Kopi Time E131 - SE Asia 2024-34 with Charles Ormiston

decided to do a collaboration. So today's podcast is about the outcome of that collaboration, Charles Orson founded, ran and grew BA in Southeast Asia from 1993 to 2007. He's presently the chair of the S Sana Council, a Singapore based Think tank backed by Monks Hill Ventures. It is focused on growth potential of Southeast Asia. Charlie. Welcome back to Copy Time. Thank you, Turner. It's great to have you Charlie. So you and I

had a couple of conversations late last year. And then at the beginning of this year, we got some people together and we started doing some work. What did we do, Charlie?

Uh Number two, the way a consulting firm looks at capital markets is different than the way a bank looks at capital markets. I think number three, I kind of miss deep collaboration. Best work I did at Bain was always with somebody else. Uh Even the the large accounts that I worked on, I always co led them, which wasn't the Norman Bin, but it was the way I preferred to work. So I approached you to see if you'd be interested in collaborating.

And uh I was lucky to say you said yes and sure enough, I think it's fit like a glove. Um I think where your your expertise in economics with the IMF with D BS perfectly complements what, what my background in business, some economics and also thinking through uh market entry, which is probably one of the most relevant lenses for, for looking at country strategy,

BS site came together. And Charlie, the idea was initially that you with your experience and with support from Bain would draw a picture of what brings Southeast Asia where it is today. Is it

America or the Middle East or, or Africa? But nonetheless, is really not grown the way that China or India or other developing markets have and certainly given its potential,

it feels like it was falling short of potential. What are, what, what we came up with at the time was that Southeast Asia had focused a bit more on stability than on growth and largely as a result of the 97 crisis and that had carried through all the way to the state when we did this report two years ago, it was just coming out of COVID, we were just coming out of COVID and it was hard to escape that. It was hard to look out. You, you call it recency bias, I think.

But it was hard to look out 10 years when you've just been through the worst crisis in the world in, in years. And it affected the CO co the region in an unusual way and it affected different countries at different levels depending on, you know, the mix of tourism and export and how dependent they were on China versus us, et cetera.

Um The good news is two years later, we could see that the green shoots that were evident two years ago have prospered and in fact, a number of the transitions in government that have taken place have led us to believe that most Southeast Asian governments are going to be more pro growth in the next 4 to 5 years. We really can't see beyond that politically than they have been for the last 20 or 30. We see that particularly in

the Philippines under Marcos Malaysia, under Anwar. Uh I think in Indonesia, they started earlier, Prabowo was considered very pro growth and sorry. Um Jacoby and Prabowo is committed to following his footsteps and then Singapore has always been pro growth and Lawrence Wong may try some new things, but it's exciting to see where he plans to head. Um Vietnam seems to have just secured a more stable outcome after two years of some, you know, a lot of changes in the, both the

Prime Minister and the President. And um and there's a lot of uh a lot of the insiders we talked to who are quite optimistic that Vietnam is now ready to kind of have pursue stable growth for the next 5 to 10 years. So it's a different time than two years ago. And so even though the approach was similar, our optimism has increased in that two year period. And so for the first time, in a long time, we are willing to say, we believe Southeast Asia will

grow faster than China for the next 10 years. And in addition, in absolute terms, will attract more foreign direct investment than China. And that was a hypothesis a year or two ago. But we decided we weren't ready to, to lay it in uh to put it in on print. And now we are

It will be in the show notes, the link and the visualization and all the work in there. The title of a report is navigating high winds. You have some views on high winds, not just from geopolitics, but just very specifically vis a vis China. So let's start with that discussion,

the wonderful place to source from. But uh in, in times like COVID, when you could had trouble getting exports out or you, your management couldn't fly into the market. You you realize that having your eggs in different baskets made more sense as a as a manufacturer. A second could be political. Um You could be either under guidance from your respective government or just have your own concerns and decide you want at least some of your production outside of China.

And so some people are diversifying for that reason. The third could be, your costs are escalating in China. Uh China is, has started to decline in terms of its working age population. Um There's a great competition for the best workers in China. And so people have seen uh wage inflation in China, that's uh ahead of inflation in China.

And that has caused some concerns particularly at the very low end, semi skilled or unskilled labor value, a low value added and something that naturally falls now outside of China. Um I think the last could be tariffs which sometimes is related to national security but not always you, it'd be hard for me to argue that solar panels or wind turbines are a national security issue is more a desire to protect local industries, same with electric vehicles or batteries.

And as a result, not just us firms, but Chinese firms are being forced to establish bases offshore uh in order to not evade tariffs, but to comply with law and use a different export base in order to, to uh receive lower tariff uh paid lower tariff levels. So it's, it's all very rational in a, in a world where uh some markets are becoming more protectionist. It doesn't matter what your reason is. The outcome is, you're going to move some of your manufacturing outside of China.

Now, that's a nice tailwind. Southeast Asia has always been friendly to M and C investment. Um One thing people forget is that in the eighties and nineties while Korea and Japan were on a tier in terms of growth. And so so was Taiwan, at that point, they weren't that receptive to foreign investment. It was very hard to invest in the markets. A lot of hurdles, hard to participate in the domestic market.

