Webinar Summary

In this session, based on the latest facts and the results of surveys and analyses, we clarified the reality of the further strengthening of economic ties between China and ASEAN even amid the COVID-19, then discussed with experts how Japanese industry and companies should develop global business centred on Southeast Asia in the future under such circumstances.
Mr. Koshiba, Vice Chairman, Japan Association of Corporate Executives, Chairman Emeritus, JSR Corporation gave the keynote speech at the beginning of the session. Based on the awareness that we are approaching a turning point in the long-term cycle of the world order since the late 2010s, and that we are also at a major turning point in the mid-2020s in terms of science and technology, when innovative progress will be made and social structures will change, Japan Association of Corporate Executives made a proposal in April 2021 that corporate executives should be a key party in the economic security of the world.
The next speaker, Mr. Hemmi Nobuhiro, Partner/Chief Strategist, Deloitte Tohmatsu Consulting Head, Monitor Deloitte Institute, Japan, presented further progress from his presentation at last year's ASEAN-Japan Business Week. He introduced the fact that even in the midst of COVID-19, the economies of Southeast Asian countries are increasingly dependent on trade with China, as well as the trends of Chinese companies that are difficult to be seen by Japanese companies: investment in invisible demand, investment in invisible locations and investment in invisible partners. As a hint for the future direction of Japanese companies, he mentioned five possible gaps between Japanese companies and the global market.
Based on the above-mentioned presentations, a panel discussion was held with Professor Jimbo of Keio University, an expert in international politics, and the following points were discussed, which were highly suggestive for the future business considerations of Japanese companies, (i) there are significant differences between the countries of ASEAN, and it is necessary to consider how to do business and how to create a framework while looking closely at each of these differences; (ii) the importance of a viewpoint that considers cooperation as an equal partner, as the combined GDP of the 10 ASEAN countries will overtake that of Japan by around 2030; (iii) the need to develop a forum for dialogue between industry and government, not only between Japan and the US, but also across ASEAN, as a response to economic security; (iv) the very important position of Japan and ASEAN as stakes that hold multilateral cooperation together within the perspective of Japan and ASEAN as part of the three major economic blocs of China, the US and Europe, which operate in a self-serving manner; and (v) the significance of identifying the strengths and specialties that Japan can contribute to Southeast Asia in a relatively well analyzed manner, and the next-generation computing infrastructure based on quantum technology, high-speed communications, biotechnology and a society that values people were mentioned. The importance of not making decisions too quickly and increasing management options as much as possible, including in relation to ASEAN, was also pointed out in these times when it is difficult to foresee the future.

［Koshiba Mitsunobu, Vice Chairman, Japan Association of Corporate Executives Chairman Emeritus, JSR Corporation］

For almost 40 years, I have been working with JSR to develop advanced sectors, including the semiconductor supply chain and the materials industry, and since 2009 as President and CEO, I have been working to increase corporate growth and corporate value through transforming business portfolio. With regard to business expansion as well as capital and strategic investment decisions in various regions of the world, we have incorporated not only market growth and trends, but also geopolitical analysis into long-term management strategies and decision-making.
And in April 2021, Japan Association of Corporate Executives stated: The times have changed, and Japanese companies should recognize that we are now in a state of emergency. And submitted an opinion paper entitled 'Towards the establishment of strong economic security: what course should Japan take in the age of geopolitics', while I was in charge of economic security and assurance and advanced technology. The underlying issue is that in the late 2010s, the long-term cycle of the world order was approaching a major turning point in the eyes of geopoliticians, investors and others.
In addition, as stated in an opinion piece submitted by the association in 2018, there is an awareness of the problem that science and technology will make revolutionary advances in the mid-2020s that will significantly change the structure of society, and that the 2020s will continue to be uncertain and volatile, with the economy and advanced technology being used as a weapon which turning out to be a reality.
The era of globalization and liberal economy of the 2000s-2010s has come to an end, and it is now the 2020s when we must reconsider what we used to take for granted: that our business activities are only possible when the security of the state, land, people, etc. is ensured. In its April 2021 proposal, we recommended that business managers should be aware that they are responsible parties to economic security.
The three major economies, the US, China and Europe, where profess public support for other countries, but in reality they are pursuing economic policies and rule-making centred on their own countries and regions. In this global balance of power, Japan is placed in a very difficult position. This applies to the Indo-Pacific countries, including ASEAN, as well as to companies operating in the region.
Today, focusing mainly on ASEAN and Japan, I would like to exchange views with experts on the direction of co-existence with the ASEAN countries, which have strong economic and cultural ties with Japan in this global situation, and to further deepen my own knowledge of ASEAN.

