South-east Asia’s rising export stars

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For more than four decades, investors and others have considered China the world’s factory. From Barbie dolls to bicycles, steel beams to smartphones, it became the manufacturing destination of choice. But other south-east Asian nations are increasingly challenging its status, at least in some markets. By the end of this year, it has been forecast that for the first time in over a decade, China will account for less than half of the US’s low-cost imports from Asia.

“These countries are physically well-placed, being on the same shipping lines across the Pacific,” explains investment manager Ben Durrant.

“And several have similar economic starting points to China: cheap, abundant labour and governments with strong political control and a willingness to enact supportive policies. While they haven’t always lived up to their promise, geopolitical tensions between the west and China, among other factors, may be giving them another roll of the dice.” 

Durrant recently returned from his latest trip to the region. And as he tells the Short Briefings on Long Term Thinking podcast, China can also benefit from the rise of its neighbours.

“China’s still the world’s largest exporter and will remain so for the foreseeable future. But as its companies’ labour costs rise, some are building facilities elsewhere. They’re unlikely to do so far away in Ecuador, for example, but south-east Asia represents a natural next step.”

Vietnam’s advantages

Vietnam currently leads the pack as the alternative fabrication destination of choice. Exports from the nation rose nearly eight-fold between 2007 and 2022, from $49bn to $371bn. That its factory workers typically earn about half the hourly wage of their Chinese counterparts helps. But so too does the country’s impressive schooling.

“If you look at standardised education tests, Vietnam outscores the UK quite comfortably, which isn’t what many people expect,” notes Durrant.

“It’s also everybody’s friend. We’re seeing Chinese, Korean and American companies building factories and making other investments there.”

Baillie Gifford’s holdings in the country include FPT, Vietnam’s leading IT services provider, and Shenzhou International, a Hong Kong-based apparel maker for Nike, Uniqlo and Adidas that’s made goods in Vietnam for almost a decade.

“We’re investors in Vietnam’s largest exporter, Samsung Electronics,” Durrant adds. “It’s building a dedicated port there, which shows you quite how committed it is. Industrial park developers we met also spoke about strong interest from companies looking to set up facilities.”

Since 2018, Baillie Gifford has also held a stake in a more unusual Vietnamese company: Vinh Hoan. It’s the world’s largest exporter of Pangasius, a type of catfish.

“It isn’t your typical growth stock,” Durrant acknowledges. “But we think Vinh Hoan is the best operator in a tough industry, which should mean rising trade standards will act to its benefit.

“Pangasius is also one of the cheapest, healthiest proteins there is. So we can see it replacing some of the more vulnerable but better-known types of fish.”

Indonesia’s ambition

Durrant also spent time in Indonesia, one of the world’s biggest suppliers of vegetable oils, metals and other natural resources.

“Indonesia is geographically blessed. Above ground, it’s got everything from rubber and rice to coconuts. Below, there are plentiful reserves of bauxite, copper and nickel,” he says.

“But it’s suffered from a resource curse: by exporting these raw materials, it hasn’t fully benefited from their value. And that’s meant the proceeds have mainly been restricted to the rich and not the country’s enormous population.”

President Joko Widodo, or Jokowi as he’s better known, is trying to address this. In 2020, he banned nickel ore exports to force companies to process it locally. Refined nickel is a key ingredient in stainless steel and batteries, and the intention was that the ban would also encourage companies to set up related supply chains.

“Many people thought these measures wouldn’t work and miners would go elsewhere. But Chinese firms, in particular, are making enormous investments in nickel processing there,” reflects Durrant.

“That could benefit companies like Hyundai Motors, which has built an electric vehicle factory close to the capital, Jakarta.”

Earlier this year, Jokowi introduced follow-up restrictions on the export of bauxite ore, which is used to make aluminium. Next year, he plans to add copper concentrate, tin and gold to the list.

Our Emerging Markets Team’s holdings in the country include the miners Merdeka Copper Gold and Vale Indonesia, and the battery makers CATL and LG Energy. In addition, they have a stake in PT Bank Rakyat Indonesia, which has more than 35 million small-loan borrowers, giving us exposure to the wider economy. During his visit, Durrant also met with local cinema and supermarket chains to explore further investment possibilities.

“The changes we’re seeing in Indonesia have the potential to strengthen the currency and increase tax revenues, so we believe the country has the chance to take a turn for the better and its huge population to prosper,” he says.

Thai talks

Thailand was a third destination. There, Durrant caught up with Fabrinet, one of the country’s biggest manufacturers and a recent Baillie Gifford investment. It specialises in making electro-optical electronic components, including parts that other companies use to build fibre optic communications systems, industrial lasers and cars.

The stop-off also gave Durrant the chance to meet the leaders of consumer-facing companies hoping to profit from the rapid growth in household spending in Thailand.

“One that caught my eye was a rural lender,” Durrant recalls.

“I met with the son of the founding couple to understand its lending culture and ethos. We had a good conversation, but the most insightful thing for me was that he was wearing a $10 Casio watch and had a mid-range Samsung phone with a cracked screen despite having family wealth running into the billions of dollars.

“He’s going to be running the firm for the next 30 to 40 years, and our discussion focused on understanding if he, his company and his customers were all aligned for the long term. That conversation and his frugality about little things suggested to me that there could be more to the business than we might have thought.”

Durrant is still exploring the firm’s potential to deliver long-term growth to our clients. But, as he reflects in the podcast, the visit illustrates how such ‘aha’ moments can depend on travelling to meet company leaders on their own turf.

Play the podcast at the top of the page or listen to it on Spotify, and Apple Podcasts

Words by Leo Kelion

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