And suddenly starting with Singapore, Southeast Asia threw up its openness market and said we want you to come here e especially if you're there to export, there was all kinds of incentives, you could have 100% ownership. There was uh they built infrastructure for you. And so some of the most interesting investments in the world landed here in Southeast Asia. It didn't take much, it took cheap land, cheap taxes, cheap labor, but mainly a willingness to allow M and CS to invest here.

Um It was open for business over the next 30 years, it got a lot harder. Suddenly others started to copy this approach of trying to attract M and C investment as supposed to resist it. And the most successful dose was China and China went from very difficult to do business in when I was working in China in the nineties. Um it was very difficult to get 100% ownership of an entity. It was hard to get access to the local market. You were often you found it difficult to operate for

various reasons. Um The road transport was not good. Rail transport was very difficult to access and very slow. So you, you, you went to China because you saw the long term prospect, but it wasn't cheaper and, and then gradually it all changed. And now we're in a situation where the competitiveness of China is just staggering to people who are not deeply involved in manufacturing,

the scale of the facilities you put in. There are usually the largest you have in the world, the scale of the ecosystem supplying you, whether it's a chemical provider or certain kinds of components or accessories. A lot of those are produced in China and it's cheapest to get them in China. The the facilities to help you export are some of the best in the world. Now, you can access almost any port in the world directly from China.

And so the list goes on, but it's also generally very easy to work with government in China. If you're setting up some kind of manufacturing facility and you're not just working with the national government. In fact, rarely do you interact with the national government. It's usually you're choosing between different kind of city ecosystems that will back you and support you. But you have to be careful who you pick because just as you pick one to support you, others may then be annoyed

that you chose one of their rivals. There's tremendous rivalry between the different cities in China to attract investment and to see the companies that invest locally prosper. So China has become a big competitor, competitor So I was talking, I was in one of the Southeast Asian countries late last week talking to a some a minister there. And he said, look 30 years ago, we were almost the only game in town Vietnam didn't exist. China didn't exist. We really just

competed against Singapore some degree, Philippines, Malaysia and Indonesia. And now we compete with at least 10 countries. We, we compete with Mexico, we compete with India. We compete with different provinces in China. We compete with Eastern Europe. So nothing falls into our lap. We have to win everything. So while the there are opportunities that are coming out of China, they are heavily contested and nothing will fall into a country's lap.

some of the best. It's not a, it's not a raw capability, there's nothing there. But the reality is the amount spent on education, the availability to the full mass population is limited everywhere but Singapore and Vietnam. And so one reason we have seen Vietnam outperform the other Southeast Asian countries we believe is they have everything else, right? But they have a far more educated general population than Philippines, Indonesia, Thailand and Malaysia.

And also their English speaking skills tend to be above those countries as well for the mass population. And we think that's made it easier for a lot of MC to operate there. And therefore they've, they've had a better experience and they've been willing to, to invest again.

And depending on what needs, there were, there was suddenly a diesel shortage in Thailand or there was a surplus of light crude oil from Indonesia back in the days when they exported heavily. Um They, the, the, the the facility here was so flexible that they could quickly tweak the settings on the refinery and produce what was needed with the crude that was cheapest and it was, it was an arbitrage opportunity. It meant the refineries here were very,

very profitable. So Indonesia, Malaysia, Thailand all saw this and decided, why are we letting Singapore win this? After all, we have cheaper land most in those days, Malaysia and Indonesia were both major producers of oil. At that point, Thailand actually hadn't found significant gas reserves and maybe they found, but they weren't being brought to the surface. And so they wanted to build large

refining facilities and neither really succeeded. They, they succeeded in building refineries and with some attached chemicals that serve the local market, but they weren't able to be a producer for the region. What also occurred at the time is Taiwan was doubling down on their chemicals capability. Korea was as well and so was the Middle East. So it was a competitive market.

It didn't create the kind of margins that maybe you could, if you weren't operating a refinery perfectly, you could really make money on. And that was when I first learned that there was a lot more to the where you put a a manufacturing facility than low cost labor, low cost land. Over the subsequent 20 years, we could see some really smart efforts to build manufacturing, but we also saw some

real failed ones. So for example, Indonesia spent and I believe it's correct to say billions of dollars trying to develop an aerospace industry under Habibi. And I don't believe they may have produced about eight planes, but it, it squandered quite a bit of money that could have gone into some sectors that would have been more appropriate. I don't think Malaysia got a significant payback from the proton project, which was again a significant a a way of approaching it. So we want our own

auto industry. We don't want to rely on MN CS. Whereas Thailand approached the market by saying, let's attract Japanese and C investment in automotive. So they took the best players and allowed them to use Thailand as a base and gave them more control. And the winner after all that was Thailand. Thailand became the leader in producing combustion engine vehicles.

So as you look through different sectors, you can actually see that not every step was a misstep, but not every step was a solid step towards attracting a sector, attracting a promising company, getting them to set it up as a base and then continue to invest behind that base cast forward. And uh the big competitors started to become China and China started to attract far more investment than Southeast Asia.

