15 June 2015

How to succeed in ASEAN:

Advice for Norwegian

companies

ASEAN-Norway Business Conference

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company is strictly prohibited

1

Today's discussion

ASEAN in context

The reality of ASEAN economic integration

Market prospects

Doing business in ASEAN

2

Incomes in ASEAN countries are rising at unprecedented rates

1 Time to increase per capita GDP (in PPP terms) from $1,300 to $2,600.

154

53

65

33

25

12

16

11

19

16

48

50

1700 1750 1800 1850 1900 1950 2000

Vietnam

India

China

Indonesia

Thailand

Philippines

Malaysia

Singapore

Japan

Germany

United States

United Kingdom Year

154

53

65

33

25

12

16

11

19

16

48

50

1700 1750 1800 1850 1900 1950 2000 Country

United Kingdom

Vietnam

Malaysia

Philippines

Germany

Singapore

Japan

United States

China

Indonesia

India

Thailand

Data chart, do not delete!

50 Norway

3

But there are large disparities in economic development

GDP per

capita, 2014

% of US level

GDP, 2014

$ billions

Population,

2014 Millions

68 1 16 ~0

2 8 17 15 Cambodia

Real growth

of GDP, 2000-14

%

6 5 888 252

Brunei

Indonesia

3 7 12 7 Laos

21 5 338 30 Malaysia

2 9 63.5 64 Myanmar

5 5 285 100 Philippines

102 5 308 6 Singapore

10 4 374 67 Thailand

4 6 186 93 Vietnam

Norway 180 2 500 5

4

13 19

Myanmar

21

Laos Cambodia Vietnam

33

Philippines

37

Thailand

49

Indonesia

55

Malaysia

56

Singapore

11 15 13 26

33 38 45

100

48

More than 90 million people will move to ASEAN’s cities by 2030

ASEAN

43

36

1 Brunei not included as the country has no cities with population >200,000

1 128 31 15 34 15 1 1 9 235

2013-30 2012-30

xx Number of

cities with more

than 200,000

inhabitants

2030

2013

Share of country population living in cities of more than 200,000 inhabitants1

%

5

Real GDP growth, 2013-30

1 Includes cities with greater than 200,000 inhabitants

Small and mid-size cities will drive ASEAN’s future growth

Less than 5 percent

5 to 7 percent

More than 7 percent

GDP compound annual

growth rate, 2013-30

(%)

