06 001b Final Report

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An Investigation into the Measures Affecting theIntegration of ASEANs Priority Sectors (Phase 2):

The Case of Electronics

REPSF Project No. 06/001b

Authors:

David Parsons

Assisted by Mawardi Maghfuri, Bintoro Ariyanto, Rina Oktaviani

Final Report

June 2007

The views expressed in this report are those of the authors, and not necessarily those of the ASEANSecretariat and/or the Australian Government.


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An Investigation into the Measures Affecting the Integration of ASEANs Priority Sectors (Phase 2):The Case of Electronics

REPSF Project 06/001b: Final report i

ABSTRACT

The electronics sector is one of ASEANs priority sectors and is set to become a singlemarket and production base across its 10 member countries. To achieve this, ASEANgovernments have established a roadmap for integration of electronics which includes the

elimination of tariffs and non-tariff measures, and a wide range of other measures to facilitateintegration. The objective of this study is to investigate the measures affecting thisintegration process, especially non-tariff measures and other supply chain impediments.Along with similar studies on the Logistics, Textiles and Apparels sectors, this study is thesecond phase of a larger study on ASEAN economic integration under the RegionalEconomic Policy Support Facility (REPSF). While problems relating to supply chain efficiencyare apparent, the most significant challenges for the integration of the electronics sectorcome from attaining the capacity to meet international standards of competitiveness acrossall ASEAN electronics producing countries. The study identifies individual factors affectingcapacity and competitiveness varying across ASEAN countries depending on the level ofdevelopment of their electronics industry.

The study provides some economy-wide and specific recommendations. It recommends

enhancing industrial clustering; standards certification; developing stronger mould and dieindustries; improving management and labor skills, as well as domestic transport system andsupplies of electricity. These actions should also be supported at a macro level by a betterclimate for business and investment, improvement of infrastructure and services, eliminationof government red tape, and the development of an ASEAN Single Window for CustomAdministration.


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An investigation into the Measures Affecting the Integration of ASEANs Priority Sectors (Phase 2):The Case of Electronics

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REPSF Project 06/001b: Final report v

EXECUTIVE SUMMARY

Competitiveness and Capacity Issues Challenge ASEAN Integration

The most significant challenges for ASEAN in integrating the electronics sector come fromcapacity and competitiveness issues within ASEAN countries.

This is because the electronics industry is a front-line and fast changing global industry withits roots outside of ASEAN. It is driven by global investment, technology and innovation,global production and consumption, and global marketing strategies.

The electronics sector is also now the worlds most integrated manufacturing sector,spanning large markets across the developed and developing world. ASEAN is part of thissystem as illustrated by the data. ASEAN accounts for about 10 percent of world productionand five percent of consumption. Intra-ASEAN trade only accounts for about 20 percent oftotal ASEAN trade in major electronics products.

Global benchmarks therefore shape international competition in electronics.

This is the context of the electronics sector in ASEAN. Deeper integration within ASEAN can

only be achieved and sustained if more ASEAN countries can meet these standards ofcompetition and capacity.

ASEAN Integration Driven by ASEAN Partners

It is clear that ASEAN firms are not the drivers of integration in electronics. ASEAN relies onmedium and large multilateral firms from its neighbor countries in North East Asia and the USand EU for its further expansion and integration.

These firms already have a strong presence in China and India which, despite havingcompetitiveness challenges, offer large rapidly growing markets and the potential forcomprehensive domestic integration. Many growing ASEAN firms have also shown a stronginterest in expanding further in these markets.

The large and rapidly expanding markets of China and India provide direct competition for

ASEAN but they also hold the potential for ASEAN growth through deeper integration withthe production and supply chains in those markets.

In both competition and integration with China and India, ASEAN will need to focuscomprehensively on building stronger international competitiveness to continue to attract newinvestment in electronics.

This will be important to ensure that investment growth in the electronics sector in ASEAN isdriven by much more than ASEAN being an alternative location to diversify investment andproduction.

Supply chain efficiency important but not enough

The efficiency of ASEAN supply chains is an important factor in ASEAN competitiveness inelectronics but improvements in supply chains alone will not be enough to create the

environment necessary for deeper integration.The electronics sector is highly sensitive to changes in costs and time because internationalcompetition has shaved margins to a minimum. As a result, general inefficiencies anddisruptions in the supply chain are amplified more in the electronics sector than other goodssectors.

The complexities of supply and production chains in electronics and the large number ofproducers involved in these chains make it difficult to calculate the cost of impediments.However, it is the impact of the accumulation of impediments in the supply chain that willdetermine the location decisions of firms.


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vi REPSF Project 06/001b: Final report

Customs procedures remain a concern in many ASEAN countries but poor domestictransport systems are likely to emerge as a more important issue as ASEAN countries adoptNational Single Windows for customs administration and as ASEAN production centrescontinue to expand around major cities.

Efficient domestic transport is important for promoting efficient clustering and domesticsupply chains as well as getting goods in a timely way to and from ports and airports.

Other Non-Tariff Measures are not as pervasive in the electronics sector as others sectorswith no readily identifiable NTMs in some sub-sectors like components. There are, however,more NTMs facing the consumer electronics sectors. While NTMs themselves are notreported as the most significant impediments in the supply chain, cumbersome and time-consuming licensing and inspection procedures and informal payments are of concern. It istherefore the administration of NTMs that have a heavier impact on the supply chain in somecountries.

Building Capacity for Entry and Change

Local component manufacturers form an essential part of integration in electronics. Manyare very small producers. These local firms in many ASEAN countries lack the capacity toenter highly competitive production and supply chains or to maintain their participation as

new products and systems emerge.Some of these firms have difficulty competing because economy-wide issues like labor costsand laws, the high cost of electricity and poor transport infrastructure tip the balance againstsmall and medium operators.

However, there are also four specific capacity issues that impact on the electronics sector inASEAN countries:

Domestic mould and die industries: Moulds and dies are the foundationfor the electronics sector and are a vital part of all modern manufacturing.Most ASEAN countries rely on imports of about 80 percent or more of theirmoulds and dies resulting in higher costs and the potential for delaysbecause of the difficulty of on-site adjustment.

Training of management and workers: The highly technical and fastchanging nature of the electronics industry increases demands for skilledmanagement and workers who can adjust new production techniques.There remain considerable skills shortages in some ASEAN countriesreduce competitiveness, especially for smaller firms.

Insufficient Standards Testing facilities: The standards and specificationsfor components are essentially established by the large international firms.Some ASEAN countries have no independent Testing Laboratories or aninadequate number to ensure these standards are met. Such laboratoriesare public goods and generally require the support of governments.

Poor facilities and services for smaller firms: Many smaller firms arelocated near but outside of dedicated industrial areas reducing their

access to higher quality services and the larger firms and reducingpotential efficiency of clustering.

Individually and together these factors impact most heavily on small and medium sized firmswhich must be mobilized and developed if ASEAN is to compete and integrate on asustainable basis. These factors are more critical for the electronics sector because smallproducers must meet global standards in their production and delivery.