And I I just had this gut feeling that uh in the words of Ross Perot who was a famous uh independent candidate for president, uh he probably was the reason Bill Clinton beat uh George Bush senior for his second term because he drew away enough votes. But he said the North American free Trade agreement will create this massive sucking sound of jobs to the South. And, and I, I'm kind of perjured that or whatever the right term is. And I think we've seen a bit of a sucking sound to

the north. And so we looked at data on manufacturing value added in uh Southeast Asia and we also looked at a couple of academic papers, one by a guy named Dan Roderick, who's a, who's a phd at, at Harvard. And they all led us to the same conclusion that the developing world, it it is not just the developed world that has lost jobs and manufacturing to China, it's also the developing world. And his paper was title the premature indus deindustrialization of the

developing world. And when we looked at the data, we saw a similar pattern. But now what's interesting if you go into the details of the data which I encourage you to do. It's on the website is that Malaysia and Singapore and I believe Thailand have started to improve things. But Indonesia and the Philippines continued their decline for this entire, since,

since the early two thousands. So Southeast Asia peaked in terms of manufacturing value added in the two thousands, with one exception, Vietnam, but three have started to turn the corner in the last 10 years. And so it, what it told us is good policy and particularly follow through on your commitments with Mn CS that have have invested in your country will often result in

continued presence in manufacturing. However, if you don't fall through your commitments, if you play games with some of the rules, if you make it harder to import parts or chemicals, if you force downs streaming into new sectors that they hadn't intended to go into, if you cut off exports for a period of time, because it will keep prices

low in the domestic market. All those send signals to people that this is not a desirable place to invest and that might, you might get away with it if there are only three or four options. But as, as, as I learned in Thailand last week, there are a lot of options for any investor considering investment. And so we see continuity and policy following through on your commitments, trust is probably the key driver of raising both FD I and manufacturing. Value added.

people pay a lot of attention. I think it's gotten some newspaper headline also is the fact that majority of the FD I that's come into the region over the last 5, 1015 years has been the same thing.

but still Singapore is a major investor in other countries. So, you know, the net number doesn't necessarily just favor Singapore. Um And uh one of one of our council members from uh Indonesia, Geeta Weir Jwan. I didn't put it well at an investor conference I was at in, in, in Malaysia. He said, look, it all comes down to trust and we think we can attract these companies with a deal. But what the first thing they do is they talk to their friends and they said, what has been your

experience in this country? And if they've ever had a difficult experience, whether it was customs or immigration or getting work permits or getting chemicals in an appropriate time or spare parts or somebody asking for, for, um, for some share of the revenue share of the business itself. These things happen in developing world, then they aren't going to share a good story.

And, and ultimately Singapore has people's trust. There's a great article in today's straits Times by the pfizer Ceo and he talked about why they keep investing billions of dollars into Singapore and he didn't use the word trust. But every if you distilled his words down, it came down to that, that we have had a strong working relationship with the Singapore government for years and we believe in what they, that, that they'll do what they say they'll do. So I, I uh now do I think Singapore can

keep this up? No. Um I this is a very small place and if Southeast Asia really gets its act together, then you start to be optimistic that more while Singapore will probably still grow ft I, the greater growth will take place in other parts of Southeast Asia and we can see it occurring already. Uh For example, if there really is a uh an sez as a special economic zone between Singapore and Johor, we would expect some of Singapore's investment and foreign investors to divert investment

that would have gone to Singapore to Johor. But this will benefit both Singapore and Johor. Uh We know Thailand is very eager to attract more of the investments that they see going to Malaysia, Vietnam and Indonesia. And we know Vietnam is keen to reverse a recent slide in kind of the league tables. And uh they're very disappointed that they lost a couple of investments. One was with Intel um to uh I believe it was Poland.

And so this is a, this is a region that is committed to attracting a greater share in FD I and realize the next 5 to 10 years might be a unique period to secure Greenfield investments.

it could be to get the special tax breaks, etcetera. Now, part of that is a reasonable political consideration that in order to get to, to persuade the public that we should give this kind of tax break is to say, well, look, they're creating jobs that otherwise wouldn't exist here and they're not really competing with a local company, they're doing something that no local company can do. So

I understand the political rationale for it. The challenge is that most of these economies would benefit from more competition in their domestic market. And if you as we go to other sources of growth beyond export led manufacturing, things like the green transition, entrepreneurial activity, uh growing new sectors, particularly in the services side, almost all of them benefit significantly from local competition. It tends to attract more investment which

is a surprise to people. It tends to attract uh result in more innovation, more, more and better outcomes for consumers. Competition is good. There's always a tendency to want to protect local players and to be worried about MNC protection IMNC is taking over the market. We do find that yeah, there are certain businesses where you could look and say their global scale gives them an unfair advantage against a local player.

