Regional Spotlight: Vietnam, Indonesia and Philippines

Much of consumer electronics (CE) manufacturers’ attention on Asia Pacific is centred on China and India. In this article, Euromonitor International casts its eyes on the often overlooked countries like Vietnam, Indonesia and Philippines (VIPs) and assesses their potential to CE manufacturers.

Welcoming the VIPs

As Western Europe and the US are embroiled in economic woes, manufacturers are banking on Asia Pacific, notably China and India, as a catalyst for growth. The vast territory of Asia Pacific offers hidden gems for manufacturers and retailers, with consumers from Vietnam, Indonesia and Philippines also having the economic might to purchase electronic devices.

The combined GDP of the VIPs is expected to exceed US$1 trillion in 2011, with Indonesia contributing a considerable chunk. Indonesia and Philippines’ annual disposable incomes are higher than in India in per capita terms. Similarly, both these countries boast of having a higher percentage of middle-class households (annual disposable income over US$5,000) that are slightly above the corresponding figure in India, as seen in the middle column of table 1.

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Source: Euromonitor International

Note: 2010 exchange rates 

Connected VIPs

Like in most developing markets, mobile phone penetration is high for the VIPs as consumers in these markets eschew landlines in favour of mobile phones. Despite being categorised as developing markets, consumers from the VIPs are, in fact, well connected to the digital domain.

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Source: Euromonitor International

Note:  (1): ‘000

Indonesia is ranked behind the US as the country with the highest number of Facebook users in the world, according to online analytical company Socialbakers. Philippines is ranked eighth, ahead of developed markets like France and Germany.

Vietnam is ranked 53rd, with 2.5 million Facebook users, amongst nearly 28 million internet users. Vietnamese people joining Facebook is expected to skyrocket, as the communist state government eases access to the social networking site.

Challenges for VIPs

Despite the huge potential for the VIPs, challenges are abound. Corruption and bureaucracy present challenges for businesses. Underemployment (population employed in low-skilled jobs and the low-pay agricultural industry), inadequate infrastructure and widespread counterfeit products all add to the challenges facing consumer electronics manufacturers trying to break into these markets.

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Source: Euromonitor International

Note: For Corruption Perceptions Index, a higher score reflects a less corrupt country. For Ease of Doing Business Ranking, a lower score is preferred.

CE manufacturers give Indonesia the cold shoulder

Indonesia has made headlines in the technology scene for the wrong reasons, with Google Inc and Research in Motion (RIM) choosing to set up operations in neighbouring countries rather than Indonesia. RIM, the producer of the widely popular Blackberry smartphone, announced in September that it will be opening a manufacturing plant in Penang, Malaysia. The snub by RIM is especially painful as Indonesia is a well-known Blackberry nation, with one in four smartphones sold in 2010 belonging to the Canadian manufacturer. A few weeks later, Google announced plans to set up three new Asian data centres in Singapore, Hong Kong and Taiwan, again bypassing Indonesia altogether.

Indonesian government officials are threatening to impose luxury taxes on Blackberry smartphones and other punishments on Google and RIM. The business community in Indonesia pointed to unrealistic demands by government officials as further testament that the government is out of sync with businesses and is living in ivory towers, unaware of the competitive business environment in Indonesia, ASEAN region and even the global economic climate.

Despite its attractiveness of being a manufacturing hub, Vietnam faces skilled labour shortage

While China is the manufacturing hub for most consumer electronics products sold globally, the earthquake and subsequent tsunamis that hit Japan in March 2011, which affected global electronics components supplies, highlighted the risk of having manufacturing sites centred in one location. Vietnam’s close proximity to China positions the communist country as an ideal alternative, low-cost manufacturing site. Further, the Vietnamese government has taken several reform measures, including a corporate income tax cut in 2009, in order to encourage foreign investment.

Intel Corporation opened an assembly and test factory in Ho Chi Minh in 2010. Special tax concessions were made by the government, and the state-owned company Saigon Hi-Tech Park (SHTP) even signed an anti-corruption agreement with Intel as part of the agreement to set up operations in Vietnam. Much fanfare was made by the Vietnamese government on its achievement to bring cutting-edge technology into the communist state, and will serve as a springboard for more foreign investment.

Although Vietnam has a high adult literacy rate, standing at 93.3% in 2011, skills shortages have been a persistent problem due to the country’s inadequate university training, as well as the existence of a “brain-drain” problem. Shortages of technical and management skills thus have posed a major challenge for foreign investors in the country.

Philippines in state of political turmoil

The Philippines is a difficult place to conduct business due to poor governance and on-going political and economic instability. Of the three countries, Philippines fared the worst in both the corruption perceptions index and the ease of doing business ranking in 2011. Its economy continues to underperform compared to its neighbours, while corruption is rife. The regulatory environment is cumbersome, costly and inconsistent. High levels of taxation remain and skills shortages blight its economic progress.

With the rise of Vietnam as an alternative manufacturing hub to China, Philippines is gradually losing its lustre with Consumer Electronics companies. The opening of Intel’s new plant in Vietnam in 2010 signalled the closure of Intel’s assembly and testing facilities in Cavite, Philippines.

Banking on VIPs

As the Eurozone once again teeters on the brink of fresh socioeconomic turmoil and the US walking a financial tightrope, emerging markets like Vietnam, Indonesia and Philippines can provide a financial lifeline to CE manufacturers, once the limiting factors as detailed above have been improved upon. Retail sales of consumer electronics in the VIPs are expected to continue growing during the forecast period and even overtake France in value terms by 2013.

Consumer Electronics Retail Sales (US$ million)

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Source: Euromonitor International 2010 exchange rates

Despite the difficulties for manufacturers establishing operations in emerging markets, the VIPs’ growing role in the global economy as one of the Future 7 – developing countries with growing economies which together account for one in 10 global consumers – will reward manufacturers that dare to venture into these emerging markets. While Western Europe and the US are still important for manufacturers due to their higher margins, Vietnam, Indonesia and Philippines will offer growth opportunities in order to help offset the slowdown in Western Europe and the US.