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REPSF Project 06/001b: Final report vii

Range of factors found to be affecting capacity and competitiveness

While the summary above has highlighted four sets of issues which have an importantbearing on integration in the electronics sector, the individual factors affecting capacity andcompetitiveness vary across ASEAN countries depending on the level of development oftheir electronics industry. They include:

Least Developed ASEAN Countries

Level of domestic incomes

The capacity labor and management

Availability of domestic infrastructure

Efficiency of customs and government administration

Established electronics producing ASEAN countries

Economy-wide

Greater predictability and stability in the investment and business climate

Stronger law and order and predictability in implementing and abiding byrules and regulations

Slow growth in domestic incomes

High labor costs and constraints to hiring and firing labor

Provision of reliable and competitive supplies of electricity

Bottlenecks in domestic transport systems

More efficient customs and port handling

Specific

Lack of domestic mould and die industry

Inadequacy of supporting component producers

Lack of Testing Authorities for industrial standards

The capacity of labor and management to rise to meet emerging needs

Leading electronics producer ASEAN countries

High labor costs and availability of labor

Capacity for innovation and research and development

Capacities of neighboring countries

Key Recommendations

Economy-wide IssuesEven though economy-wide issues relating to the business climate are not the focus of thisstudy, they are reported to remain of central importance in many ASEAN countries for theelectronics sector. Three well recognized recommendations should therefore be kept at theforefront in ASEAN:

Systematically address weaknesses in the business and investmentclimate that erode predictability, stability and security because their impactin one country has a direct effect on the overall perceptions of ASEAN andits capacity to integrate in electronics.


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viii REPSF Project 06/001b: Final report

Step up improvements in infrastructure and services to improve overallcompetitiveness

Cut Government red tape and the incidence of informal payments.

Customs Procedures

Continue to place the highest priority on the development of an ASEAN

Single Window for Customs Administration through implementation ofworld class National Single Windows.

Ensure that the National Single Windows not only result in efficientpaperless procedures but also have a real impact on the predictability andcertainty of handling times and produce clear and formal-only paymentssystems.

Develop capacity building measures to fast track National Single Windowsin the less developed ASEAN countries before the end date of 2012 toavoid an increasing gap in the standard of customs procedures withinASEAN.

Non-Tariff Measures

In the process of phasing out NTMs, focus on cutting processing time andon eliminating informal payments. Electronic licensing is beingimplemented in some countries to address this issue.

Development of Mould and Die Industries

Develop stronger capacity in domestic mould and die industries in order to reduce thereliance on imported moulds and dies and to increase competitiveness in all manufacturingindustries through:

Working with business to determine the present state of capacity in thedomestic mould and die industry.

Establishing and fostering mould and die industry associations in

cooperation with foreign partners to mentor those associations so thatdomestic industries can meet the demands for increasingly sophisticatedmoulds and dies in the electronics and other manufacturing sectors.

Establishing and expanding schools and training centres and equippingthem with modern machinery to train apprentices and existing smallproducers in mould and die production.

Industrial Areas and Clustering

Provide small component suppliers with production space in dedicatedindustrial parks and areas alongside large producers and assemblers toenable them to have access to efficient services and to develop moreeffective clustering.

Standards Certification Given the public-good nature of standards certification, establish adequate

independent Testing Authorities/Laboratories in each producing country totest that parts and components comply with industrial standards andspecifications.

Management and Labor Skills and Innovation

In electronics producing countries, allocate more resources to technicaleducation institutions for certified training at the school and college level


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REPSF Project 06/001b: Final report ix

and for workers and managers already employed in the electronics sector.The latter is especially important in meeting the needs of smallerproducers to continually update their skill levels.

As part of the allocation, step up the training of trainers and theupgrading of machinery used for teaching including throughcooperation programs with ASEAN partners.

Include instruction on production and supply chain management sothat managers are more able to meet chain requirements.

In countries leading the electronics sector, foster market incentives forresearch and development and innovation. Focus training on providingservices for regional production and supply management.

Domestic Infrastructure and Services

Focus infrastructure development and improvements in services on two key areas:

Improving domestic transport systems to streamline clustering and deliveryto and from ports

Providing reliable supplies of electricity at internationally competitive rates

and planning ahead for emerging demands for electricity.


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REPSF Project 06/001b: Final report 1

I. INTRODUCTION

Electronics Major Industry for ASEAN

The electronics sector is big business for ASEAN. The value of production for the sector in2005 was estimated at US$139 billion and total ASEAN trade in the same period reachednearly US$400 billion. The electronics sector because of its size and linkages generates amuch wider impact on the overall growth and trade of ASEAN.

ASEAN is a global player in electronics. It is the fifth largest producer of electronics with ashare of about 10 percent of world production. It relies significantly on global markets forinnovation and technology, investment and a complex international supply chain for importsof components as well as exports. These trade links are vital for ASEAN because it onlyrepresents five percent of the world market for consumption and about 75 percent of its tradeis with the rest of the world.

Competitive Challenge for ASEAN

In the face of a highly competitive global market, the challenge for ASEAN is to maintain andthen expand its global share of production and trade and, at the same time, to increase the

size of its domestic market to absorb more of ASEANs own production.

ASEAN Governments have therefore identified the electronics sector as one of the 12priority sectors under the Framework Agreement for the Integration of Priority Sectors withthe goal of effectively achieving a single market in electronics in all ASEAN countries by2012.

The six most developed ASEAN countries (ASEAN 6) will take a faster track. They haveagreed to cut tariffs on about 85 percent1 of all electronics products to zero by January 2007.Five of these countries have also agreed to eliminate non-tariff measures on these productsby 2010, while for the Philippines it will be 2012.

Purpose of this Study

This study is intended to investigate the measures affecting integration of the electronics

sector as one the priority sectors.

It is has been commissioned for the ASEAN Secretariat by the Regional Economic PolicySupport Facility (REPSF) under the ASEAN-Australia Development Cooperation Program.This study along with similar studies on the Textiles Sector and Logistics are Phase 2 of alarger study under this program on ASEAN integration.

These studies are encouraged to take a supply chain approach to examining the measuresaffecting integration. There is intended to be a particular focus on non-tariff measures,analyzing published databases and information on non-tariff measures and supplementingthis with consultations and interviews with the firms and industry associations in theelectronics sector. The purpose of these consultations was to gain a business view aboutthe major priorities and impediments and if possible some measures of their costs tobusiness.

Consultations with firms and industry studies immediately revealed that traditional non-tariffmeasures were not the primary concern of the electronics sector although there are particularconcerns in some countries and for some products. However, the cost of customsprocedures in the supply chain is a real concern and other issues like domestic transport arealso causing problems.

1Under the Framework Agreement for the Integration of Priority Sectors, ASEAN has agreed to cut tariffs and

non-tariff measures in 85 percent of tariff lines across all priority sectors taken together, not specifically in eachsector.


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ASEAN Production Shares by Category2005

EDP

33%

Radio

4%

consumer

8%

others

6%

Compon-

ent

49%

Figure 1 ASEAN Production Shares by Electronics Product Category(Source: Yearbook of World Electronics Data 2005)

Project Team

The study was conducted by a team from the Indonesian Chamber of Commerce andIndustry led by David Parsons, of the Chambers Committee on Investment and InternationalTrade Development.

The team also drew upon consultants within ASEAN countries to help undertake interviewsand consultations.

The team is grateful for the cooperation of individual firms and industry associations inASEAN for this work.

Two workshops were held in conjunction with these studies on priority sectors drawing

together members of the ASEAN Secretariat and other experts from the region and fromAustralia. The team is very grateful for the input and advice for these groups and for theirongoing cooperation.


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II. FEATURES OF THE ELECTRONICS SECTOR

The electronics sector has several specific features which help define the optimalproduction and trading environment. Several of these features are outlined briefly:

1. Wide diversity of components and products

2. High Level of Specialization and Integration

3. Critical Factors in the Supply Chain

4. Rapid Technological Change and Innovation

5. Dominance of Market Leaders

1. WIDE DIVERSITY OF COMPONENTS AND PRODUCTS

The electronics sector is much more complex than many manufacturing sectors which have arelatively limited set of inputs and relatively homogenous sets of final products.