And we have to, we have to adjust the rules to some degree so that there is strong competition, but it's still fair competition, it would, it would be like uh weight class or certain kind of handicapping. But if you exclude them from the market entirely, then what you'll end up with less competition, it has to be done. Sector by sector, financial services is typically done separately because of the unique characteristics of, of,

of financial crises. Versus if, if you know, if you had a shortage of croissants, it wouldn't bring down the economy in the same way it would if, if you had a bank run. So II I understand particularly why financial services might be regulated differently. But in general, we f one of our main recommendations in addition to addressing the short shortcomings in education is to have more competition in local markets in order to attract investment and get better outcomes.

big exporting firms. The Tribals, in the case of, of uh Korea, the trading firms in case in Japan, they ended up dominating both local services and export oriented manufacturing and somewhat stifling the economies and neither has really grown as fast as one would think they should given the quality of their workforce and all the other factors that they they have as a country. Um Vietnam also stands out now uh what two years ago when we saw the growth rates for Vietnam, I have

to admit I was, I was caught by surprise. Uh the work I had done in Vietnam in the nineties, I had found it one of the more challenging countries to work in. Um There was a uh a very challenging power sharing between the, the central government, the provincial governments and the military. And we were doing quite complex deals in Vietnam, buying up uh assets uh in, in a manufacturing sector in order to serve the domestic market, which is always the

trickiest place to play. And in each one, each of those three entities had objectives that they wanted served. And if either thought the other was getting more than them, the deal was off and, and, and, and it was just hard to, to get things done. And so, you know, my career took different paths and when I came back to work in Vietnam, I was, oh my gosh, this is now just on fire. And I went in, uh, I went to a couple of industrial parks and

one guy who's particularly nice to me. I still owe him a golf game because he, he just opened up his plant to me and let me ask any question I want. And one of the questions I asked is OK, you have two other plants, one in Mexico and one in Arizona. Is it true? The Vietnamese workers are more

productive than those in Mexico and the US. And he said, oh, you bet he goes, let me give you an anecdote if I were to go to the US and demand that the workers spend the weekend working and I'd pay them overtime, half of them would quit. If I went to Mexico and demanded that they work overtime, they'd all say yes, but only half would show up in Vietnam. If I didn't give them overtime, half would quit. He said they want to work 60 hours a week.

And if I don't give them 60 hours, they'll start looking for another job because they have a certain amount of money. They, they wanna take home every day. But he said, just aside from, from that attitude, he just said the quality of the work and I you know, he let me observe them working for a couple of hours. We went to different workstations and I could see the, it wasn't a, a super complex product,

but it was a very uh uh delicate one. They were producing surgical gowns for, for surgeries in the US. And they had to be done, as you might imagine in a way that was uh resulted in a sterile document. That was absolutely perfectly done because you couldn't have leakage. And, and they were, you know, he just said the quality, they, they almost stopped inspecting because they just never found issues in, in this particular facility. So

that's just an anecdote. But when you, when you talk to others in Vietnam, what you heard time and time again was we were given a deal and not only did the government fulfill that deal, but they kept coming back just to say, how could we get you to invest more? Whereas in some countries, if I asked the same question, they'd say after we got established, we didn't, the people that we worked with left and then we no longer knew who to call. And, and gradually some of the

parts of the deal started to fall away. Like I was, I was in one situation recently where somebody's power bill had gone up three times in the last few years. And it's because it's something that the government says is outside their control, the, the, the power, the costs are being set by the private sector and they could not control it, but they were no longer competitive with other,

other markets in Southeast Asia. And so when time came to set up a new facility, they put it in Malaysia and, and the government was quite upset that they said, look, I, I mean, you, you allowed the power to go up

on us. So governments are going to have to recognize that if they don't have competitive provision of utilities and eventually that's going to be green utilities, then they won't be able to win business even if they give them low taxes and cheap land and, and you know, uh relatively cheap labor is available in the market,

that take most of the Laurels. It is interesting nonetheless that Malaysia scores the highest in public infrastructure investment as a share of GDP going forward as strategic investments become more critical about the government's role in some of these investments become important. I think that gives Malaysia a degree

of strength. And then one of the things that we brought into this report was trying to get financial stability and buffer markers and there, Indonesia, I suppose because of the post 97 recovery was tepid has kept external debt to a rather minimum. And as a result in a world where we might be embracing more volatility, Indonesia's external debt burden is the best in terms of management.

We see a lot of indicators that Malaysia is turning the corner and I, I'd point to three things. I think one is just purely anecdotal that a number of the business leaders that I either inter interact with directly or indirectly through other people that I know are saying that if they have a good opportunity that Anwar or his team will pull all stops to try to do a deal to attract the business in a way that they haven't felt for years that they're, they're focused on getting

more of this investment. I think the second is that um the special economic zone with Joor sends a lot of signals, but it also creates interesting competition between Penang Kl, the Kang Valley and Johor and it's a dynamic we've seen in Vietnam, we've seen in China as well that when different regions of a country start to compete with each other, you end up with better outcomes and businesses have options and they like that and, and the, and, and people

can't get away with taking things easy. Um Penang was probably in the driver's seat recently simply because of some very good decisions that were made 20 or 30 years ago to attract a number of leading players uh affiliate with the uh the semiconductor sector, consumer electronic sector, they produce build servers and things there that are now in high demand due to to the data centers and also a decision in the mid nineties to develop Cyber JIA is what was called there, the

