have the human resources as well as the infrastructure to make the transition towards higher-end electronics manufacturing.
Automotive (US$21b, 2% of global exports)
Thailand is currently the world’s 7th largest car exporter, and has even been dubbed the “Detroit of the East” thanks to Japanese car makers who have made it one of their key manufacturing and assembly hubs, sourcing most of the their components from local Thai suppliers. The government also provides tax incentives for the production of economically friendly cars.
Hospitality (US$20b, 3% of global share)
Thailand attracted a record-breaking 22m visitors in 2012, and the government plans to further develop the tourism sector to increase tourism revenue and tourist arrivals by 5% and 6% per annum respectively. Thailand ranks first in Asia in foreign medical tourist arrivals with 50-70% cost savings to similar treatments in the US. There is also a growing trend of US-based medical establishments outsourcing diagnostic assignments to Thai hospitals for patients undergoing treatment in the US.
Therefore, we believe that the Thai tourism industry is set to post moderate growth in the near future.
Plastic (US$17b, 3% of global exports)
The Thai government offered a slew of fiscal and non-tax incentives for investors, including tax and import duties exemptions, and laxer labour and land ownership regulations, targeting areas such as Eco-friendly Plastics and Bioplastics.
Agriculture (US$30b, 2% of global exports)
Thailand is the world export leader for seafood and rice. Direct investments in the Agricultural cluster could be challenging as many commodities are protected by the government and subject to regulation. However, there could be opportunities to invest in related industries that face less regulation, such as processed foods, that is gaining popularity amongst Thailand’s middle-to-upper class.
- Electronics (US$60b, 6% of global exports)
Uncertain economic conditions have altered consumer’s purchasing patterns and companies have created a new “low-price market” within the electronics industry. Private Label TVs, sold at half the price of a typical LG TV, has been immensely popular, and such trend is expected to spread to other consumer electronics as well. If the low-price market retailers are able to back this trend by offering good after-sales services, the popularity of such brands are expected to continue increasing.
For this reason, we favour local mid-market companies catering to the smartphone and tablet clusters, as well as private label consumer electronics manufacturers. We also see an upside in the Data Storage segment with increasing data usage on smartphones and HD TVs continuing the stream content over the Internet.
- Automotives (US$58b, 5% of global exports)
Competition is heating up for the Korean car industry as global rivals such as Volkswagen and Toyota aggressively gear up to expand their market shares in the global market. A declining Yen and plans by Japanese carmakers to reduce their prices will boost the competitiveness of Japanese cars, eroding South Korea’s market share. This is also reflected in the growth in foreign car imports from Germany, fueled by Korea-EU FTA and their competitive product quality. The preference for larger luxury cars is clearly a trend in Korea as domestic sales have fallen for years.
Hence, we see an opportunity to invest in local suppliers and distributors of foreign luxury vehicles.
- Marine Equipment (US$49b, 27% of global exports)
Despite weak global demand, South Korea still remains the top shipbuilding country in the world. South Korea’s technological edge has led to it taking most of the world’s high-value shipbuilding orders such as LNG-floating and Re-gasification Units, valued at US$1.2b per ship.
China competes aggressively with South Korea in this industry. However, South Korea’s technological advantage in building sophisticated and complex vessels gives it a massive edge over China. Korean companies will enjoy a technological monopoly over the high-end market for the near future.
Therefore, we see potential to invest in high-value shipbuilding components manufacturing and outfitting services.
Keen to invest in Asia's leading industries?
Read our next article on how we make private equity investments in Asia.