At the heart of the electronics sector is the production of hundreds of components that makeup a very diverse set of intermediate and final products for a wide variety of uses from simple

consumer goods to highly sophisticated equipment. They can be grouped into eight mainsets of products2:

1. Electronic Data Processing (computers and peripherals and associatedparts and accessories)

2. Office Equipment

3. Control and Instrumentation

4. Medical and Industrial Equipment

5. Radio Communications and Radar

6. Telecommunications

7. Consumer Products

8. Components

Under these product groupings, there are further sub-groups. The components groupcomprises inputs into any of the product groupings including other more completedcomponents.

2. HIGH LEVEL OF SPECIALIZATION AND INTEGRATION

The integration, production and assembly process is complex and highly specialized.

Figure 2 illustrates how this process could typically work. A final product could for exampletake 200 or more components made by individual producers in several different countries.

Several countries might also be involved in sub-assembly of these components into sub-parts with final assembly being conducted in another different country.

The whole procurement and production chain requires a highly efficient process of SystemsIntegration. The task of Systems Integration is to lay out the requirements and objectives of

2These categories are used in the Yearbook of World Electronics Data. A detailed list of products and

components under each category is attached in Appendix 1. The four digit HS Codes associated with productgroupings are attached in Appendix 2.


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the production chain, to determine the work breakdown specifications, to bring thecomponents together and then to farm out the work in specific packages.

Finally, when the production process is underway, Systems Integration is required to trackand guide the whole process, including procurement of components, sub-assembly andassembly, until the final product is achieved.

This whole process points to the need for seamless flows of communication and componentparts across the network which, as noted, could include several different countries.

3. CRITICAL FACTORS IN THE SUPPLY CHAIN

The electronics sector world-wide has been a leader in the development and management ofthe supply chains over more than a decade and competition continues to force greaterefficiency onto all producers in all aspects of the production chain.

The electronics supply chain depends more critically on time and price than most othergoods sectors because of the small margins forced by greater competition and efficiency. Aspart of this process, highly efficient information flows across the whole supply chain are also

crucial.Cost margins of component suppliers are continually squeezed by the major players as theyare forced to compete on final products in the market. An elaborate bidding process amongpotential component manufacturers led by the major players means that higher costproducers are quickly eliminated from the market if they cannot perform to specifications andprice requirements.

While factory level costs are important, government imposed costs can be a significantproblem. For example, in at least one ASEAN country an inefficiently applied value addedtaxation system, where refunds on export products are severely delayed, has effectivelyeliminated some producers from being able to compete in aspects of the supply chain.

Time is critical at all levels and this also relates to reliability of supply at agreed timelines.For example, many producers site the inefficiency of land transport from factory door to the

port as adding a burden to both time and cost. In one country, traffic congestion hasdeteriorated so much that a single truck which could previously take three containers to theport each day is now reduced to one container per day.


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Figure 2


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4. RAPID TECHNOLOGICAL CHANGE AND INNOVATION

The electronics sector is subject to rapid levels of technological change and innovation.

Application and diffusion of digital technology and chip technology are having the mostsignificant influence on these changes. Innovation in design and functions of products is also

occurring more rapidly. This is happening at both the consumer end of the market and withcommunication and industrial-related products.

Two readily understood examples are the rapid shift in demand from VCR technology to DVDtechnology, and the now emerging shift to plasma and LCD televisions and monitors fromCRT-based televisions and screens.

However, these changes are just as pervasive in components and final products.Component producers must be able to adapt to the changes demanded by new technologyby adjusting management and labor.

Competition for market share in products like computers and mobile phones is translated intothe production and launching of new products every six months.

This increases the pressure on component producers to adapt quickly. Price pressures add afurther dimension to the challenge

5. DOMINANCE OF MARKET LEADERS

The supply chains in electronics in ASEAN are characteristically driven by large anddominant market leaders from Japan, the United States, the European Union, Korea andTaiwan who are the producers of internationally branded final products or major intermediateproducts.

The pressure to increase efficiency in the supply chain comes from these big producers who

through a process of competitive outsourcing drive down product prices, demand morecertainty of supply and importantly require coordinated delivery according to specified timelines.

In the electronics sector, the margins of tolerance and error in the supply are therefore small.


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III. THE STATE OF INTEGRATION IN ASEAN ELECTRONICS

Contribution of Electronics in ASEAN

In 2005, the share of intra ASEAN trade in the four main product groups that make up 94percent of production in ASEANs electronics3 sector stood at about 18 percent of exportsand 20 percent of imports.

These shares are slightly lower than intra-ASEAN shares in the regions total trade whichwere about 21 percent of exports and 23 percent of imports.

The ASEAN trade and UN Comtrade databases show that these intra-ASEAN trade shareshave marginally reduced since 2002 although exports have nearly doubled in value andimports have increased more than three and a half times in value in the period from 2002-2005.

The ASEAN trade database also shows that among nine4 ASEAN priority sectors in 2005only automobiles has a higher share of intra-ASEAN exports but in intra-ASEAN importselectronics ranks fourth after agro-based products, fisheries and wood-based products.

However, these shares must be kept in perspective because the electronics sector is muchlarger than other sectors, with the four electronics product groups accounting for nearly 40percent of total intra-ASEAN trade. The impact on integration is therefore substantial.

Table 1 - ASEAN TRADE Shares at a GlanceShare ofIntra-ASEANTrade inTotal Trade

Share ofIntra-ASEANTrade inTotalElectronicsTrade

Share ofElectronics inTotal ASEANTrade

Share ofElectronics inIntra-ASEANTrade

Increase inASEANElectronicsTrade 2002-5

Exports 21 % 18 % 46 % 39 % Nearly 2 times

Imports 23 % 20 % 43 % 37 % Nearly 3.5 times

Source: ASEAN Secretariat 2006, UN Comtrade 2006

Table 2 - ASEAN TRADE Shares at a Glance

This overall picture is what could be expected from a highly globalized sector like electronics.

While these indicators provide a useful snapshot of the state of integration in electronicsthere are some limitations relating to the data which make analysis and comparisons difficult.

First, the sector is changing rapidly over time in production and trade with the latest databeing from 2005. Second, the official data does not take account of smuggling which in many

3 This share refers to trade in the four main product groups of electronics used in this paper that make up 94 percent of

ASEAN production: namely, components, EDP, communications and radio and consumer products.

4 The nine sectors analyzed in an associated paper for this project, An Investigation into the Measures Affecting the

Integration of ASEANs Priority Sectors (Phase 2): Review of Regional Trade and Available Tariff Rate Data are

Agro-based products, Fisheries, Health care products, Rubber-based products, Wood-based products, Textiles

and garments, Electronics, Information and Communication Technology, Automotive.


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countries is widespread. This impacts most on import data. Third, the data used is from boththe ASEAN and UN Comtrade databases and there are some differences in the databases.In the detailed analysis of trade later in this section, the UN Comtrade data is used because itprovides more detailed information about the flow of intra and extra ASEAN trade by countryin electronics product groups.

Main ASEAN Players in Electronics

Total ASEAN electronics trade

ASEAN trade in electronics is led by Singapore and Malaysia accounting for nearly threequarters of total ASEAN exports and imports (see Figure 3). Only six of the 10 ASEANcountries engage in significant trade in electronics. Vietnam has the smallest trade share ofthe group of electronics producers but its production and trade has been increasing relativelyrapidly in the last two years.