［ Hemmi Nobuhiro（Partner/Chief Strategist, Deloitte Tohmatsu Consulting Head, Monitor Deloitte Institute, Japan）］

Since my speech at last year's ASEAN-Japan Business Week based on my book 'The Impact of China-ASEAN', I would like to talk about the situation facing the world today and how this should be perceived within ASEAN. I would like to briefly review four key points from the book.
The first is the 'China-ASEAN Economic Circle': even amid COVID-19, the economic ties between China and Southeast Asia are growing stronger, both at the macro and micro level. In external circulation of China's Dual Circulation Strategy, which is linked to ASEAN, ties are growing stronger, starting with Southeast Asian cities. These cities are expected to exceed the economic scale of Japan's ordinance-designated cities by 2030. Local large enterprises will also emerge in line with this.
The second is 'Gigantic Cities Leading China ASEAN', which is also related to the first topic. It is important to look at China from the perspective of city clusters, and within China it is necessary to be aware not only of the Beijing and Shanghai economic zones, but also of the Greater Bay Area, including Shenzhen, and western city clusters such as Chongqing and Chengdu. These areas and the Mekong region in South-East Asia are connected by highways and other means, and logistics are improving dramatically. Against this backdrop, e-commerce, live commerce and other forms of commerce are very active, and economic links between cities within China-ASEAN are deepening.
The third is 'Evolving cross-border EC'. In addition to the development of road, rail and other infrastructure, the combination of Chinese capital and Southeast Asian local EC platforms is stimulating two-way business.
The fourth is the 'Overseas Chinese/Chinese network'. Chinese and overseas Chinese are also at the center of these new movements, and it is important to note the new generation of Chinese and overseas Chinese networks. There is also the aspect of connected political, business and academic communities, where information is gathered quickly and decisions are made more promptly.
I will explain what progress has been made based on what I shared at the AJBW last year, as described above. First of all, there is the fact that the importance of ASEAN as a trading partner of China is rising, surpassed the EU to become the top trading partner in 2020, and has been growing very rapidly in the most recent 1Q2022. On the other hand, Japan was China's fourth largest trading partner until 2021, after ASEAN, the EU and the US, but was overtaken by South Korea in 1Q2022. This macroeconomic situation from the Chinese perspective needs to be kept in mind. ASEAN's ties with China from an ASEAN perspective are also growing stronger. 'Dependence on China in trade' and 'Size of trade relative to GDP' have both risen in each country over the three-year period 2018-2021. In other words, ASEAN economies are becoming more dependent on trade with China and their economic ties are deepening.
I would like to touch upon three points where China has accelerated in terms of business, even under the COVID-19 pandemic, in a sphere that is invisible to Japanese companies.
The first is how to invest in invisible demand in the face of increasing uncertainty about economic growth. Chinese companies are actively investing ahead of time in future growth and new products.
The second is the increase in geopolitical uncertainty, i.e. whether the other party is visible or invisible. China and Southeast Asia are connected to each other through improved logistics, and more and more goods are being transported to Southeast Asia from factories in China. Thus, investment in places that are not directly visible from Southeast Asia is also becoming more significant.
Third, as uncertainty in the supply chain increases, it is also important to look at how to work with partners and invest in invisible partners. Chinese companies are successfully working with top industry partners, including Japanese companies, in the value chain.
When looking at China's manufacturing industry, it can be classified according to two factors: high or low industry concentration, and whether it is a developing or matured industry. In descending order of industry concentration and growth potential, it can be broadly divided into the Core Materials Industry Group, Processing and Assembly Industry Group, Daily Life Related Industry Group and Heavy and Large Industry Group. China's business expansion pattern can be summarized in line with the aforementioned: the Core Materials Industry Group competes domestically in China and exports its products from China to ASEAN because the high added value has a low transport cost ratio. The Heavy and Large Industries are too heavy to transport and require high transport costs, so the pattern is to produce locally in ASEAN for local production and consumption. In between are the Processing and Assembly Industry, such as cars, and the Daily Life related Industry, which is a hybrid of export and local production. Let's take a look at EV battery separators in the Core Materials Industry Group and cement in the Heavy and Large Industry Group as case studies.