6

ASEAN’s urban infrastructure is generally poor

Average Best practice Worst-in-class

1 2 3 4 5

Country

Fact-based

project

selection

2.6

3.5

2.5

4.5

2.5

2.5

2.3

Streamlined

delivery

2.5

3.0

2.5

4.0

2.8

2.5

1.2

Making the

most of existing

infrastructure

1.8

3.0

1.5

4.5

2.0

1.8

1.4

Robust funding

and finance

framework

2.3

4.0

3.5

4.0

2.3

2.5

2.0

Strong

infrastructure

governance and

capabilities

2.2

3.0

2.2

4.5

2.2

1.8

1.5

Indonesia

Malaysia

Philippines

Singapore

Thailand

Vietnam

Myanmar

7

ASEAN must spend $7 trillion on infrastructure to support growth

0.5

0.5

Others

2.7

Indonesia

Water

Telecom

Residential

real estate

1.2

7.0

0.6

Transport

0.6

1.0 Power

Commercial

real estate

Malaysia

0.7

Singapore

0.7

Vietnam

0.8

Thailand Philippines

0.9

3.1

0.7

Total

investment

Required infrastructure and real estate investment, 2014-30

$ trillions

8

ASEAN’s workers and consumers are young Percent of population under 45 years old

81% Philippines

76% Indonesia

76% Malaysia

59% Korea

66% China

77% India

48% Japan

58% Norway

Vietnam 73%

9

4.8

5.9

4.8

7.4

3.4

Contribution to overall real GDP growth, 2006-12

%

50

46

45

43

33

27

44

59

26

14

23

10

30

54Thailand

Vietnam

Singapore -4

Indonesia

Philippines

Productivity impact

from sector reallocation

Within-sector

productivity improvement

Labor input Past growth was driven by labour force expansion

GDP compound

annual growth rate,

2006-12

%

10

Labour is inexpensive but low output

186.6

57.1

33.2

16.5

21.2

14.2

3.8

12.5

Indonesia 8.6

Vietnam 6.7

Singapore 87.4

China 27.5

Malaysia 26.7

Thailand 16.3

Philippines

2.4

8.9

5.2

8.7

5.5

5.4

6.9

10

9

5

10

6

19

5

7

8

8

8

5

11

7

-3

-1

3

-2

-1

-6

2

-73%

Average daily wage

cost for a factory

worker

$ per day

Annual manufacturing

labor productivity

$ thousand per worker

Average daily

output/wage

$

Compound annual

growth rate,

2007–12 (%)

11

To keep growing, ASEAN must boost labour productivity

2.2

-0.2

2.52.02.2

4.34.23.8

5.4

7.9

5.8

0.1

5.24.1

3.5

6.35.5

4.7

5.9

7.9

Singapore Brunei Myanmar Thailand Malaysia Philippines Vietnam Laos Indonesia Cambodia

Historical productivity

growth (2000–13)

Required productivity

growth (2013–30) to

maintain historical

growth rate1

-0.6 10.4 25.7 28.7 46.5 59.7 99.7 111.0 159.2 170.2

Annual labor productivity compound annual growth rate

%

Required increase in productivity

%

12

Five ASEAN countries rank among the world’s 50 most connected nations

Connectivity

index rank

1-10

11-25

26-50

51+

ASEAN2

country Services Financial People Goods

Data and

Communica-

tions

Indonesia 49 39 113 31 65 56

Cambodia 82 59 109 81 104 91

Malaysia 23 34 26 10 32 18

Thailand 19 27 94 12 56 36

Vietnam 56 41 90 25 58 48

Singapore 3 4 18 2 5 4

Philippines 45 47 52 53 54 45

Rank

Norway 25 12 75 34 23 29

13

ASEAN ranks high by some measures of global technology adoption

2013, millions

103

Russia

India

ASEAN

110

162

Japan

189

Brazil

US

88

623 China

267

Turkey

Brazil

US

125

163

India

67

40

61

Mexico

ASEAN

32

32 UK

248 Russia

Brazil

141 Japan

India

715

China

351

1,216

US

888

274

ASEAN

Mobile users Facebook users Internet users

14

Vast differences in digital readiness

Overall

rank Country

Infra-

structure Affordability Individual Business

2 Singapore 16 46 10 15

5 Norway 6 28 2 12

30 Malaysia 71 48 49 27

45 Brunei 37 129 50 56

64 Indonesia 85 37 95 36

67 Thailand 73 47 85 59

78 Philippines 89 75 91 43

84 Vietnam 121 8 84 88

108 Cambodia 97 105 105 78

109 Laos 125 130 129 74

146 Myanmar 136 146 143 145

Selected indicators from the Networked Readiness Index 2014

Readiness 2 Usage3

1–10

26–50

11–25

51+

Ranking

15

Today's discussion

ASEAN in context

The reality of ASEAN economic integration

Market prospects

Doing business in ASEAN

16

Intra-ASEAN trade is relatively low

2012

$2.2

trillion

63

13

24

2000

$705

billion

73

4

23

2012

$8.2

trillion

36

5

59

2000

$3.4

trillion

34

2

64

2012

$4.8

trillion

48

12

40

2000

$2.2

trillion

49

5

46

Extra-regional (excluding China)

Intra-regional

Trade with China

North American Free

Trade Agreement

(NAFTA)

Association of

Southeast Asian

Nations (ASEAN) European Union (EU)

Trade within and outside of trading blocs

Share of total goods trade, %

17

“Transform ASEAN into a single market and production

base, a highly competitive economic region, a region of equitable

economic development, and a region fully integrated into the global economy”

AEC Blueprint

The AEC Blueprint aims to create a single market

“Transform ASEAN into a single market and

production base, a highly competitive economic region, a region of

quitable economic development, and a region fully integrated into the global economy”