Shares of Total ASEAN Exports and Imports, 2005

(Components, EDP, Consumer, Communications)

0 0 4 0

28

0

10

46

11

10 0 2 0

25

0

11

48

14

1-

5

10

15

20

25

30

35

40

45

50

55

60

Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam

Percent

Share of Total ASEAN Exports

Share of Total ASEAN Imports

Figure 3 Shares of Total ASEAN Trade in Electronic (UN Comtrade)

Singapores high trade share includes its role as a key port for electronics exports andimports for other ASEAN countries, especially the nearer neighbors, as well as its role as aproducer of high value electronics products. This is illustrated in Figure 4 which comparesproduction and total electronics trade shares in 2005. It shows that the trade shares of nearneighbors, Indonesia, Malaysia and Thailand are all lower than their production shareswhereas Singapores trade share is significantly higher.

Indonesias low share of official imports is the result of smuggling. The Indonesianelectronics sector says that large quantities of imports, especially from China are smuggledinto Indonesia through neighboring ports. This is illustrated in the comparison of productionand trade shares for Indonesia in Figure 2 although this difference also relates Indonesiaslarge domestic market.


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ASEAN Production Shares by Country2005

Indonesia

7%

Malaysia

34%

Thailand

15%

Singapore

33%

Philippines

10%

Vietnam

1%

ASEAN Trade Shares by Country 2005

(four main product groups)

Vietnam

1%

Malaysia

27%

Indonesia

3%

Singapore

47%

Philippines

10%

Thailand

12%

Figure 4 Comparison of Production and Total Trade Shares in ASEAN 2005 (Source:Hitoshi Ozaki (2006) and UN Comtrade)

Intra-ASEAN electronics tradeFigure 5 shows that intra-ASEAN exports and imports follow the same pattern of trade astotal trade in electronics, with Malaysia and Singapore taking an even more dominant rolewithin ASEAN.

Indonesias share of exports rises to 7 percent but its import share stands at just 1 percent ofintra-ASEAN trade. The higher export share reflects the close relationship between Batamand Singapore. The drop in its import share is cited as further evidence of the smugglingproblem.

Shares of Total Intra-ASEAN Exports and Imports, 2005

(Components, EDP, Consumer, Communications)

0 0

7

0

30

0

9

44

8

10 0 1

24

0

7

53

14

2-

5

10

15

20

25

30

35

40

45

50

55

60

Brunei Cambodia Indonesia Laos Malaysia Myanmar Phi lippines Singapore Thailand Vietnam

Percent

Share of Total intra-ASEAN Exports

Share of Total intra-ASEAN Imports

Figure 5 Shares of Total Intra-ASEAN Trade in Electronics


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ASEAN with its international partners

ASEANs electronics sector is dominated by its trade and investment with large internationalplayers in Asia, the EU and the United States.

In 2005, five major partners, Japan, Korea, China, the EU and the USA, accounted for 44percent of ASEAN electronics exports and 45 percent of its imports (see Figure 6). Taiwan is

also a major partner but comparable trade data is not available.

The data depicts an overall pattern of trade with these partners. The United States and theEU are larger markets for electronics exports from ASEAN but relatively larger shares ofimports come from within the region. Of these regional partner countries, China is just aheadof Japan as the largest source of electronics imports for ASEAN. Later analysis will showthis trade tends to be in different among the product groups of electronics showing areas ofspecialization.

These trends reflect the investments and supply chains of large multinational companieswhich drive the electronic sector in ASEAN. They will be a key determinant of integration ofelectronics in ASEAN.

Share of ASEAN Electronics Trade 2005

ASEAN Exports and Inputs in Components, EDP, Consumer and Communications

18

6

3

7

12

16

20

11

6

12

6

10

0

5

10

15

20

25

ASEAN Japan Korea China EU USA

Partner

Percent

Share of ASEAN Exports

Share of ASEAN Imports

Figure 6- Share of ASEAN Electronics Trade 2005 (Source: UN Comtrade)

Highlights of Country Trade in Main Product Groups

In this section, highlights of each countrys trade in the four product groups are shown. Thecharts for imports and exports show the pattern of trade with partners in ASEAN and themajor five international partners for which data is available. They reveal the level ofspecialization in trade in product groups and the important supply chains.


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Indonesia Trade Highlights

Exports: Components and EDP to Singapore, with a large proportion coming fromcompanies operating in Batam. Consumer products and communications are importantexports to EU and US.

Imports: Low official imports shown due to smuggling. Industry sources estimate actualimports are fourfold.

Indonesia Exports 2005 (Four key electronics groups)

0

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

1,600,000,000

Malaysia Philippines S ingapore Thailand Vietnam Japan Korea E U USA China

USD

Component Exp

EDP Exports

Consumer Exp

Communications Exp

Figure 7 Indonesia Electronics Exports 2005

Indonesia Imports 2005 (Four key electronics groups)

0

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

1,600,000,000

Mal aysia Phil ippines Singapore Thailand Vietnam J apan Korea EU USA China

USD

Component Imports

EDP Imports

Consumer Imports

Communications Imports

Figure 8 Indonesia Electronics Imports 2005


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Malaysia Trade Highlights

Exports: A major focus on components and EDP, with the US and EU as the major marketsexcept for Singapore, which is the dominant export partner in ASEAN. Consumer productsand communications exports are significant in ASEAN terms.

Imports: A major importer of components from throughout the world. China is the biggest

source of EDP products. This reflects Malaysias important role in assembling.

Malaysia Exports 2005 (Four key electronics groups)

0

1,000,000,000

2,000,000,000

3,000,000,000

4,000,000,000

5,000,000,000

6,000,000,000

7,000,000,000

8,000,000,000

9,000,000,000

10,000,000,000

11,000,000,000

Indonesia Ph il ippines Singapore Thailand Vietnam Japan Korea EU USA Ch ina

USD

Component Exp

EDP Exports

Consumer Exp

Communications Exp

Figure 9 Malaysia Electronics Exports 2005


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Malaysia Imports 2005 (Four key electronics groups)

-

1,000,000,000

2,000,000,000

3,000,000,000

4,000,000,000

5,000,000,000

6,000,000,000

7,000,000,000

8,000,000,000

9,000,000,000

10,000,000,000

11,000,000,000

Indonesia Philippines S ingapore Tha iland V ie tnam Japan Korea EU USA China

USD

Component Imp

EDP ImpConsumer Imp

Communications Imp

Figure 10 Malaysia Electronics Imports 2005


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Philippines Trade Highlights

Exports: Exports focus on components and EDP, providing all major markets relativelyevenly with the EU in the dominant position. China is the second largest market forcomponents.

Imports: Principally a component importer, with the US as the overwhelmingly largest source.

Japan an important partner in components and EDP. The data for Taiwan is not available.

Philippines Exports 2005 (Four key electronics groups)

-

1,000,000,000

2,000,000,000

3,000,000,000

4,000,000,000

5,000,000,000

6,000,000,000

Indonesia M alaysia Singapore Thailand Vietnam Japan Korea EU USA China

USD

Component Exp

EDP Exports

Consumer Exp

Communications Exp

Figure 11 Philippines Electronics Exports 2005

Philippines Imports 2005 (Four key electronics groups)

-

1,000,000,000

2,000,000,000

3,000,000,000

4,000,000,000

5,000,000,000

6,000,000,000

Indonesia M alaysia Singapore Thailand Vietnam Japan Korea EU USA China

USD

Component Imp

EDP Imp

Consumer Imp

Communications Imp

Figure 12 Philippines Electronics Imports 2005


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Thailand Trade Highlights

Exports: Components and EDP dominate but consumer products remain important. Marketsoutside of ASEAN are dominant. Strong links with Japan and US on components. China isthe largest market for EDP products.