First, let us present a case study of the separator industry. The strategy of a Chinese separator company is ‘investment in invisible demand’, and it has already made an upfront investment in a new commercial material, aluminum film for example, as it sees the separator business peeking out in the near future, looking ahead to the technological evolution of EV batteries. In addition, from the perspective of 'investment in invisible places', the production base is concentrated in Yunnan Province in China, and the strategy is to export to ASEAN as a market. This is a dynamic that is not visible from South East Asia. Also, in terms of 'investing in invisible partners', China itself is unique in its policy of specializing in manufacturing and forming alliances with top manufacturers of raw materials, machinery and technology in Europe, Japan and South Korea. And the key point in this process is the way in which the production capacity of the factories is secured first, making it impossible for other countries to keep up.
The next case is in the cement industry, where 'investment in invisible demand' takes into account the fact that it is easier to respond to stricter environmental regulations later on, such as waste incineration and CO2 emission control, at the plant building stage. In terms of 'investment in invisible locations', the Chinese are investing not only in Thailand and Indonesia, but also in Vietnam, the Philippines and other countries in South-East Asia. In regard to 'investing in invisible partners', in technology, they are accelerating technological alliances with Japanese and European manufacturers. Looking also at the two industries from a cost perspective, there is a large difference in production costs between Japanese and Chinese companies. There is a price difference of two to three times for separators and four to five times for cement. With such cost differences and the global market share of Chinese companies increasing, we need to consider how Japanese companies can compete on a factual basis.
Although the current situation is challenging for Japan, in order for Japanese industry to win in Southeast Asia and the rest of the world, it is important to recognize the following possible gaps in the perception of the business environment by Japanese companies.
The first gap in perception is whether Japan tends to regard Southeast Asia only as a production base. China, Europe and the US see Southeast Asia's growing market affluence and the cities' increasing purchasing power as an attraction.
The second gap in perception is that Japanese products are superior to those of other countries because of the high quality and technology. We need to recognize the importance of securing customers and production infrastructure as well as technology.
Thirdly, we are too concerned about protecting technology and maintaining old value, overlooking the fact that technology will eventually become obsolete.
Fourthly, we need to consider whether we should partner with other Japanese companies or with top global companies as future business alliances.
Finally, it is important to consider whether priority should be given to building partnerships from a long-term perspective or to pursuing economic rationality on a business or deal-by-deal basis.
In these points above, I believe that it will be a focus of discussion as to where Japan should target.

＜1st Topic ：Deepening SEA-China economic ties＞

●Koshiba

• ー After listening to Mr. Hemmi's speech, it was clear that the direction of the 'China-ASEAN Impact' is further accelerating.
• ー From a manufacturing perspective, when we look at ASEAN from a security perspective, the situation differs from country to country, whether it borders China, whether there are maritime issues, the political situation of the country, and so on. That is why we have made various business decisions while observing those countries one by one.
• ー JSR has been competing on a large market basis, but that strategy no longer allows it to compete with Chinese companies, so it is important to focus on a certain number of points and to recognise that the products required by each generation will change.
• ー In fact, when we were considering where to expand our operations for specialised fuel-efficient synthetic rubber, we looked at Singapore, Thailand and China as candidates; we decided to have a base in ASEAN and target the local market and the Chinese market, and finally decided on Thailand because we thought the chemical industry in Singapore had a tough future. Other companies all went to Singapore, but business in Singapore is still challenging in many ways for us, thus we are very happy that we chose Thailand.
• ー After Mr. Hemmi’s presentation, I was again left with the impression that the perception of ASEAN changes depending on product to product.