AEC Blueprint

Free flow of goods

Free flow of skilled

labor

Free flow of services

Free flow of

investment

Free flow of capital

Food & agricultural

security

Integration of 12

priority sectors

Single Market and

Production Base

1

2

3

4

5

6

7

Develop competition

policy

Strengthen consumer

protection

Intellectual property

rights

Promote

infrastructural

development and

e-commerce

Reduce double-

taxation

Competitive

Economic Region

1

2

3

4

5

Free flow of goods

Free flow of skilled labor

Free flow of services

Free flow of investment

Free flow of capital

Food & agricultural

security

Integration of 12 priority

sectors

Single Market and

Production Base

1

2

3

4

5

6

7

Develop coherent ap-

proach towards external

economic relations

Form and manage free

Trade Agreements

(FTAs) and Compre-

hensive Economic

Partnerships (CEPs)

Enhance participation in

global supply networks

Integration Into the

Global Economy

1

2

3

Develop competition

policy

Strengthen consumer

protection

Intellectual property rights

Promote infrastructural

development and

e-commerce

Reduce double-taxation

Competitive

Economic Region

1

2

3

4

5

Accelerate the

development of

small and medium

enterprises (SME’s)

Enhance ASEAN

integration to reduce

development gap

between member

countries

Equitable Economic

Development

1

2

Develop coherent

approach towards

external economic

relations

Form and manage

free Trade

Agreements (FTAs)

and Comprehensive

Economic

Partnerships (CEPs)

Enhance participation

in global supply

networks

Integration Into the

Global Economy

1

2

3

Accelerate the

development of small

and medium

enterprises (SME’s)

Enhance ASEAN

integration to reduce

development gap

between member

countries

Equitable Economic

Development

1

2

18

Foreign ownership restrictions remain in multiple sectors Foreign equity ownership index

100

75

100

50

50

100

100

66

65

100

81

Telecom

Wood

Manufacturing

Agriculture

Health care

Logistics

Tourism

Vietnam

100

100

70

70

40

100

70

100

49

100

80

Malaysia

49

69

95

98

57

65

100

49

99

100

78

Indonesia

49

87

49

49

49

49

100

49

49

49

58

Thailand

77

87

79

72

62

88

96

62

75

93

79

ASEAN

40

75

40

40

40

100

100

40

606

100

64

Philippines

Aviation

Financial services

Services

Cross-Sector

Mining, oil and gas

Goods

0-24

25-49

50-74

75-99

100

19

AEC lags other regional trade agreements

Already realised (or

significant progress

toward realisation)

Targeting but not

sufficient realisation

Not targeting (to any

meaningful extent)

AEC1 Eurozone2 NAFTA3

Elimination of tariffs

Elimination of non-tariff barriers

Common tariffs with other countries

Liberalisation of service trade

Mutual recognition of standards

Trade facilitation

Liberalisation of foreign investment

Free movement of people

Intellectual property

Government procurement

Competition policy

Common currency

20

ME

DIU

M

LO

W

HIGH MEDIUM LOW

Telecommunications Rubber

Mining, oil

and gas

HIG

H

Financial

services Electronics

Automotive

The impact of integration therefore varies by sector

Current progress on integration

Potential impact from full integration

Agriculture-

based Wood

Size = 2013 GDP

Goods Services

Aviation

Logistics Textiles

Consumer

goods

Health care

21

ASEAN Integration: Is the glass half-full or half-empty?

Progress on AEC

implementation: 82% of the

initiatives planned for the current

phases have been achieved

(according to ASEAN secretariat)

Lowering of Tariffs: Tariff rates

virtually zero in ASEAN-5 and

Brunei

National Single Windows

implementation: Live

implementation of the National

Single Windows in ASEAN-5

Trade agreements: Five

“ASEAN+1” FTAs signed with

Japan, Korea, India and

Australia/New Zealand

ASEAN exchange: A collaboration

of seven stock exchanges kicked

off in 2012

Removal of non-trade barriers and

non-tariff measures: Safety, health

regulations or technical barriers remain

obstacles

Lack of institutional capability for

reinforcement: Implementation down to

each country with no limited

accountability

Low involvement of the private

sector: Need Public-Private

partnerships to achieve implementation

targets

Low progress on service sector:

Financial services, healthcare and other

service sectors have generally seen

limited progress

Weak labour mobility: 8 mutual

recognition agreements, but only 2

(architects and engineers) have

progressed

22

Today's discussion

ASEAN in context

The reality of ASEAN economic integration

Market prospects

Doing business in ASEAN

23 SOURCE: Source

INDONESIA

24

Indonesia will become a global top 10 economy by 2030 Ranking by overall GDP

Ranking 1990 Ranking

Trillion USD

2010 PPP

trillion 2010 Ranking 2030

25 18 Indonesia Indonesia

5 5 5 France Italy Brazil 5.28

6 6 6 UK UK Russia 4.82

4 4 4 Germany France Japan 5.55

3 3 3 China Germany India 23.27

1 1 1 US US China 38.49

8 8 8 Italy Spain Germany 4.05

9 9 9 India Brazil United Kingdom 3.67

2 2 2 Japan Japan United States 24.62

7 7 7 Brazil Canada Indonesia 4.28

10 10 10 Canada China Mexico 3.20

25

37

Malaysia

52

Thailand

55

Indonesia

65

USA

69

India

58

China UK Norway

41

57

Private consumption

Private consumption drives Indonesian growth

Contribution of private consumption to GDP, 2014

Percent of total GDP

26

69 65

5586

1314

Consuming class

Wealthy class

164

<2

2013

138

<2

Aspiring class

Struggling class

2020

The population of Indonesia’s urban consuming class is growing by the equivalent of one Singapore every year

Indonesian urban population

Millions

27

Indonesia’s fastest-growing cities are beyond Java GDP development, 2010–30 Less than 5 percent

5 to 7 percent

More than 7 percent

GDP compound

annual growth rate,

2013-30 (%)

Sumatra

Maluku

Papua

Java Bali and

Nusa Tenggara

Kalimantan

Sulawesi

28

Experts describe common set of impediments to Indonesia growth

29

GDP growth has yet to recover

5.6

5.05.0

4.64.6

5.15.15.3

5.65.75.8

6.1

Q4 Q2 Q1 Q4 Q2 Q1 Q2 Q3 Q1 Q3 Q4 Q3

Year-on-year quarterly GDP growth

Percent

2013 2014 2015E

30

PHILIPPINES

31

The Philippines has rebounded to its highest growth rates since 2000

500

200

300

100

0

400

2013 85 2000 10 90 75 70 65 1960 05 95 80

CAGR

4.9% 5.0% 5.9%

6.6%

1.7%

5.3% 4.7% 5.1%

2.9%

4.8%

Philippines

ASEAN

Marcos

Administration

Martial

Law Marcos Aquino Ramos

Estr-

ada Arroyo

Aquino

III

Real GDP growth over time

1990 USD millions (PPP)

32

The Philippines’ largest cities will become significant markets by 2030 GDP 2030, USD billions 2013 prices

Malaysia

GDP, 2013

312

Manila

GDP,

2030F

307

Manila

GDP,

2013

97

Antipolo

Cebu

59

GDP,

2030F

75

21

23

32

GDP,

2013

26

5 6

15

Dasmariñas

Myanmar

GDP,

2013

Manila will grow to the size of

Malaysia today

Next 3 cities will become the size of

Myanmar today

33

Consuming households are expected to more than double, from 11 million in 2013 to 23 million in 2030

Households

with income

>$7,500

Millions

23

42

37

42

32

19

19

2030

29 100% =

7

2013

20

2

11

Consuming middle class

(20,000-70,000)

Emerging consumers

(7,500-20,000)

Globals (>70,000)

Basic consumer needs

(0-7,500)

Annual household

income brackets

$ PPP 2005

Share of households in each

income bracket

%, millions of households

34

Unique ‘hard and soft’ strengths position Philippines for growth

Hard

Improving governance, strong

government finances, steadily increasing

country credit rating

1

Large and increasingly skilled overseas

population with stable remittances

account for 10% of GDP

2

Millions lifted from poverty in last 15

years (although much remains to be

done)

3

Youngest median age in ASEAN, 3rd

largest English-speaking population

globally

4

Consuming households will double to 23

million by 2030 5

A foreigner-friendly multi-cultural ethos 2

High affinity for technology, 8th highest

population globally on Facebook and

Twitter, fastest growing smartphone

market in ASEAN, and self-declared

‘selfie capital of the world’