Imports: The strongest links with Japan with components. China is also the largest source of

EDP. Most consumer and communications imports are from outside ASEAN.

Thailand Exports 2005 (Four key electronics groups)

-

500,000,000

1,000,000,000

1,500,000,000

2,000,000,000

2,500,000,000

3,000,000,000

3,500,000,000

4,000,000,000

4,500,000,000

Indonesia Malaysia P hilippines S ingapore Vietnam Japan Korea EU USA China

USD

Component Exp

EDP Exports

Consumer Exp

Communications Exp

Figure 15 Thailand Electronics Exports 2005

Thailand Imports 2005 (Four key electronics groups)

-

500,000,000

1,000,000,000

1,500,000,000

2,000,000,000

2,500,000,000

3,000,000,000

3,500,000,000

4,000,000,000

4,500,000,000

Indonesia Malaysia Philippines Singapore Vietnam Japan Korea EU USA China

USD

Component Imp

EDP Imp

Consumer Imp

Communications Imp

Figure 16 Thailand Electronics Imports 2005


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Summary on Country Trade Flows

The review of country trade flows for the individual products show that trade in componentsand EDP products are the most important for all countries, even the smaller producers.

The scale of these two sub-sectors and the role of small component suppliers means thatthey provide considerable opportunity for greater integration within ASEAN. However, the

level of integration is likely to be determined by the large international companies who directthe supply and production chains.

For consumer and communications products, the most important trading relationships areoutside the region with the large markets of the United States and the European Union.Within the region, Singapore is an important trading centre for these products but less so forthe Philippines and Thailand.

With income levels rising within region, ASEAN itself is likely to grow as a market for theseproducts although it has been pointed out by one large consumer electronics producer thatASEAN cannot necessarily be seen as a single market because consumers in each ASEANcountry have different tastes in many consumer electrical products.

Shares of Intra-ASEAN Trade for Main Products

Intra Industry Trade Indexes are most commonly used to illustrate how integrated traderelationships are between countries and these have been used to illustrate traderelationships in other reports associated with this project.

However, it was found that these Indexes did not adequately illustrate the integration processfor electronics products in ASEAN because different countries did not trade in the sameproducts bilaterally but specialized.

A simple measure of intra-ASEAN trade shares also misrepresented how integrated ASEANeconomies were in specific products because the shares do not take account of tradevolume. Integration depends on both shares and volume.

Figures 19 to 26 on the following pages therefore map the value of each countrys intra-

ASEAN trade in a product group with the share of that countrys intra-ASEAN trade in its totaltrade. This is done for exports and imports in each of the four product groups used in thisstudy.

This therefore gives some perspective to the fact that a country like Myanmar might have alarge trade share but very small volumes of trade while a country like Singapore has lowshares of intra ASEAN trade but very high volumes. Under these circumstances Singaporehas a great impact on integration.

The figures reveal that in terms of intra-ASEAN trade Components and EDP provide both thehighest value of trade and the highest shares for most countries. These sectors are alsogrowing rapidly. This indicates that these two product groups now provide a strong basis forintegration and are likely to in the future.


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Intra-ASEAN components Trade

Intra-ASEAN Exports of Components: Value and Share 2005

24 24

36

23

1820

1417

35

-

2,000,000,000

4,000,000,000

6,000,000,000

8,000,000,000

10,000,000,000

12,000,000,000

14,000,000,000

16,000,000,000

18,000,000,000

Brunei Cambodi a Indonesi a Laos Mal aysi a Myanmar Phi li ppi nes Si ngapore Thail and Vietnam

USD

0

10

20

30

40

50

60

70

80

90

100

Percent

Value of Intra-ASEAN Exports

Share of Intra-ASEAN Exports inTotal Exports

Figure 19

Intra-ASEAN Imports of Electronics Components: Value and Share, 2005

31

2321

30

19

87

12

22

26

20

-

2,000,000,000

4,000,000,000

6,000,000,000

8,000,000,000

10,000,000,000

12,000,000,000

14,000,000,000

16,000,000,000


US$

-

10

20

30

40

50

60

70

80

90

100

Percent

Value of IntraASEAN Imports

Share of IntraASEAN Imports inTotal Imports

Figure 20


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Intra-ASEAN EDP Trade

Intra-ASEAN Exports of Electronic Data Processing Goods: Value and Share, 2005

27

31 31

0.00

16

50

1212

17

38

-

500,000,000

1,000,000,000

1,500,000,000

2,000,000,000

2,500,000,000

3,000,000,000

3,500,000,000

4,000,000,000

4,500,000,000


US$

0

10

20

30

40

50

60

70

80

90

100

Percent

Value of IntraASEAN exports

Share of IntraASEAN Exports inTotal Exports

Figure 21

Intra-ASEAN Imports of Electronic Data Processing products: Share and Value, 2005

34

23

27

13

21

100

13

2627

34

-

1,000,000,000

2,000,000,000

3,000,000,000

4,000,000,000

5,000,000,000

6,000,000,000

7,000,000,000


US$

-

10

20

30

40

50

60

70

80

90

100

Percent

Value of Intra-

ASEAN Imports

Share of Intra-ASEAN Importsin Total Imports

Figure 22


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Intra-ASEAN Consumer Products Trade

Intra-ASEAN Exports of Electronics Consumer Products

33

1

12 1311

14

6

25

-

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

1,600,000,000

1,800,000,000


USD

0

10

20

30

40

50

60

70

80

90

100

Percent

Value of Intra-

ASEAN Exports


Figure 23

Intra-ASEAN Imports of Consumer Products: Value and Share, 2005

31

7 7

20

16

98

1721

10

22

-

500,000,000

1,000,000,000

1,500,000,000

2,000,000,000

2,500,000,000


US$

-

10

20

30

40

50

60

70

80

90

100

Percent

Value of Intra-ASEAN Imports

Share of Intra

ASEAN imports inTotal Imports

Figure 24


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Intra-ASEAN Communications and Radio Products Trade

Intra-ASEAN Exports of Communications/Radio: Value and Share 2005

23

4

21

14 14 15

9

11

-

500,000,000

1,000,000,000

1,500,000,000

2,000,000,000

2,500,000,000


USD

0

10

20

30

40

50

60

70

80

90

100

Percent

Value of Intra-

ASEAN Exports


Figure 25

Intra ASEAN Imports of Communications/Radio: Value and Share, 2005

29

84

12 13

98

11

17

11

20

-

500,000,000

1,000,000,000

1,500,000,000

2,000,000,000

2,500,000,000


US$

-

20

40

60

80

100

120

Percent

Value of IntraASEAN Imports

Share of IntraASEAN Imports inTotal Imports

Figure 26


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IV. A REVIEW OF NON-TARIFF MEASURES

NTMs in Electronics in Perspective

A review of non-tariff measures in the electronics sector reveals a generally positive butsometimes mixed scorecard for ASEAN.

NTMs in the electronics sector are generally less prevalent than in some other sectors andfor the components sector, which comprises nearly half of trade and production, tradedistorting NTMs are rare.