Multimedia Super Corridor, if you're old enough to remember, and they attracted a lot of data centers into uh just south of KL. And so suddenly two sectors that are super hot semiconductors and data centers. Malaysia is in the best position. When you see this investment in infrastructure, you realize that they have also got the utilities and the road infrastructure

and port infrastructure to handle these investments. And then the third is I think Malaysia has been very smart and I would recommend all the countries in Southeast Asia to form commercial relationships with both the West and China. Um China is the biggest export partner of every Southeast Asian country. It will we think over time become the largest investor in Southeast Asia. They have the leading low cost position.

A lot of important manufactured products. They can build infrastructure cheaper than others, they can build solar panels and wind turbines cheaper than others. And so to ignore that opportunity to work with China, to develop your infrastructure and to provide it to other investors in the region, I think would be foolhardy. And so we're we're bullish on Malaysia because we see them pursuing three tracks will raise their growth rate beyond their, their recent history.

are precisely talking about. So the two things that I want to add is one is the green aspect that if indeed we need data centers that have clean energy as their driving force, Malaysia is in a position to deliver that I think that would hold them in very good shape, especially with respect to Johor because if there are certain FD I coming into Singapore, it wants to spill over into the Malaysian side of the border. It better be green energy. Otherwise the big

emacs of the world would not go for it. And the second is while Malaysia is playing a fairly delicate but fairly successful so far game of courting investment, both from the West as well as from China. I think there's a third pillar which is the Middle East among the South countries, even though Indonesia is also a Muslim majority population, Malaysia seems to be very good at this. They have a thriving supermarket, they have very good relationship with the

Middle Eastern wealth funds. And I think that as more and more projects and we are talking about multibillion dollar projects in Johor elsewhere that get into fruition, we'll see large part of that being under being funded or underwritten by Middle Eastern capital.

the finished goods. I think Middle East has always wanted to invest in in Southeast Asia but finding the right vehicle because they they often don't have companies that have global supply chains but is Southeast Asia builds up infrastructure, particularly the green infrastructure, the logical place to source some of that funding will be the Middle East. And, and you're right, Malaysia more than I think almost any market in the world and

you see it in the tourism as well. You know, when you're in, when you're in Thailand, there are tourists from everywhere but you see particularly from China, Korea, Japan. But when you're in Malaysia, you see a lot of, uh, of, uh, tourists from the Middle East and, and it's, it's funny if you're out late, you realize that's when the restaurants are open.

to be different in the past. And it's very important to articulate those differences. So one is something we've already talked about that, the sheer competitiveness of China and we do not think that's going to change. Yes, people might have tariffs. Yes, you may want to diversify away from China. But in general, if you're developing a strategy or you're trying to attract investors, you need to do so conscious that you need to complement what is probably a very competitive player in in China.

In addition, you have to take into account that you may end up with excess capacity in a particular sector. Let me take for example, um I was talking to a government that was saying, look, you're you're saying that we should try to attract some Chinese investment. Should I try to get them to build a very large solar plant in my country?

And I said it's tempting but I'd probably say no because right now based on what I read in the economist last week and kind of what I know working a little bit in the sector, China has enough capacity to meet the world's current consumption by 2.5 times. So capacity ization is about 40% in the solar panel sector. So if you put a plant in, it's gonna lose money because any industry that has that

level of credit, at least for period. So what you would rather do is say I'd like you to build in this way, maybe an auto plant where you can provide a large domestic market and do exports that go around barriers and I will buy your panels. Because if there's anything that right now, China needs somebody to buy their panels. And I also want you to provide low cost financing to install those panels. And I want you to help me with the grid

that will use the electricity from those panels. So I think you need to be pretty thoughtful about not just saying, oh, we don't want you to import anything into our country. We want to force you to build a plant when their need is to get rid of their excess production. And there may be opportunities to work together to, to solve both needs you, you buy their excess production, but you get very cheap, well financed green energy, for example. And that could be, that could be true for ports,

it could be true for the grid. It could be true for other investments you want to make. The second is that China is going to be a, a bigger and bigger player in Southeast Asia. It's the largest trading partner. And we think over time it will probably become the largest investor in the region. Simply they

have surplus of funds. Uh It's logical to invest in your trading partners and they have political and economic interests in Southeast Asia we have seen, for example, us, investment has gradually been declining as a share of total investment in the region for the last 1020 years, you pick the time frame. And so given that that kind of likely outcome, we do think it's important for you to, to

enjoy peaceful productive relations with both major powers. Let's face it, China and the US ending together about half the global economy. And so you don't want to lose half of that. The third is the rivalry between the US and China. And this is kind of in the goldilocks scenario which we're currently in not too hot, not too cold. Southeast Asia benefits from the rivalry. Both will seek to gain favor with Southeast Asia. Both

will be willing to negotiate with Southeast Asia. And we don't believe in general that you should pick one over the other. You should seek friendly and, and, and strong relations with both. I think in terms of FD, I, we talked about this a bit but what are people making decisions on the FD? I? And what's changing? It was never so much about cheap land, cheap labor, cheap taxes, it was

for certain businesses. But those move very quickly to depend on what the latest offer is, whether it's a shoe factory or certain kind of textiles or very low end manufacturing. Um Well, the desirable manufacturing that comes with a big price tag, a lot of capital commitment and maybe long term returns needs things like reliable green utilities, a supply of highly educated laborers, laborers, labor laws that allow them to bring in expatriate talent at all levels. It might be a

