Deloitte’s ASEAN Economic Community (AEC) agenda leader Jeff Pirie speaks exclusively to StrategicRISK about why the region’s risk managers need to be alert to AEC integration – and how increased competition may well be the top challenge that arises from this often misunderstood process

When people talk about the AEC, it is usually in relation to a single date: 31 December, 2015. This is the day that the AEC officially comes into existence, but it is only part of a longer process of transforming the economies of ASEAN’s 10 member states into a single market and production base.

What does this actually mean in the real world? Well, one thing it doesn’t mean, Pirie (pictured) is quick to point out, is that everything will immediately become completely different.

“There are some people who think the world is going to change on the first of January 2016,” he says.

“The one thing you can be clear on is that it’s not a big bang; it’s a process that is ongoing.”

Pirie says that a new Deloitte report The ABC of AEC: To 2015 and beyond is designed to clear up misconceptions about the AEC integration process.

“Of course, before you start wondering about what you’re going to do about it, the first step is to ask ‘well, what is it?’,” he says.

“So, step one is understanding and I think that is very important for the business community.”

The report looks at how and at which point work for the AEC started, where the AEC is heading, and why it is happening. It examines what is seen as a uniquely South East Asian approach to multilateralism and charts the progress of the integration progress so far.

It also contains a survey of chief executives of leading companies doing business in South East Asia to find out how much they understand about the AEC and how it might impact their business.

Pirie says that it is clear that “the level of awareness and intimacy with this amongst the business community is not what it should be”.

“Isn’t it stunning that there’s this tectonic shift going on and everyone’s going, so what’s this all about then?” he asks.

“I had one conversation with a services association where they asked me when liberalisation was going to happen. In fact, we’ve already had five rounds of negotiations resulting in eight packages of liberalisation.”

Fairly nebulous

The AEC is commonly defined as a single production market that is competitive and very much integrated with the world economy, which Pirie says is a “fairly nebulous” concept.

“It should make economies that are close to each other more connected, but that does not mean they will become one or uniform,” he explains.

“If you hold yourself up to the bar of a single and uniform market, frankly I can’t think of one market in the world where you could say that.”

Pirie advises Asia’s risk professionals to keep a close eye on the AEC integration process.

“From a risk manager standpoint, the worst crime will be to be caught asleep at the wheel,” he says.

“Saying that, if you are informed, you analyse and you conclude that there’s no change in direction required, that’s fine, as it’s not going to affect everybody equally or in a profound way.”

Then key is educating yourself about specific impacts on your industry, Pirie suggests.

“You’ve got to plug this firmly into your competitive analysis,” he says.

“If there was one area where from a risk standpoint I would be thinking long and hard about as a risk manager and see what is changing, it is enhanced competition; so, new entrants – the people not yet competing [with you] but who could.”

The other risk, which isn’t actually a risk associated with the programme itself Pirie points out, is economic nationalism.

“Some feel that entrenched domestic interests will throw spanners in the collective works, such that the AEC won’t happen, happens in part or a long time from now,” he says.

“It’s understandable, and you will hear repeatedly in that context that Indonesia comes up.

“It’s our biggest market by some way, it’s one of the less connected ones within the region, and it’s got a lot to gain from a societal standpoint, but you have large national interests that may wish to preserve aspects of the status quo.”

Source of opportunity

But most analysts are not viewing the AEC integration process through a prism of risk at all, Pirie says.

“In work we’ve done so far, it is very clear that overwhelmingly business sees this as a source of opportunity; it’s probably 80/20 opportunity/risk,” he says.

“Business sees two big opportunity types. The first one is bigger markets, both in terms of bigger existing markets and access to new markets.

“The second area of opportunity is on the cost side, which is rationalisation, cost reduction.”

Pirie believes that there is a common view that there is an ideal that everybody involved in the process is absolutely aligned to and clear about.

“I think this is unrealistic,” he says. “Different players all have a different perspective on the end goal and they will certainly be tactical about how they get there.

“So I think the implementation will morph and change over time. It will be organic.”

Diversity as a strength

ABC of AEC: To 2015 and beyond explains that the AEC does not seek to establish a uniform ASEAN marketplace or implement uniform economic policies regionally.

“Instead, the AEC translates diversity (often hailed as ASEAN’s weakness) as a strength,” the report states.

“With integration, ASEAN’s variety becomes attractive to global investors, combining as it does the capital and skills of its more economically mature member countries (such as Singapore) with the competitive costs and abundant labour and resources of its developing ones (such as Myanmar).”

ASEAN’s 10 member states are Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

The report goes on to state that the potential gains from implementing the AEC are enormous: “In numeric terms, conservative estimates (both in time and in effects) by academics show more than 5.3% gains above base-line growth within a five-year period.

“But more than that, the AEC has the potential to move South East Asia on to a higher and more sustainable growth path.”

Last, but not least, the report goes on to predict that integration will give South East Asia a bigger role within the economies of Asia-Pacific and a louder voice at the table when negotiating with the large economic powers.

“It holds the key to forging a long-term strategy for shared prosperity amongst ASEAN’s members,” it concludes.