A majority of the more prohibitive NTMs, used across all countries, are imposed for non-economic purposes. For example, ASEAN governments use prohibition and licensing to:

control equipment and products that can be used for example incounterfeiting and mass duplication of DVDs, CDs and video for piracy orfor pornography

inspect tapes, disks and videos

restrict and control specialized radio and telephone equipment for security

and a range of machines for gambling and amusement

However, for some products, particularly consumer products, and in some countries, NTMsare used to impede or block the flow of imports to protect domestic industry. As would beexpected, these products are generally included on the negative list of the country thatapplies the NTMs and are therefore scheduled to be eliminated by 2010 as part of thesecond stage of liberalization of the electronics sector.

Technical measures are widely used to control safety standards but in some cases thesemay be used to impede imports.

Table 2 provides a summary of NTMs by measure and by country. The table only gives abrief and indicative description of the product subject to an NTM. Appendices 3, 4 and 5 givefurther information from different perspectives. Appendix 3 provides a detailed description of

the measures and products subject to NTMs for each country. Appendix 4 provides thesame information as Table 2 but gives HS codes. Finally Appendix 5 provides an illustrationof the distribution of NTMs in each country by the four product groups used in this study.

A review was conducted of available databases including the ASEAN and UNCTADdatabases. It was found that for the electronics sector, the UNCTAD database generallypredated the ASEAN database and was less detailed. The analysis used in this study istherefore based principally on the ASEAN database.

Para tariffs, Price Control measures and Finance Measures

The review shows that in the areas of para-tariffs, price control measures and financemeasures the electronics sector is free of NTMs. However, in Indonesia and the Philippines

a domestic value-added tax is applied to all exports. In Indonesia companies must apply tohave this tax reimbursed after the product has been exported. The business sector says thereimbursement process can be long and cumbersome and can require informal payments.Businesses therefore complain that significant amounts of funds can be tied up in thisprocess disadvantaging the export sector.

Automatic Import Licensing

The review reveals that Indonesia is the heaviest user of automatic licensing. Licensing isapplied to a wide range of electronics and electrical items and components. The Indonesiangovernment says automatic licensing is used to ensure greater consumer protection and to


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differentiate between legally imported and smuggled goods. There are proposals to labellegally imported products. The Indonesian Government announced that in early 2007 itwould adopt electronic licensing to facilitate the process.

Brunei and Singapore apply automatic licensing to some specific communicationsequipment, electrical products and replication equipment to monitor these imports.

Quantity Control Measures

The quantity control measures are applied through non-automatic licensing and importprohibition and quotas.

In most cases non-automatic licensing and import prohibition are used for non-economicpurposes to control sensitive items related to security, piracy, illegal and undesirableactivities, unlicensed radio or communications transmission and health and medical.Thailand prohibits the import of refrigerators using CFCs and Vietnam prohibits the import ofused refrigerators and other used electrical items.

Indonesia uses both non-automatic import licensing and quotas to control the imports of arange of computer machinery, electrical appliances and refrigerators. It also uses enterprise

specific restrictions by giving selective approval to importers for computer and machinery. Itis claimed that these measures are for monitoring consumer protection and to preventsmuggling and other illegal trading. An examination of the smuggling problem later in thisreport indicates that quantity control measures are likely to promote smuggling rather thanprevent it.

Monopolistic Measures

Monopolist measures appear to be applied in three countries. Indonesia applies a singlechannel for certain heavy-duty equipment, electronic equipment and household electronicappliances for sole importers. The Philippines applies this to shipments bound for thePhilippines government and in addition, any imports made under government loans and

credit should be loaded on Philippines flag vessels. Finally, Vietnam uses a single channelfor imports of machinery and paper used for money, vouchers and certificates.

Technical Measures

Singapore lists the largest number of technical measures of any country in ASEAN. They areapplied to a wide range of consumer items to ensure that these products meet the safetystandards of Singapore and receive a Safety Mark from the Productivity and Safety Board.Laos lists the second largest number but it appears to use technical measures for security,health and safety reasons where other countries use different instruments for this as outlinedabove.

This contrasting approach to technical measures between the most developed and least

developed ASEAN countries illustrates the scope for interpretation and intervention onstandards. In this case neither country produces these items and therefore the measures arenot intended to protect domestic producers.

Some countries like Brunei list no technical measures but interviews in Brunei showedcomplaints about consumer protection and adherence to stated manufacturers standards onmany imported electrical items.

Indonesia is concerned about an unbalanced approach on standards and testing whichbecause of government policy and smuggling means many imports are not tested or do not


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require specific standards while producers for the domestic market and export are required tomeet specific standards.

Other Non-Tariff Measures and Current and Emerging Trends

The review and surveys did not reveal other systematic NTMs not included in the ASEAN

database that affect the electronics sector.There are cases of NTMs which are not specifically directed toward electronics thatnonetheless impede efficiency in the supply chain. For example, it was reported thatseamless road transport across the Malaysian-Thai border is impeded by a regulationdesigned to protect transport operators. It was noted that goods must be unloaded at theborder from the truck registered in one country and reloaded onto another truck registered onthe other side of the border. This naturally creates delays that fall heavily on electronicsproducers. This is a clear example of where the intention is to prevent integration.

There are likely to be more regulations which are not specifically directed toward electronicsbut have an impact upon intra-ASEAN trade including electronics trade.

Overall, traditional NTMs are not used as a major form of impediment in ASEAN except inspecific countries and for some goods. The next section will show that the administration of

these NTMs in some countries can be of concern because they can involve severalgovernment agencies and many are not yet processed by electronic means. However, asprotection is reduced on goods now in the negative lists of individual countries ASEAN mayhave to be vigilant in watching for new forms of NTMs on these more sensitive goods.

The issue of consumer protection and safety standards and testing could emerge as aconcern in ASEAN as new electronics products come onto the market and as new safetystandards are applied. This issue involves smuggling, the development of testinglaboratories and the development of the ASEAN MRA on Electronics and Electrical Products.These issues are considered in more detail in the next section.


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2. Quotas (6200) Broadcastingequipment, andpin tables

Refrigerators,computer-machinery.

3. Import Prohibitions (6300) Video games Computer-machinery and

electricalequipment,records, tapes,and otherrecorded

Broadcastreceivers,

printing

Table orparlour

games

4. Export Restraint Arrangement(6600)5. Enterprise Specific Restrictions(6700)

Computer &machinery

Monopolistic Measures

1. Single Channel for Import (7100) Electricalequipment

All electronicproducts

2. Compulsory National Services

(7200)Technical Measures

1. Technical Regulations (8100) Electricalequipment

Records,tapes andotherrecordedmedia

Electricalequipment

2. Pre-shipment Inspection (8200) Machinery &electricalappliances

3. Special Custom Formalities (8300)


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V. ASSESSING VIEWS FROM THE INDUSTRY

Interviews and consultations were conducted with a range of electronics firms and industryassociations from eight ASEAN countries. Laos and Myanmar were not included in the

interview process because they have no significant electronics sector and trade remains verysmall.

The challenge in consultations was to take account of the great diversity in the electronicssector in ASEAN. This diversity arises from:

the differences in the nature of the sub-sectors,

the interests of importers and exporters,

the interests of ASEAN companies versus foreign multinationals and smaller componentsuppliers that do not trade, and

the differences in the production and trade profiles of different countries.

