Is this Asia's new manufacturing hub?

Phnom Penh, Cambodia
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Phnom Penh, Cambodia

The greater Mekong subregion (GMS) could become Asia's new low-cost production hub as the region becomes more integrated, experts say.

The GMS comprises Vietnam, Myanmar, Cambodia, Laos and Thailand as well two regions in China: the Yunnan province and the Guangxi Zhuang Autonomous Region.

"With China's industrial heartland in the coastal regions of the Pearl River Delta and Yangtze River Delta facing increasing pressures on competitiveness due to rising labor costs, the GMS offers considerable potential as an alternative location for the establishment of low cost manufacturing," Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight, said in a note last week.

Biswas estimates the region's combined gross domestic product (GDP) at $1.1 trillion this year, larger than in Indonesia, Southeast Asia's most populous country. By 2015, the region is forecast to grow 6.2 percent and hit a combined GDP of $3 trillion by 2024. The area currently accounts for less than 5 percent of global manufacturing in value-added terms, but IHS notes that infrastructure is key to realizing the region's potential.

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"If infrastructure connectivity is strengthened in Southeast Asia to allow high-speed rail networks and modern roads to link provinces such as Yunnan in southern China to the Indian Ocean via Thailand and Myanmar, this could significantly improve freight logistics...and create significant opportunities for the development of major ports and free trade zones in Thailand and Myanmar, boosting their economic development as entrepots."

While China still enjoys retains its reputation as the world's leading production center, its slowing economy and double-digit wage increases are causing foreign firms to look to Asia's frontier economies.

Minimum wages increased by 13 percent in 20 out of 32 Chinese cities this year, according to data from non-governmental organization China Labor Bulletin. Average factory labor costs are roughly $7 a day in Vietnam, versus $28 in China, official data shows.

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"While China has many advantages, including a much better developed supply base, advanced infrastructure, robust manufacturing and engineering capacity, and a huge domestic market, this [wage increase] could still create an opening for Southeast Asian economies to become the next factories to the world," global consulting firm McKinsey said in an October report.

Aside from infrastructure, the firm identifies three developments could stimulate growth in the region's manufacturing sector: the implementation of the Asean Economic Community (AEC) integration plan, attracting production from multinationals, and the application of big data and disruptive technologies.

China plays a major role

Beijing doesn't appear concerned about potential competition for manufacturing.

Instead, it recently pledged $11.5 billion in financial assistance, including $1 billion in infrastructure aid, during the 5th GMS Leaders Summit earlier this month. The money comes on top of Beijing's commitment of $40 billion for financing projects aimed at improving infrastructure across key GMS economies, such as Laos, Myanmar and Vietnam in its establishment of a Silk Road Fund in November.

So, why exactly is China so interested in the GMS?

"Improved connectivity in the Southeast Asian economies of the GMS will also assist the economic development of the inland Chinese provinces in southwest China such as Yunnan province, which is already growing more rapidly than the Chinese national average," Biswas said.

"The economic development of the GMS will therefore help to realize a key strategic priority of the Chinese government, for reducing the economic development gap between inland Chinese provinces and the more advanced Chinese coastal provinces," he added.