25 year old programmer. It might be somebody from Germany who has been through a special process training that they need. You don't want to get too involved in second guessing who they need or why they need to move people in and out so that they're at different stages in

the development of their enterprise in order to grow. And we find, in fact, my discussions last week in one of the Southeast Asian countries was focused mainly on this issue that there were just too many hurdles to moving talent into the country for people to put their best processes and factories in that country. Um Another is that there's a lot of Western press on how much tariffs are going up and it's true for us and maybe Europe.

But from what we see in Asia, most of the intra region, tariffs are declining because of our ce P. Um India hasn't joined yet, but presumably, you know, India will also open itself up more for trade. Now, one has to be careful, it's not all about tariffs. And we also hear stories about non tariff barriers going up as the, the tariff bearers kind of come down. But nonetheless, we don't necessarily think that globalization is dead. We certainly

think regionalization is very much alive. Um, on the green transition, there was a tendency a few years ago to kind of say, look, the West has all the money, the West created all the problem if they don't give us the money to s to solve this. Well, screw them. I think that's misguided. I think the first two are actually true, but it doesn't lead you to the third point. If green energy becomes very cheap and very reliable, then you want to do it for three reasons. One,

you should do it just for the environment. You wanna do it because it's more secure. The next time there's an oil crisis, at least half of your energy is coming from locally generated green sources. And then the third is um so economics, security. And then the third is its balance of payments. I was in uh one country and I estimated they'd have to spend 30 to 40 billion a year on green transition over the next 10 years.

It was a very rough calculation. So I'm not gonna name the country because I don't wanna be, be a second guest on it. And they're like, where are we gonna find that kind of money? There's no way that's just, you know, smoking dope kind of thing. And I said, well, you spend 60 billion a year on imports of oil and gas. I said you find the money for that and it just flows out. It just goes mainly to the Middle East.

And so surely you can rebalance that if, if you only spent 30 billion in the Middle East and 30 billion on local capital projects where your local work, even if you were bringing in the solar panels in the winter, but they were installed locally, they were maintained locally. And from the point it was put in, basically, the uptake was practically free. Isn't that a better outcome? And, and that's a, that's a simplistic

way of looking at it. You know, green energy is, it's is more variable, you need some battery backup, there's all kinds of other considerations. But by and large, the cost curves are such that over time, it will be cheaper, it will be more reliable and it will be better for your national security. And so what, what we're recommending is go after the easiest 20% 1st. It just makes total sense and then

go up to the next 20. Don't worry about the last 20 now, just keep going at the easiest parts first and then the final one, which is uh a tricky one is innovation. We were in a world 30 years ago where a lot of the innovation was coming out of the US, but it was still quite dispersed. Japan was a leader. Germany was a leader, good things. Were, you know, a lot of telecoms capability came out of Scandinavia. And China, everybody said wasn't an innovator. They were just copying everybody

fast forward to now. And the world has changed. The two great innovation ecosystems are the US and China and they actually dominate most leading edge technologies. There's a paper by the Australian Strate Strategic Policy Institute that I cited in a paper I wrote that says that of the 44 most important technologies, the US and China are the

co-leaders in 41 of them. So and only three is one of them, not one of the co leaders and and they were always second, I think two were India, one was Korea or something like that. And, and I looked through the technologies and I, you know, I'm not the world's expert in this, but I said these make sense, these are the ones you want to lead in. And China figured this out 2030 years ago and went on a path and spent billions of dollars

to close the gaps. So now you have a situation where you have two that are vying for leadership, neither wants to be dependent on the other for either of the technologies. And the result is we think going to be an acceleration in the pace of technology innovation, which is a good thing for the world, the world will benefit. But on the other hand, it makes it much harder for other countries to keep up because even in Germany, Japan, the best researchers will often now go to either the

US or China. Because to, to get the Nobel Prize, you need to be in the market where the most money is available, the smartest colleagues are available, it's easiest to be with the university to get published, et cetera. And those happen to be the ecosystems in China and the US. So I won't pick a winner. Depends on the technology, which one and sometimes leadership like take space. China actually emerged as the leader for a short period

of time. The US was launching most of its satellites on both Russian and Chinese rockets, believe it or not spacex came along through a different innovation model and has now surpassed everybody in the world. It's it's more reliable and lower cost than everybody else in the world through a different innovation model that the US has versus China

and nobody has been able to close the gap. And so you can see that leadership can shift, but it will often be between these two ecosystems as opposed to outside. Where does that leave Southeast Asia? Make sure you're tied into both ecosystems, make sure your best and brightest are getting an opportunity to study and work in both of those markets. Make sure that your leading companies are tied in to the best research being done in both markets.