An initial questionnaire was created for the interviews which reflected the strong interest the

studys terms of reference placed on non-tariff measures. However, it quickly became clearthat a wider set of interests were of concern to the industry because non-tariff measureswere not as prevalent as in some other sectors and because issues relating to theenvironment for production as well as trade were deciding factors in the path towardintegration. It also became clear that using a single formal questionnaire seekingdeterminate responses would not be successful in capturing the scope and richness of theconcerns of industry.

To help address this overall challenge, a strong emphasis was placed on consulting withindustry associations as well as firms because the electronics sector has organized relativelystrong associations and uses them to discuss sectoral-level issues, to make representationsto governments and to help distill policy priorities.

Despite the diversity noted above, the interviews revealed concerns around several key

themes which are outlined in this section. These themes are first placed in an overallframework before being outlined and analyzed. Some of the major themes have beenexamined in more detail as case studies to illustrate specific problems and issues.

While a table of priority concerns by country is presented, this is very limiting as a summaryreference. The issues that are highlighted may identify some key impediments to electronicsfirms but they risk diverting the attention of policy makers away from the important mix ofpolicies and sequencing in implementation that is required to promote integration.

1. Two levels of issues concern for electronics

Consultations with the electronics industry reveal there are two broad levels of issues thatare of concern to companies and affect the integration process in the electronics sector in

ASEAN. These can basically be described as:

1. Issues that affect the pattern of trade with existing production and supply chains.

2. Issues that affect the location of growth in production and the pattern of new trade.

The first level relates principally to impediments in the supply chain which raise the cost ofexisting intra-ASEAN trade in electronics. These costs may be significant but eliminatingthem may or may not lead to significantly deeper integration among existing electronicscompanies in ASEAN.


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The second level of issues relate to what could broadly be called competitiveness andcapacity. These issues influence whether new and existing electronics companies locatemore of their production within ASEAN countries with a view to deepening intra-ASEAN tradein electronics products. These issues include factors like the investment climate,infrastructure, the costs of production and the quality of available labor and other inputs. Therelative costs in the supply chain also form part of this larger calculation about

competitiveness.

It is evident that addressing the bigger set of policy issues in combination with impedimentsin the supply chain will have the greatest impact on integration.

In the case of the electronics sector in ASEAN, the industry nominates specific and highpriority concerns from each of these two levels for policy action. They do not necessarilyseparate supply chain issues from competitiveness issues but they do tend to think of twotracks: one that government should address urgently and another that should already beunderway but will take longer to address.

It should be noted that smuggling and the less pervasive problem of hi-jacking are of greatconcern to the industry because they undermine formal supply chains and orderlydevelopment of industrial development for regional integration. Smuggling is symptomatic of

significant price differences and inadequate policing of borders. This issue is addressedspecifically in a later section.

2. Approaches of the Electronics Sector to Supply Chain Problems

Typically both domestic and international firms give highest priority to factors that affect thebottom line on current profitability and these are issues that companies believe should beaddressed by governments in the short term.

The efficiency of the supply chain is the focus of these concerns, particularly inefficiency anduncertainty created by poor government administration, processing and policing in areas thatare the responsibility of government, like licensing, customs and standards. For the industry,informal payments, which are endemic in these systems, typify the administrative approach

taken by many government agencies.There is a second area of concerns nominated by firms for action in the shorter term that alsoaffect the efficiency of the supply chain and are a subset of the competitiveness challenge.These concerns result from a lack of government policy and action rather than interventionand include issues like poor domestic transportation systems and associated transportinfrastructure.

While all of these issues affect current profitability, through the interview process it was notpossible to gain a clear and comprehensive costing of these impediments along the supplychain for several reasons:

First, different departments of the firm, different companies and agents takeresponsibility for various elements of the supply chain and the interviews weremainly with senior managers and executives.

Second, local firms and factories often took these impediments as an unfortunatefact of life and did not explicitly calculate their total cost unless they were easilymeasurable even though they implicitly made decisions based on accumulation ofthe burden borne through supply chain costs and other impediments to doingbusiness. International firms more often calculated these relative costs at theirhead office.

Third, while this study focuses on ASEAN, not all the firms interviewed wereexporting to ASEAN markets and they did not necessarily differentiate between


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ASEAN and other markets in supply chain issues in terms of clear calculations ofimpediments.

However, some firms and industry associations provided examples of their problems whichgive an indication of their magnitude and, where these are relevant, they are included in thisreport.

3. Approaches of Electronics Sector to Competitiveness and Capacity

All electronics firms and industry associations were concerned about factors affectingcompetitiveness and capacity although the types of concerns varied among ASEANcountries. Most identified economy-wide as well as industry-specific issues among theirconcerns.

At the economy-wide level, firms cited the investment and business climate, referring mainlyto uncertainty in policy regimes and lack of transparency. Law and order, the credibility andconsistency of the rule of law and the overall level of corruption were listed as specific issuesthat affected the investment and business climate.

Firms also looked at the pace of economic growth and level of incomes. This was not just toassess the strength and prospects for domestic demand. It was also used by some firms as

an overall indicator of the bigger dynamics of an economy and of a governments approachto reform and economic management.

Existing firms within ASEAN tend to expect that these issues are part an ongoing mediumterm agenda but for firms considering new or expanded production, the current performanceof ASEAN in these areas is much more important.

At the more industry-specific level, the concerns of firms and the industry could becategorized into five broad sets of issues many of which are interrelated. These are outlinedbriefly here and some are covered in more detail in later sections:

1. Workforce and Management:

a. Labor laws with overly restrictive and costly dismissal provisions which were outof line with prevailing provisions in many other countries, and relative labor costs(or productivity);

b. Insufficient ongoing investment in training especially for smaller firms which meantit was difficult for the industry to move through the ranks to produce higher valueadded products with changing technology;

c. Management skills particularly for operating to the deadlines and specificationsneeded in the production chain.

2. Infrastructure and Services:

a. A lack of forward planning and action to improve transport infrastructure to enablegoods to move among suppliers domestically and to be transported to ports orairports without delays;

b. High cost of electricity and the fear of outages and concerns that some countrieswere moving to the limits of their power generation capacity more quickly thannew power generation plants were being built;

c. Poor performance of telecommunications particularly the internet.

3. Local Mould and Die Production:

a. A high reliance on imported moulds and dies which made it more logisticallydifficult and expensive for smaller firms to operate and allowed competing firmsoutside the region to copy designs.


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Firms tend to identify those factors that impact on current levels of profitability as most urgentto be addressed by government, and they have understandably focused much of their effortson seeking improvements in these areas.

Customs remains a high priority issue in many ASEAN countries along with informalpayments. Of other non-tariff measures, only standards and testing was raised as an issueof concern by some.

However, addressing these urgent factors alone will not be enough to tip the balance towarddeeper integration.

Over the medium to longer term, other seemingly less urgent issues are likely to be moreimportant factors because of their contribution to improving competitiveness and capacity.These urgent factors addressed together with issues that have a strong influence ondecisions about where to locate growth in production and trade will be more effective indeepening ASEAN integration in electronics.

This is in line with ASEANs formally agreed approach as shown in the Roadmap.Realistically, in each economy the full range of improvements should be running concurrentlyas a mix of policy reforms with different timetables.

With considerable diversity in cost structures and different levels of development, ASEAN

countries have the potential to keep production within their region by preparing lower andmiddle level producing countries to take up production of products that can no longer becompetitively manufactured by a higher cost neighbor.

For the electronics sector, facing strong competition for new investment from outside ofASEAN and with the continuing need to climb the value-added ladder to remain competitive,it is therefore becoming increasingly urgent as well as important to focus on implementationof the broad ranging and coordinated reform agenda.