●Jimbo Ken (Professor, Faculty of Policy Management, Keio University)

• ー My specialty is international politics, so I will talk about how ASEAN is viewed from the perspective of geoeconomics and geopolitics.
• ー In response to Mr. Koshiba's discussion on how to view the current era in the context of long-term cyclical theory, I recognised that ASEAN today is a partner that needs to be viewed in a slightly different definition, both from a macroeconomic perspective and from the perspective of international political science.
• ー For example, in terms of nominal GDP, ASEAN was a total of USD 1 trillion in 2005, but is now over USD 3 trillion and is expected to exceed USD 6 trillion by 2030. Even if Japan's GDP is now USD 5.5 trillion and increases to around USD 6 trillion, the economic scale of Japan and ASEAN is about to become equal. The situation is such that ASEAN may even surpass Japan in the near future.
• ー As Mr. Hemmi mentioned, it is important to move away from the old idea of ASEAN as a production base and see it as a market and a new investment destination.
• ー In the world of security and military affairs, the combined defense expenditure of all of ASEAN used to be only one-third of Japan's total defense expenditure, but by 2030, the defense expenditure of ASEAN as a whole is expected to be USD 80 billion, which is in the 10 trillion-yen level. Japan will also expand its defense spending in the future, but it is currently in the latter half of the 5 trillion-yen range, and ASEAN is gradually gaining strategic independence and transforming itself into a powerful region. Rather than building capacity building for ASEAN, Japan must deal with ASEAN from the perspective of an equal partner with a shared strategic view. It will be important for Japan to support ASEAN in its efforts to gain freedom of choice in the strategic competition between the US and China.
• ー Recently, President Biden launched a new economic framework for the Indo-Pacific called IPEF. Although it was not well received by the business community, it was successful in gaining the participation of 13 countries at its inception, and many ASEAN countries joined. In fact, the reasons behind this were the intention of ASEAN to get off the watch list of the US Congress, to get on the supply chains that the US is reviewing, and to put sensitive issues such as the China-Taiwan issue on hold for a while. It is also clear that the US will not be able to enter the regional framework unless it takes into account the complexities of ASEAN and their business environment.
• ー In the circumstances described above, it is crucial to decide how to expand business and to create a system where the facts of what is happening between China and ASEAN, and between Japan and ASEAN, are clearly presented and reflected in the system.

＜2nd Topic：Direction of Japanese companies, expectations from ASEAN＞

●Jimbo

• ー The strategic conflict in the US-China relationship will probably continue. Many Japanese companies are focused and deeply involved in both the North American and Chinese markets, and it is important to establish how this is seen from ASEAN as an identity.
• ー Secondly, as the economic security debate and the supply chain review progresses, many Japanese companies feel compelled to restructure their future capital markets and technology alliances. The supply chain restructuring that the Biden administration is currently undertaking is in four areas - semiconductors, batteries, pharmaceuticals and rare earths - and this will gradually expand in the future. When, for example, we want to form a partnership in the future with a Chinese start-up or a company that has technology and data, there is a possibility that a new risk will be taken on the Southeast Asian market, saying that maybe this company will be on the US Department of Commerce entity list in a year's time.
• ー When such a situation arises, it is important to hold policy dialogue, as METI does with USTR and the US Department of Commerce, to deepen understanding between the business community and the government on what kind of regulations are possible. Institutions are gradually being established in Japan and the US, but I feel that extending this to the framework of South East Asia and raising literacy in the economy is necessary to stimulate business.