If you tie yourself to only one ecosystem, then you may not be working with the leader,

So I think we began by thinking first in scenarios, we present this in the report that there are three scenarios, there is a central expected growth scenario which probably odds on favorite, but that doesn't necessarily mean it's like an 80% growth.

So I think the idea is this is where we are, but it's not, you know, we, we wanna lay that out so anybody else could look and say, well, if I'm further to the right, I I would assume a higher, I I would have to believe in that we would lead to a higher rate of growth. Right. Again,

middle and a right hand side scenario. So let's talk first of all, the low growth scenario where I don't think we're being that outlandish in thinking that if things don't go right, if management of growth risks are not adequate, that we might see, for example, China growing by 2 3% we might see substantial additional fragmentation between China and the US.

Um We might see a financial stability issues around feds management of monetary policy or PB O CS management of the property sector in China, disappointing developments on the green transition and perhaps even some geopolitical exacerbation over Taiwan. So that's Charlie is the low growth scenario. My question to you is how much probability would you assign to that scenario?

of of the process. There's more dialogue between the US and China over the issues, et cetera. But on the other hand, the slowdown in China hasn't gotten better. And the recent third plenum, uh uh at least from my, my feeling didn't address the core issue of domestic demand and addressing the property crisis in the way that would, would start to accelerate

growth in the near term. So I would put those as kind of the 20 to 25% scenario on the left and then kind of 50 in the middle and then 20 to 25 on the high side.

too many new things. Post third plenum, some of the measures that are being announced on the consumption site, I'm more optimistic. And then the issue of, you know, coming back from the brink on tariff war, both with respect to the US and Europe sitting here in August of 2024 with 5050 odds of Trump coming back to power. It may seem too optimistic, but we have seen many different scenarios play out on this area and, and it's a 5050 election so it can go either way.

Um And then the issue of, you know, global macro management, whether its spillover from China's property market to the rest of the world or the exit from tight monetary policy for the FED. We right now may think that they're not getting it right. But it doesn't take too many levers and too many things to come in place for that to align and the issue of technology and green investment uh and the new levels of productivity being unlocked, I think very much. Uh

formation and the productivity around that capital. Uh What we did was we decided to make the framework richer by adding what we think is one of the most important sources of growth going forward, which is the quality of human capital and its contribution to productivity. So we brought in capital, labor and human capital and we made some reasonable assumptions about what was the residual and the growth regression or the growth model, which is total factor productivity.

Um To your point recognizing the hyper competitiveness of the US and China, we decided to be a bit modest in our assumptions of growth factor productivity. So there are charts in the report that compare productivity in the good years in recent years which have not been that great and forward looking years. We're not talking about a mean reversion. We are cognizant of the various realities out there that's already been discussed. But we still get a pretty decent set of numbers.

We get about 6.5% around the 6.6% growth for Vietnam. Based on our assumptions again of demographic dynamic and productivity and labor and capital contribution. Second highest is Philippines huge demographic tailwind but also some uh path dependency coming from the recent success in growth up performance, especially between 2010 and 2019. Uh Indonesia and Malaysia are commodity producing economies. Typically, their

performance has to sort of zigzag with commodity performance. We like to think especially since we have discussed a lot of time, I spent a lot of time in this discussion, talk about Malaysia that there are reasons to be optimistic about Malaysia's non commodity future. And that consideration goes into the 4.5% average growth forecast that we have for Malaysia. I'm going to talk about Thailand, Singapore and then we'll come back to Indonesia because I want to ask you

a question on Indonesia. So in Thailand, we are not particularly optimistic. Although there have been the Detroit of Southeast Asia, they are embracing the supply chain. But unlike most other developing countries, they unfortunately are going through a very adverse demographic dynamic going forward. And the immigration safety valve they had in the past does not seem to be working that well. Uh and that drag sort of bring them to a sub 3% growth outlook over the next decade.

Singapore, which raises some eyebrows when we share that. We're expecting it to grow at 2.5%. The question being, why so poor? And our answer is actually it's not poor at all. Uh 2.5% for one of the richest per capita economies in the world is very good, especially when we take into account the very strong demographic area

Um One of the other changes in Indonesia that's taken place since I've been working here is they went from a, you know, six terms of Suharto to a pretty vibrant democracy and a lot of people wonder is that good for growth or not so good for growth. And it's certainly in, in my view, been very good for growth. Indonesia has been one of the most entrepreneurial econ economies

in Southeast Asia. And that I, I didn't, I, I expected all the Southeast Asian countries to have an entrepreneurial success but that it's concentrated in Indonesia came as a bit of a surprise to me and I can't really explain why, but it's given them AAA kind of another leg of the stool for growth that we think has really helped

them in the last 10 years. Um Things like shopee and grab and, you know, just, you name it, whether it's in Edtech or in health tech, Indonesia has some of the most pro promising start ups in Southeast Asia. So why would we have any concerns? I think number one, the, the infrastructure continues to lag what's needed even though Jacoby really took this on and some high profile projects were

done and more roads were completed than have been completed. And, you know, like more in the last decade than several decades before. That's great. They just need a lot more. It still doesn't have good infrastructure compared to a Vietnam or Singapore or Thailand and Malaysia. The second is the education levels in Indonesia continue to lag and that's a problem is that's a multigeneration problem.