One challenge is that the constituency for reform among firms tends to be less pressing forissues that might not have an impact on current balance sheets. As a consequence,individual governments in ASEAN may not give enough attention to mapping out andimplementing plans outlined in the Roadmap that are specifically needed by the electronicssector.

It is unclear whether there is a monitoring process and whether this includes the views of thebusiness and whether such a process would have an effective impact on improvingimplementation.

Some industry associations and the leadership of the ASEAN Electronics Forum considerthat business groups themselves could do more to catalyze cooperation and integrationamong themselves through practical measures. Some such initiatives are included in theRoadmap.

Interviews with industry associations and chamber representatives revealed that cooperationbetween associations at the working level has not been easy to foster and does not occur inall ASEAN countries on a systematic and ongoing basis.

The ASEAN Electronics Forum now has a register of all electronics companies operating in

ASEAN. This is an important tool for cooperation and business matching but it will require astrong commitment by the industry itself to seek out and take up opportunities and to drive aprocess of specialization.

Part of the challenge of cooperation arises from the varying levels of value placed on ASEANintegration by the electronics sector in each country and questions about who or what is thedriver for integration. Many are focused on working with their large international partnersand others are skeptical about the benefits that ASEAN integration can bring. In Indonesiafor example, which has the largest market for electronics products in ASEAN, the domestic


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industry is concerned about losing domestic market share to other ASEAN countries withoutgaining very much.

However, there is generally a clear understanding of the opportunities that are offered byintegration and the importance of using integration to enable ASEAN to compete moreeffectively with China, already a large producer, and India, as it emerges as a producer.

Some larger firms that are operating from Singapore indicated that China had benefits overASEAN because of scale and because all suppliers, large and small, could be located withinclose proximity thereby reducing the costs in the supply chain. These firms stated that theywould prefer to locate future production in India because they believed India could also offerthe economies of scale and clustering advantages.

Their criticism of ASEAN also included the lack of coherence in regulations andadministration and corruption. When asked whether these same criticisms could be made ofChina and India they indicated that the large and growing domestic markets were acompensating factor. To illustrate this, the interviewee said that he had just returned fromIndia where he had been informed that one leading mobile phone company was currentlyable to sell 4 million mobile phones a day.

6. Case studies and specific country concerns

Table 4 below provides what can be termed urgent concerns and ongoing competitivenessissues at the country level. This table should be viewed as a summary rather than a tool foranalysis and assessment because it is not intended to be comprehensive, it provides littlecontext and does not outline what measures are already being taken to address theseconcerns.

It should be stressed that this Table is not intended to provide a statistically significant resultfrom a formal survey because the firms and industry associations provided both theirassessments and concerns, and the importance attached to them will vary from firm to firm.

Table 4 is followed by more complete descriptions of some of these challenges with someexamples.

Table 4 shows customs is the single most important issue of urgent concern across ASEAN.Non-tariff measures were not singled out as urgent concern except in the case of standardsand testing. Some firms said that standards were effectively being used as an impediment insome cases because of mandatory and specifically defined testing procedures. In one othercountry, a lack of consumer protection was a serious concern.

However, it should be noted that customs is singled out because it is a high cost, high profileissue. The accumulation of less high profile issues like domestic transport, waiting time atports continue to erode supply chain efficiency in many countries and are foreshadowed tobecome worse if more infrastructure is not developed.


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An investigation into the Measures Affecting the Integratio

38

because of poor domestic transport and porthandling bottlenecks

No significant testing of safety standards on imports

(and smuggled goods) but testing required onexports often in other countries

Shipping and port handling: incidences of damage toimported high value cargo

Development of the m

Labor laws includingovertime rates which

than China.

Malaysia Informal payments and delays in customs

Hi-jacking of trucks carrying high value componentsan emerging issue

Shipping and port handling: incidences of damage toimported high value cargo

Lack of labor and rising labor costs

A shortage of labor focused around maintransition from assemproducts including retraining.

Philippines Smuggling and informal payments through customs

(although electronics products are given a specialtrack)

Incidences of hi-jacking high value trucks

Personal Security

High cost of electricity

Labor laws on hiring and firing

Improvements in the

including greater certaStronger focus on law

More infrastructure for

Maintaining labor prod

Developing local moul

Singapore No urgent domestic concerns cited

Smuggled goods are channeled through Singaporeport sometimes accompanied by fake Certificates ofOrigin

Tax incentives for res

Transforming from a p

Coping with high labo

ThailandCustoms handling requires informal payments butwith online applications this has reduced

Widespread smuggling through land borders ofcheap and poor quality electrical goods

Inconsistent taxes on some electrical items like air

Infrastructure for tramanufacturing facilitie

Mould and die develo

Industry association the business secto


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conditioners which distorts the market economies of scale China. ASEAN brand

Vietnam Informal fees in customs which can be 5 times higherthan official fees

Online customs running parallel can take longer thanpaper applications

Problem in processing Form D (Certificate of Origin)requiring many forms and many procedures and fakeForm D issued outside of Vietnam causing problemsfor local producers

Transport infrastructure because traffic isoutstripping existing infrastructure. Heavy trucks notallowed in the city during the day adding to costs.

Weak local industry inthe electronics secto

labor force, developfinance for establishin

Research and plannin

Development of moul

Development of infrageneration


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7. Customs Procedures: A Continuing Concern

a. ASEAN lagging in adoption of best technology and practices

The business sector, including the electronics sector, have been making representations tothe governments in ASEAN for many years about poor customs procedures and associated

informal payments.

Over this same period, major advances have been made in international customscooperation through international and regional organizations, in the technology available forelectronic processing and in the systems and their linkages.

Some countries within ASEAN and many outside of the region have been at the forefront ofthese developments and have implemented highly efficient and user friendly customsprocedures.

Yet, customs procedures still remain a major concern to the electronics sector in manyASEAN countries. Part of this may be the result of constraints in capacity and knowledgeand a lack of funds in adopting new technology and better practices.

However, the feedback from the business sector indicates that these constraints are coupled

with a widespread lack of integrity within customs services where informal payments are rife.Informal payments are necessary to facilitate proper processing, release of consignmentsand can be used to bypass legal processing. In many ASEAN countries, low governmentwages encourage these opportunities.

The ASEAN customs reform agenda and the adoption of the ASEAN Single Window areviewed by the electronics sector to be of critical importance because of the continuingdemands to shave time and costs in the supply chain.

b. Paper Still Overwhelming Business

While some ASEAN countries are well underway with electronic processing and the adoptionof National Single Windows for one stop paperless trading, paper can be still be an

overwhelming part of the export process.

In Indonesia, a company which has a high proportion of its products for export reported that itis obliged to prepare and submit 40,000 to 60,000 pages a month to fulfill customsrequirements.

Companies report that if the processing was not carried out correctly then they could easilybe the subject of an audit. Such an audit may result in large informal payments which maybe at a minimum the equivalent of about $10,000.

Companies were required to pay the salaries and overtime of customs officials and their so-called wet signatures were needed to gain approval for the appropriate documentation toenable shipments to leave the factory.

International companies in many ASEAN countries have difficulty in making these informal

payments because of laws in the home office country prohibiting such payments whereauditing is conducted.

c. Feedback on Electronic Processing

In the case of Thailand where the development of the National Single Window is wellunderway, the industry reported that customs procedures were now improving with electronicprocessing. It was cumbersome in the first stage of the process but after thi

06 001b Final Report

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