Asia: Weathering the Economic Crisis

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"The talent is really good," says Sanjeev Bhatia, vice-president for international operations at Wipro BPO. "We are really bullish."

Global corporations still come to Southeast Asia-to find manufacturing alternatives to China. First Solar (FSLR), of Tempe, Ariz., has chosen Kulim, Malaysia, for a $680 million solar panel manufacturing plant. British motorcycle maker Triumph is building a $73 million plant in Thailand. And Volkswagen (VLKAY) this summer is launching a joint venture to produce Touran minivans in Indonesia.

Vietnam, though, is the primary beneficiary of the move to diversify away from China. Its proximity to the mainland and the low tariffs it enjoys in Southeast Asia thanks to ASEAN trade agreements are big pluses, as are its productive labor force and entrepreneurial culture. In April, Samsung Electronics opened a $50 million mobile-phone plant outside Hanoi. Some 700 miles to the south near Ho Chi Minh City, Jabil Circuit (JBL) is building a $100 million circuit board plant in the Saigon Hi-Tech Park. Nearby, across former rice paddies muddied by afternoon rains, workers are readying a $1 billion Intel (INTC) plant that will open next year. "We expect more high-tech companies to follow," says Rick Howarth, general manager of Intel Products Vietnam. "The global crisis may have dampened companies' desire to invest, but they are also being forced to look at new markets for growth."

One of the region's greatest strengths is also a weakness: a growing reliance on exports, especially to China. The mainland's coastal factories use countless parts made in Southeast Asia for goods that are ultimately destined for the U.S. and Europe. When those Chinese exports get slammed, ASEAN economies suffer. "The region is excessively dependent on China, which does assembly, while ASEAN does components," says Charles Adams, a professor at Singapore's Lee Kuan Yew School of Public Policy. "What's needed is more intraregional trade in final goods."

THE CHINA CONNECTION

There are few signs Southeast Asia will wean itself from that dependence anytime soon. Philippine outsourcers work primarily with U.S. customers. Intel plans to export most of its production from Ho Chi Minh City, since Vietnamese will buy just 3 million or so computers this year, while the Intel plant will be able to turn out hundreds of millions of chips annually. And Canon's (CAJ) $100 million laser printer facility outside Hanoi, its largest anywhere, ships its products overseas.

An ASEAN agreement that allows free trade in autos around the region may help reduce the importance of China and the West. Ford Motor (F), for example, ships sport-utility vehicles from Thailand to Vietnam, Indonesia, and the Philippines. The free trade "gives us enough volume," says David N. Alden, president of Ford's operations in Southeast Asia, where auto sales are about the same as in India. "Thailand's market alone could not have made this a business base."

AirAsia, a scrappy budget airline based in Malaysia, shows the potential of the regional market. In 2001, entrepreneur Tony Fernandes took a bankrupt carrier and relaunched it with just two planes flying out of Kuala Lumpur. Thanks to liberalization of air travel in much of the region, Fernandes has ramped up to 81 aircraft and 122 destinations in 16 countries—often smaller cities others had ignored. He expects to carry 24 million passengers in 2009, up 30% from last year. "We focused on building an ASEAN brand," says Fernandes. "We saw a huge opportunity no one was exploiting."

Balfour is Asia correspondent for Bloomberg Businessweek in Hong Kong.

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