Transcription
Southeast Asia's economies are navigating an increasingly complex landscape. Indonesia is seeing inflation pick up, while Vietnam is grappling with a widening trade deficit. Businesses across Southeast Asia are forced to adapt to shifting supply chains, tariff pressures, and geopolitical tensions.
Against that backdrop, a new report by IMD Business School argues that globalization has not disappeared. Instead, its purpose has shifted. So, what does this new reality mean for Southeast Asia's growth prospects? Joining us now is Professor David Bach, president and Nestle Professor of strategy and political economy at IMD Business School. Welcome back to the studio, David. Good to have you here.
>> Great to be here.
>> All right, let's zoom in straight to your report. You said the old playbook for globalization has changed. How so?
>> Yeah, so globalization used to be very much about scale and efficiency. That is what informed decisions to enter markets, to source from markets. That's changed. It's much more about security and reliability at this point. So, you're thinking much more about how do I bolster my resilience to my supply chains, to my operations, rather than just maximizing efficiency.
>> All right, so rather than just maximizing efficiency, let's look at Southeast Asia as a case in point. It has now entered an era where geopolitical risks matter as much as economic fundamentals. How should Southeast Asia adapt and stay competitive?
>> So, absolutely. I mean, Southeast Asia is very much at the fault line of all of that, right? Equally connected to China, to the United States, you know, trading with everyone around the world. And so, many of these things are felt most acutely here in Southeast Asia. I think companies in the region overall have done a pretty good job. They've benefited from efforts by Western companies to de-risk to some extent their exposure to China. But clearly, they're realizing that tariffs and pressures can come from the West as well, particularly from the United States. So, they'll have to continue to adapt to a world that is just going to be much more volatile.
>> All right, continue to adapt. You You've argued that security is taking precedence now over efficiency.
>> Yeah.
>> Uh so, how much is today's supply chain, considering that Southeast Asia is very trade-dependent, how much is that diversification of supply chain is driven by economics versus geopolitics?
>> Well, clearly the economics still matter, but I would argue that the politics now come first, right? It used to be that you would choose your locations based on efficiency, where can you get the most scale, and then you dealt with the politics. What were the FDI regulations? You know, how easily could you move things in and out? Um to what extent was your intellectual property protected? Now, this has inverted. First, you deal with the politics. What is the relationship between that country and the major trading hubs that I want to access? Uh to what extent can I operate freely here? Are there digital sovereignty requirements that I have to be mindful of? And among the countries that are suitable politically, then you're looking at what is the most effective economic efficient way of operating, but the sequence has now changed.
>> All right. So, you mentioned that Southeast Asia is located right at the center of the geopolitical fault line with what's happening between US and China right now. Can Southeast Asia remain the biggest beneficiary of China plus one?
>> I think so, because, you know, the fundamentals have not changed, right? China remains incredibly important. Um I think Western firms, certainly European firms in particular, realize that they cannot decouple from China. What they're trying to do is de-risking, and that means be less dependent on China, and so you continue to see Vietnam, Thailand, but also Indonesia and Malaysia benefiting from that. India, of course, now is a is getting into this game, trying to attract manufacturing. So, I think that is going to continue. Uh but the region, of course, itself has to uh closely watch its relationship with China. China is, you know, the elephant in the room. It is the biggest player in the region. And so, countries in Southeast Asia will, on the one inside, benefit from China de-risking by the West. And on the other hand, by the close proximity to the world's biggest economy.
>> But in a world that's getting more and more fragmented, how do people achieve that? How do leaders in Southeast Asia get to that point?
>> Yeah. So, I think it's really important to recognize this volatility is not going to go away. So, the winners are going to be those who can manage that volatility better. And that requires some shifts. It's less about optimizing and more about navigating. It's less about picking that one bet and having instead an index, a portfolio of bets that is going to work out. And it's about benefit strengthening your resilience at the individual level, the team level, the organizational level.
>> All right. It's interesting how you mentioned that leaders must now become navigators rather than just mere optimizers. So, if you were advising an ASEAN leader today, what would be that vulnerability that they must watch out for the most?
>> I mean, I there's so many that you could look at, right? I mean, let's pick the most obvious one. Energy security and energy sovereignty clearly has emerged now as a major issue. It's always been a key issue in this part of the world, but the closure of the Strait of Hormuz has underscored this again. So, how do we bolster our resilience? Why is China doing a little bit better? Well, in part because they electrified more, because they built up reserves of petroleum, right? So, what is it that we can do now to prepare for the next round of disruptions, which are going to happen either in energy or elsewhere?
>> Okay. Amidst this energy disruption, what would be Southeast Asia's strongest competitive advantage then? Since it's not producing its own energy.
>> Well, but but it can, but it must, right? So, you're beginning to see, uh you know, a lot of hydro being uh produced in parts of Southeast Southeast Asia, investments into renewables, the opportunities around nuclear. You know, Korea and Japan have been leading in that space, right? So, I think we need to recognize that energy is again not just about efficiency and cost. It's about security and reliability, right? And and that's going to be a massive opportunity across the region.
>> Security, liability, and also resilience in this increasingly fragmented world. Thank you so much for the conversation today, David.
>> Thank you.