Chinese Investments in Southeast Asia

A Growing Hub for Global Manufacturing

By Luca Menghini

Chinese investments in Southeast Asia have grown significantly in recent years, transforming the region into an important manufacturing hub. This trend is driven by rising production costs in China, increasing geopolitical tensions, and a strategic shift towards diversifying supply chains. ASEAN countries, thanks to their strategic location, competitive labour costs, and investment-friendly policies, are at the forefront of this transformation, attracting substantial Chinese investments across various sectors.

The drive for this shift stems from ongoing trade tensions between China and the United States, which have disrupted traditional supply chain flows. U.S. tariffs and stricter rules of origin have pushed Chinese companies to relocate manufacturing operations abroad to bypass these barriers. Southeast Asia represents an attractive alternative due to its proximity to China, established trade agreements, and cost advantages. Countries like Vietnam, Thailand, Malaysia, and Indonesia have become key destinations for these investments, reinforcing their role as indispensable players in global supply chains.

A clear indicator of this trend is the rapid growth in exports of intermediate goods from China to ASEAN countries. From January to November 2024, exports of these goods to Vietnam alone increased by 32% compared to the previous year, accounting for over 70% of China’s exports of mechanical and electrical products. This reflects a broader pattern of Chinese companies shifting supply chains to ASEAN countries to mitigate risks associated with geopolitical tensions and tariffs. This shift marks a new chapter in the globalization of manufacturing, with Southeast Asia taking on an increasingly central role.

The region's appeal to Chinese investors lies in its competitive labour market. Average wages in the manufacturing sector in ASEAN countries remain significantly lower than in China, with hourly rates ranging from USD 1.50 to USD 3 in Vietnam, Thailand, and Malaysia, compared to USD 8.27 in China. This wage disparity offers a strong incentive for labour-intensive industries to relocate. However, substantial productivity differences persist, and Chinese manufacturers are addressing this challenge by investing in workforce training and adopting advanced automation technologies—a strategy aimed at replicating China's success in building an efficient industrial base.

Southeast Asia's infrastructure, although still developing, is undergoing significant improvements to support this manufacturing boom. Governments in the region are heavily investing in transport systems, ports, and energy systems to enhance their attractiveness to foreign investors. For example, Indonesia is leveraging its rich nickel reserves to create a robust electric vehicle (EV) supply chain, including battery and component production. Meanwhile, Thailand is positioning itself as a hub for EV assembly, supported by subsidies and localization requirements aimed at promoting domestic production capabilities.

Among the main beneficiaries of Chinese investments are the electronics and automotive industries. Vietnam, now one of the leading exporters of electronics, has seen a significant inflow of foreign direct investment (FDI) from Chinese companies looking to leverage its growing manufacturing capabilities. Similarly, Malaysia and Thailand have become central to the automotive sector, with numerous Chinese companies establishing operations to produce components and assemble vehicles. These investments align with global trends favouring sustainable energy solutions, such as the rapid growth in electric vehicle (EV) production.

Chinese companies are also leveraging ASEAN's favourable trade policies to access broader markets. Initiatives such as the Regional Comprehensive Economic Partnership (RCEP) have streamlined trade procedures and reduced tariffs, making the region more attractive to businesses. By enabling products to cross borders multiple times with minimal costs and bureaucracy, RCEP has reinforced Southeast Asia's role in global supply chains. Furthermore, the region's integration with the Belt and Road Initiative (BRI) has further deepened economic ties between China and ASEAN, facilitating greater investment flows.

Despite these advantages, significant challenges remain, such as political instability, regulatory discrepancies, and infrastructure gaps, which in some ASEAN countries pose risks to long-term investments. For instance, inconsistent legal frameworks and fragmented customs procedures can increase compliance costs for companies operating across multiple jurisdictions. Additionally, while ASEAN countries boast lower labour costs, the availability of skilled workers in high-tech sectors remains limited. This has prompted Chinese companies to invest in vocational training programs and educational initiatives, addressing the skills gap and ensuring sustainable operations.

Environmental considerations are another crucial factor influencing investment decisions. Southeast Asia is among the regions most vulnerable to climate change, with rising sea levels and extreme weather events posing significant risks to infrastructure and production facilities. In response, ASEAN governments are increasingly prioritizing sustainability in their development strategies. Renewable energy initiatives, such as Vietnam's rapid expansion of solar power, highlight the region's commitment to green growth. These efforts are essential for attracting environmentally conscious investors and meeting global sustainability standards.

Geopolitics also plays a significant role in shaping the dynamics of Chinese investments in ASEAN. The region's strategic position at the crossroads of major trade routes enhances its importance in global economic networks. ASEAN countries have skilfully maintained a balance between economic partnerships with China and security alliances with the United States. This delicate diplomacy has enabled them to attract investments from both superpowers while minimizing the risk of becoming entangled in their geopolitical rivalry.

Looking ahead, Southeast Asia's role as a manufacturing hub is set to grow, but it is unlikely to completely replace China's dominant position. The region's success will depend on its ability to address existing challenges, such as improving infrastructure, enhancing workforce productivity, and promoting greater regional integration. Initiatives like the ASEAN Highway Network and trans-regional energy projects demonstrate the region's commitment to building a more interconnected and efficient economic bloc.

In conclusion, Chinese investments are transforming Southeast Asia into a critical manufacturing hub, with far-reaching implications for global trade and supply chains. While the region faces significant challenges, its strategic advantages, combined with sustained investments and supportive policies, position it as a key player in the evolving global economic landscape. As ASEAN continues to attract and integrate foreign investments, its influence on global manufacturing will deepen, offering opportunities for economic growth and development in the years to come.