It's very, or even if a government were absolutely committed to fixing it, it would take 30 or 40 years to bring them up to the levels of say of Vietnam. Um simply because of the challenges of building out the schools and finding the teachers and, and, and, and figuring out a way to, to efficiently spend the money. And so those will always be drags on the Indonesian economy. Um The last is the governments have tended to be

slightly protectionist and they don't use those terms. Um But when you look at, for example, the export controls that were put on palm oil or the restrictions that were put on nickel production that you had to downstream while ostensibly successful and certainly attracted more FD I. As a result. In the case of nickel, you had to think about every other industry and how they would respond to those kind of control.

And it, it would, it would certainly, if you have alternatives make you think twice about, well, I could put it in a plant but let's say I put in a toy factory, what if I'm forced to also produce the plastics locally or buy plastics locally versus from the lowest cost global player? You'd think twice about being in an environment where those rules might change very suddenly and impact the economics of your business.

governments pursue? Given the thoughts that we have provided these.

Um It works, it forces you to have to be able to manage more complex enterprises. It ties you into global supply chains, it forces you to have talent that can work as an equal or part of a global organization. Ee especially when it's foreign investment, it, it raises the gain for at least a portion of your economy. And then there are spillover benefits,

but it's only one wet leg of the stool. And if you rely on that solely given the amount of competition in the world right now, and China's leadership in so many manufacturing sectors, we don't think you'll hit the growth rates that you aspire to. So, in addition to that, we think there are other legs of the stool. One is to really ensure that your entrepreneurial sector prospers. Now, it's so much more fun for a politician to go to a big ribbon cutting of a billion dollar plant.

The equival nowadays is probably the gong of a new unicorn on NASDAQ that came out of Indonesia or Thailand or Vietnam. And there's a league table that we have in the report of how many unicorns each country has managed to foster. And you can see clearly that, that the the winners right now are Indonesians, Singapore and other countries are looking and say, well, what

can we do to foster more entrepreneurs? And it's a whole host of things from ability to move talent in your laws on, on venture capital and foreign ownership of assets, your um your willingness to protect them from too strong. Lo not, I won't say too strong local competition, but I would say competition becomes so aggressive that it keeps them out of the market.

Um And also in ensuring that there's a solid relationships between your VC community and your university community that your universities have an ability to invest in start ups that the students there see going to a start up as a viable uh employment opportunity. It just being directed towards the government or state owned enterprises or large enterprises in the country. So there's a whole host of things you can do to make the entrepreneurial sector take off. And we've seen countries that do

this well, get benefits from it. The green we've already talked through. We just see, look, it probably could double the level of FD I in a country. It just becomes an equal. The infrastructure spending on FD I would be equivalent to the multinational investment in, in manufacturing l exports. I think the the issue of new sectors, the main thing we pointed out to people is if you can't point to an existing capability you have that you're building on, you will probably not be able to pull it off.

There's a lot of people who want to be heroes. This is like Indonesia saying, why can't we do an airline sector? Brazil did it and I'm impressed by what Brazil did. But when we see the Chinese have spent, I I saw a piece of data, I think the number was $80 billion so far developing the Comac aircraft. Now it probably makes sense for China to try to do that. They want to be a leader in every technology. They don't want to be dependent on us, technology, they're probably defense spinoffs

that they want from being in that sector. But there aren't many countries that can spend that kind of money and so know what you're up against and realize when, when, when the competition is going to be too heavy. So the case of Malaysia doubling down on on semiconductors or Thailand seeking to win in electric vehicles or Indonesia leveraging their nickel to to go into batteries. These, these all make sense to us that the health tech sector has so much further to run in Thailand and

Philippines should be getting a piece of that. They also have a lot of doctors and nurses and they could easily be a rival to Thailand in MedTech and health tech. So build on, on an existing asset and that all the countries in Southeast Asia have those assets. And then uh I'm getting the last one. It was the uh multilateral

waiting too long. Most country, most of the growth rate increases in countries are within the control of the domestic markets and don't require so called regional integration. However, if the region does lower non tar bearers in particular and tar bearers which are already coming down because of our CE P. If they coordinate on an electric grid, if they coordinate on certain internet elector, property protections or how data is protected around the region. That's a good thing.

But we see that is just icing on the or I I icing on the cake, not the cake itself. And we want most governments to recognize that your destiny is in your hit.

country co countries to continue to have influence. And a say in Southeast Asia tells me that there are three large pools in addition to domestically generated pools that are going to be available for investment and, and, and the government simply have to find a way to attract more of that to the capital markets in this, in this region. If you build it, they will come