●Koshiba

• ー In the era of economic security, companies cannot just carry on with their business activities on their own. Dialogue between industry and government has reached a point where it is really crucial.
• ー In terms of relations between the US, China and ASEAN, Japan is in a really fortunate position and is involved in various frameworks such as RCEP, CPTPP, IPEF and QUAD. Also considering been sandwiched between the three major economic blocs, the US, China and Europe, Japan is in a position as a stake to hold the multilateral partnership together.
• ー What Japan can contribute to ASEAN is still advanced technology even today, and this advanced technology is now directly linked to national power. Japan's ongoing attempts to become a hub of innovation in advanced technology to lead ASEAN are excellent, but advanced technology alone is meaningless; real innovation and social change can only take place when it is implemented in society. Japan already has excellent public goods from the 20th century, to which the new 21st century public goods of next-generation computing infrastructure and high-speed communications will be added, which will become the social infrastructure of the future.
• ー It will be of importance to build the social infrastructure of the 21st century on top of the existing infrastructure of the 20th century, so that ASEAN companies can participate in it, and Japanese companies can take the lead in driving innovation. If we can unite Japanese academia and industry, and the government policies that support them, I think we can make a very strong contribution within ASEAN.

●Hemmi

• ー In both business and government, many things are decided through country-to-country channels and international organisations such as the UN. In listening today's presentations and discussions, I felt that the importance of cooperation frameworks linking global organisations and countries was pointed out. This perspective of inter-regional cooperation is a perspective that does not often appear in trade and industry policy or in business.
• ー China-ASEAN also provides a new way of grouping China and the regional economic zone of Southeast Asia from the perspective of Greater China.
• ー On the other hand, from a business perspective, while there are significant differences between countries within ASEAN, there is also a tremendous economic disparity between urban and rural areas within the same country. Even if an economic ecosystem is to be created, the reality is that there is a four- to five-fold difference in the level of technicians, income and market units, and order in terms of investment will be necessary.
• ー Against this background, there are three essential perspectives.
• ー The first point is to see things from the other party's point of view. The relationship between Japan and ASEAN is not determined solely by what Japan has to say. We have to keep a close eye on what claims are made from the perspective of Southeast Asia. We must understand that in the　relationship between the US and China, Japan's position is also determined by the relative power relations between the two countries.
• ー In relativizing, the second important point is to look carefully and compare each of them.
• ー The third important point is to carefully read the publicly available documents of the other party in relativizing. Not only the central government, but also the local governments release their external economic policy and economic diplomacy documents in a very courteous manner. It is harder than it looks to train yourself to grasp things logically from publicly available information. It is one of the most time-consuming but reliable steps.
• ー Japan may not a superpower nation, but it is a middle power nation and could become a middle power alliance teaming up with other countries in South-East Asia. What value Japan can offer at that time will be determined by relative factors. Japan needs to prove to Southeast Asia and other Asia-Pacific countries that it has a specialty unique to Japan. That I believe, will be a challenge in the future.

＜3rd Topic：Innovation hub between Japan and ASEAN＞

●Koshiba

• ー According to the 2018 report by Japan Association of Corporate Executives, a fundamental technological revolution will occur in the mid-2020s. That innovation is specifically the practical application of quantum computers, which, when combined with advanced semiconductors, will in the future be able to perform calculations that cannot yet be done at the present time.
• ー This would allow us to reach various social issues, e.g. carbon neutrality and the realisation of a fully recycling-oriented society. Carbon neutrality is difficult to achieve by extending current technologies, and discontinuous technologies have to be created.
• ー To achieve this, it is necessary to develop the technology of bioinformatics, which can be greatly advanced by quantum computers. It would be possible to develop this kind of technology and work together with ASEAN, where biomass is extremely abundant, to create a new supply chain and thereby create an era in which we are not overly dependent on fossil fuels.
• ー Another possible innovation area is high-speed communication, where various data is gathered by sensors. Even now, supercomputers can simulate the spread of a disaster in the event of heavy rain, but it takes time. With the new computing infrastructure and high-speed communications that gather data in real time, it will be possible to predict disasters in five or ten minutes.
• ー If the government provides a test bed for the examples mentioned above, various companies would come together to generate innovation, which would be ideal.

