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Assessing Laos as a potential manufacturing hub in Southeast Asia
As China seeks to expand its industrial footprint overseas amidst escalating trade tensions with the United States, Laos has emerged as a contender for attracting manufacturing investments from Chinese firms.
Photo Credit: Oliver Raw/DW
As China seeks to expand its industrial footprint overseas amidst escalating trade tensions with the United States, Laos has emerged as a contender for attracting manufacturing investments from Chinese firms. The Thai industrial developer Amata has recently announced a substantial project in Laos, aiming to entice manufacturers contemplating relocation from China.
According to a DW report, in a recent discussion with Nikkei Asia, Amata’s founder, Mr. Vikrom Kromadit, characterised international expansion as a potential “lifeline” for affected companies, emphasising the strategic importance of such moves amid shifting geopolitical landscapes.
Amata’s 2024 investment brochure accentuates various incentives, including notable tax exemptions for participating firms, thus signalling a strategic shift in Southeast Asia’s manufacturing environment. Experts suggest that the geographical proximity of Laos to China may significantly enhance its attractiveness to Chinese manufacturers. Mr. Jimmy Chen, Vice President of the Thailand-Taiwan Business Association, observed that the lower manufacturing costs in Laos relative to Thailand, paired with investments from both Chinese and Thai stakeholders, positions Laos as an appealing industrial location.
Mr. Tim Scheffman, a German CEO of a FinTech firm in Vientiane, expressed optimism regarding Laos’s potential as a manufacturing hub. He noted its strategic centrality within Southeast Asia, attributed to its membership in the Association of Southeast Asian Nations (ASEAN), which boasts a population exceeding 660 million. However, Mr. Scheffman also acknowledged challenges surrounding limited human resource capabilities and structural inefficiencies within the banking sector that may hinder investment. He asserted that with the right approach towards automation and workforce training, manufacturing in Laos could flourish.
Despite its rich natural resources and a population of approximately 7.5 million, Laos is grappling with significant economic troubles, encompassing extensive foreign debt, currency depreciation, and inflation rates soaring to around 25%. The country has become increasingly reliant on Chinese investments and loans, particularly for large infrastructure projects, including a $6 billion high-speed railway aimed at connecting Laos with China’s Yunnan Province and further extending to Bangkok and the Gulf of Thailand. However, the financial obligations stemming from these projects have put immense pressure on national resources, with annual payment obligations exceeding $1 billion and total debt comprising approximately 125% of the national economy, half of which is owed to China.
As Laos endeavours to integrate more thoroughly into the regional economy, questions arise regarding whether this single-party communist state possesses the necessary conditions to succeed. Professor Zachary Abuza from the National War College argues that Laos exhibits minimal comparative advantages when matched against neighbouring nations such as China, Vietnam, and Thailand. According to Professor Abuza, essential criteria for becoming a manufacturing hub include a skilled workforce, macroeconomic stability, and a consistent energy supply. In contrast, he notes that Laos currently only maintains a reliable energy source.
Moreover, the pervasive corruption endemic in Laos poses another significant barrier to attracting foreign investment. Professor Abuza remarked that although corruption is prevalent in various countries, potential economic prospects typically outweigh such concerns. Nonetheless, he contended that the limitations of Laos’s economy — with a total value estimated at under $20 billion — render it a less appealing market for international corporations.
In conclusion, while Laos presents some ambitious initiatives to establish itself as a manufacturing hub in Southeast Asia, inherent economic challenges, coupled with structural and governance issues, cast a shadow over its prospects. To realise its aspirations, Laos will need substantive reforms and strategic partnerships to enhance its attractiveness to potential investors and ensure sustainable development in the long term.
