During the 2018-2022 period, FDI into SEA-6 increased by 37% while FDI into China increased by only 10%. (Source: Bloomberg)

Tariffs and rising production costs are also reducing Beijing's competitiveness.

A new report on the investment situation in the region released by Angsana Council, Bain & Company and DBS Bank on August 1 forecasts that foreign investment growth in Southeast Asia will continue to outpace China over the next 10 years, reversing the decline in investment in the region over the past three decades.

According to the report , Weathering the Storm: Southeast Asia Outlook 2024-2034 , in 2023, FDI flows into the top six Southeast Asian economies (SEA-6) – Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam – reached US$206 billion, compared to US$43 billion into China.

The report also shows that in the 2018-2022 period, FDI into SEA-6 increased by 37% while FDI into China increased by only 10%.

“Due to strong domestic growth and the China+1 strategy, we are increasingly optimistic that Southeast Asia will overtake China in both GDP growth and FDI over the next decade. However, cross-border investments will be highly competitive, as countries in the region push to improve outcomes for both businesses and consumers,” said Charles Ormiston, Consulting Partner at Bain & Company and Chairman of the Angsana Board.

Along with ASEAN, FDI has also been growing rapidly in India and faster than China over the past decade, although it is still slower than the growth rate and scale in Southeast Asia, Mr. Charles Ormiston noted.

Among the SEA-6 countries, Singapore holds the top spot with the highest FDI per capita. Although it lags behind its regional peers, Malaysia is not keen to “miss out” as it has pledged to make efforts to reverse this trend, particularly in promoting its interests in the semiconductor, electronics and data center industries.

FDI in Southeast Asia is forecast to surpass China in the next 10 years, especially as the region has attracted large foreign capital into key emerging sectors such as electric vehicle (EV) manufacturing, EV battery manufacturing, semiconductor manufacturing, and data center provision.

In the electric vehicle manufacturing sector, Thailand and Indonesia are attracting the most FDI, about 14 billion USD in the past 5 years, thanks to the strong development of supporting industries and many incentives and support from the government. Indonesia dominates the electric vehicle battery manufacturing sector thanks to its abundant nickel reserves, with FDI reaching 26 billion USD poured steadily in the past 5 years.

In the semiconductor race, Malaysia and Singapore top the list, attracting $38 billion in FDI. Singapore specializes in making silicon wafers, or converting raw materials into small chips, while Malaysia leads in packaging and testing.

However, according to experts, to maintain FDI growth momentum, ASEAN needs to continue improving service delivery processes and continuously innovate - two aspects that are considered to be lagging behind China.

“Southeast Asia is at a turning point. We have an opportunity to think about how to leverage technology in a meaningful way – using technology to drive more innovation in the region’s private sector,” said Peng T. Ong, co-founder and managing partner of Monk’s Hill Ventures.

Still, China remains the world’s lowest-cost manufacturer, according to the report. “As companies look to diversify their sourcing away from China, it is important to recognize the continued competitiveness of the world’s second-largest economy’s robust logistics chain,” the report said, noting that the Northeast Asian nation has unique and rare advantages over more developed markets.

“Even if labor costs rise, they will still be lower than in the G7 countries, not to mention China will have the largest pool of technical and research talent globally,” the report noted.

The report also said that China's "super-large" domestic market can meet most products and the scale of its manufacturing facilities is difficult to replicate anywhere else.