＜4th Topic：Experiences from the perspective of residing in Thailand.＞

●Jimbo

• ー I was previously a visiting professor at Thammasat University in Thailand and spent several months in Singapore.
• ー At the time, Thailand was under military rule after the coup d'état, and the US was unable to sell arms due to domestic laws, and China was in place to compensate for this. In fact, when we interviewed the Thai government, they said that they sometimes buy weapons from the US and sometimes from China, depending on the priority of Thailand's national defence, and that their strategy is to combine the two. I felt that it is a major perspective of Thailand to flexibly choose the partner according to the priority of the strategy.
• ー Some saw Thailand as a place to put into practice third-country market cooperation between Japan and China. I thought that if Japan and China cooperated with the idea of expanding the win-win relationship of a free and open Indo-Pacific that brought the Japanese and Chinese business communities closer together, Southeast Asian businesses and governments would be relieved because they would not be in a situation of having to choose between Japan or China. However, it turned out that this was not the case.
• ー In terms of whether Japan and China can actually cooperate, the difference in business methods between the two countries is that Japanese companies select projects based on their corporate logic of investment profitability and payback ratio, whereas China works with Thai companies to take up infrastructure projects even if they are unprofitable. I felt that the difference in business methods between the two countries was a very problematic issue in the promotion of this joint project.
• ー The barriers that need to be overcome when promoting the digital economy, where countries with different ideas team up and work together on infrastructure projects, remain significant.
• ー My conclusion from my experience is that the only way forward is to build Asia, in a larger sense, one project at a time.

＜5th Topic：Closing＞

●Hemmi

• ー The concept of reorganising new economic blocs, which is one of the subjects in today's presentation, is important. It is crucial to always be aware of the need to reorganize Japan's rigid view towards national and international organizations, and the associated structures within companies.
• ー The strength of Japanese urban structures lies not in large-scale smart cities, but in detailed know-how in town management and rail systems, and these Japanese strengths can be brought together to create a formation package that meets real needs.
• ー Also, in considering the concept of a human-centred society, which is a fundamental concept, the value that Japan can offer is a society that values human beings. The key point is whether or not we can humbly survive changing the framework in a reality-oriented way, while having such fundamentals in the new era we are entering.

●Jimbo

• ー I mentioned at the beginning that ASEAN as a whole will gradually overtake Japan in terms of GDP size and become more competitive in the global economy. The reality is that, for example, Indonesia is already a member of the G20, so the responsibility to the international society is arising from within ASEAN.
• ー As ASEAN increases its presence in the global economy, Japan should do its utmost to support ASEAN's growth towards a free and rule-based international market and a society that values human respect. Rather than Japan unilaterally encouraging ASEAN to grow, the most productive way to promote ASEAN-Japan relations would be for ASEAN to make its own efforts to achieve its goals, and for Japan to give full support to these efforts.

●Koshiba

• ー After all, we cannot help but be aware that ASEAN and Japan are located between the three major economic blocs of China, the US and Europe. And it is necessary to understand that those three major economies have developed a very self-serving strategy that focuses on their own country and their own region, which is expected to last for about 10 years from now.
• ー In this context, as a manager, I would like to say that the priority is first of all to get the balance sheet in order, increase management options as much as possible, and make as few decisions as possible, especially with regard to the ASEAN strategy.
• ー Despite the ongoing de-Russianisation and the continuing emphasis on business restrictions, it would still be in the best for the companies to increase management options and postpone major decisions.
• ー Conventional wisdom is always wrong. This proverb means that the extension of what we already know is wrong. From the latter half of 2020s, it is believed that a new world will emerge through science and technology, so it is very important for business managers to always be prepared for that era.