China has captured 52 percent of the world’s contract electronics manufacturing investment and much has been written about the competition for inward investment between China and Southeast Asian markets. Upbeat predictions put the Southeast Asian electronics contract-manufacturing market at $25 billion in 2011, up by $9 billion from $16 billion in 2006. This represents 7 percent of global electronics contract-manufacturing revenue, up from 6.3 percent in 2006. Of all the South East Asian markets, Vietnam, Singapore and Malaysia are projected to lead growth in the region, with Thailand, Indonesia and the Philippinestrailing behind. "The differentiating strengths of the electronics manufacturing base across South East Asia augurs well for the region,” says Reid Rasmussen, Head of Fusion Consulting’s ICT practice. "These include its high quality, low cost resources, emerging position as a potential alternative or complementary sourcing base to China as labor costs in China become higher, and its supply chain speedand flexibility slows.” South East Asia’s emerging challengers to China However, South East Asia’s major players each need to maintain their own competitive edge. While Singapore, Malaysia and Vietnam have the biggest potential to build on their electronics manufacturing industries, they will need to foster continued foreign directinvestment (FDI) in order to do so. • Singapore Singapore will attract investments in high value-added manufacturing such as in semiconductor, hard-disk drives and High Definition media, propped up by strong growth in investments in electronic manufacturing in the defence, medical, automotive and aerospace industries. Its challenge remains its relatively higher labor costs. While Singapore has a smaller domestic market, its proximity to consumers in fast-growing emerging markets Chart 1: Country competitiveness Chart 2: Market share 2006/2011 and global supply chain hub locationcompensate for that handicap. 
• Malaysia With the Malaysian government’s focus on fostering its high-tech industries, the electronics sector continues to attract and retain large, high-tech multinationals such as Intel, Dell, AMD, Sony, Agilent, Seagate, NEC and Motorola. Its main challenge is to stay competitive between low-cost giants like China and India and R&D centers like Singapore. Vietnam With its attractive low cost base and government support, Vietnam is possibly the most attractive emerging market for manufacturing companies. It is likely to grow at over 100 percent CAGR until 2011, albeit from a small base, while other South East Asian players are only showing single digit growth. Recent investments by top US, Korean and Japanese companies, such as Intel,Samsung, NEC, confirm this trend. Next steps for Southeast Asia’s major players 1. Specialisation Southeast Asian players should focus on core competitive strengths and maximize the advantages of being flexible niche players within their areas of specialization, rather than chasing after too wide a variety of investments. Singapore will do well as an R&D and specialized high-tech hub while developing South East Asian countries can focus on high-volume manufacturing to leverage their competitive wage advantage. In order to stay competitive and participate as key players in the electronics industry, governments should focus on attracting fast growing segments, such as mobile handsets, wireless communicationsand consumer electronics. 2. Wooing the MNCs Government incentives and continued support are also vital. South East Asian players will have to leverage existing relationships and provide incentives for existing investors to stay. Companies are accustomed to being wooed with tax rebates, subsidies and domestic contracts. In Vietnam for instance, corporate income tax has been reduced from 28 to 25 percent and with relaxed foreign investment rules, foreign companies can now own up to 49 percent of local firms. In Malaysia, Motorola is reported to have been awarded large contracts as an incentive tokeep its operations in the country, following initial intentions to moveto China. 3. Growing home markets Domestic markets will grow further with the rising spending power of the local middle class. As prices drop further, lower class households will also enter the market for consumer-oriented electronics and IT products such as low cost PCs and mobile phones. This is especially true for South East Asian countries such as Vietnam and Indonesia, where economic growth is translating intomore disposable income for theirlarge populations. 4. Boosting infrastructure With Vietnam emerging, companies in the electronics sector now have a wider set of options and possible choices as locations for manufacturing bases in Asia. The combination of Vietnam’s lower direct and indirect labor costs, large domestic market, relatively young population and lower risk of employee turnover makes the country a strong viable alternative as a manufacturing base. However, Vietnam must first urgently address its infrastructure weaknesses. The national power grid needs to be upgraded, and more needs to be done to create efficient logistics and material inflows and outflows. The building of a large container port in the South for example, is expected to help address this issue. Some are even hoping the port will become a major Southeast Asian hub. "Expect to see China losing share in volume electronics manufacturing to Southeast Asia, with significant investments by the large multinationals in favor of countries like Vietnam,” predictsFusion’s Rasmussen. -------------------------------------------------------- Eggs in more than one basket Large technology manufacturing companies are adopting a ‘China plus one’ strategy, seeking more balance in their Asian manufacturing and diversifying risk by being less dependent on China. This is in the light of China’s rising labor costs, high employee turnover and to some extent,greater bureaucracy verses some governments in South East Asia. The trend towards moving into South East Asian manufacturing bases is more about extending operations into places like Vietnam, notnecessarily moving out of China. From its small base, Vietnam’s contract manufacturing is expected to surge ahead at a CAGR of 120 percent between 2006 and 2011, compared to 9 percent for Thailand, 7 percent for Singapore and 8 percent for Malaysia. Responsible for about 50 percent of the world’s electronics contract manufacturing, China will continue to dominate while South East Asian countries are expected to take a higher share of futureinvestments. 
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