3

High affinity for the West, and Western-

style consumption 1

Private-sector friendly culture, 2nd highest

economic freedom rating in Southeast

Asia

4

Soft

35

MYANMAR

36

0

2

4

6

8

10

12

14

13 11 2015 07 09 05 03 2001 1999

Myanmar's economy has recovered and is now posting 8% growth

4

1999-2005

-17

2005-10

9

2010-15

Real GDP

%

Compound

annual

growth rate,

%

Myanmar’s GDP growth

2000-2020

37

While Asia developed and urbanised, Myanmar remained dark

1992 2010

38

High growth will require substantial investment

480

170

320

Estimated

domestic

savings

Estimated

foreign capital

650

Potential

investment

$320 billion

infrastructure

investment,

$180 billion of

which in real

estate

2010-2030 investment required to fuel 8%

annual growth

Cumulative, $ billions

39

Agriculture, where productivity is low, dominates Myanmar's economy

44 35 39

15

56

12

32

Myanmar

10

29

10

38

Indonesia Malaysia Thailand China Korea

Services

Agriculture

Industry

3

1965 2010 1965 2010 1965 2010 1965 2010 1965 2010 1965 2010

Sector share of GDP

%

40

By 2030, a diversified Myanmar economy could achieve annual output of $200 billion

Total 50

Telecom 0.1

Financial services 0.2

Tourism 0.6

Energy and mining 8

Infrastructure 11

Agriculture 21

Manufacturing 10

6

221

11

14

22

49

49

69

2030 2010

10

4

8

5

17

23

23

8

Annual

growth

%

GDP contribution

$ billions

41

THAILAND

42

Thailand

3.03.23.23.0

2.1

0.60.5

-0.3

0.4

2.82.9

5.6

Q2 Q3 Q4 Q1 Q4 Q2 Q3 Q1 Q4 Q3 Q2 Q1

2013 2014 2015E

Year-on-year quarterly GDP growth

Percent

43

MALAYSIA

44

Malaysia

4.74.9

4.5

5.2

5.75.7

6.56.3

4.95.2

4.54.3

Q4 Q4 Q2 Q2 Q3 Q1 Q4 Q3 Q1 Q2 Q1 Q3

Year-on-year quarterly GDP growth

Percent

2013 2014 2015E

45

SINGAPORE

46

Singapore

3.5

4.8

3.5

1.3

2.22.8

2.3

4.6

6.56.6

5.5

3.3

Q1 Q4 Q3 Q2 Q3 Q2 Q1 Q4 Q4 Q3 Q1 Q2

Year-on-year quarterly GDP growth

Percent

2013 2014 2015E

47

VIETNAM

48

Vietnam

6.7

6.4

6.2

6.06.1

6.05.9

5.8

5.65.5

5.45.2

Q3 Q4 Q3 Q1 Q1 Q2 Q4 Q2 Q3 Q1 Q2 Q4

Year-on-year quarterly GDP growth

Percent

2013 2014 2015E

49

Today's discussion

ASEAN in context

The reality of ASEAN economic integration

Market prospects

Doing business in ASEAN

50

ASEAN’s landscape is dominated by MNCs and Domestic Champions

Ace Cook Co

Betterway (Thailand)

Gold ABC

Metrotech Jaya Komunika

Hartono Istana Teknologi

United

Laboratories

Scotch Industrial Thailand

Packaged Food Apparel & Footwear Consumer Electronics Consumer Healthcare Beauty & Personal Care

Multi-

National

A global

company

with ASEAN

footprint

Domestic

Champion

A strong

presence in

a single

ASEAN

country

Regional

Champion

ASEAN co.

with multi-

country

footprint

Sing Tsu Fang

Creative Technology

Citra Nusa Insan Cemerlang

San Pablo

Manufacturing

40 companies 25 companies 27 companies 35 companies 27 companies

19 companies 2 companies 1 company 1 company 5 companies

92 companies 14 companies 13 companies 18 companies 13 companies

Total 441 companies 177 companies 142 companies 89 companies 298 companies

50

53