Once reliant on export-oriented manufacturing to power their growth, major Asean economies are undergoing an evolutionary shift to the services sector. Evidenced by their increasing percentage share of GDP, services revenues and productivity have been the storyline for the region over the past several years.
“The problem for Thailand is the transition. In the process of development transition, you need to have a certain level of education, which in this case has to be beyond the secondary level”
SU SIAN LIM
HSBC Asean economist
However, insufficient infrastructure, low educational standards, high dependence on foreign workers and poor corporate governance and transparency are weaknesses that will continue to hold back the region, say experts.
Services and trade in services are rising as a share of the major economies across the region, according to data from the Institute of Chartered Accountants in England and Wales (ICAEW). Singapore came first, at 86%, the highest services trade share in the region as measured by the sum of services imports and exports; followed by the Philippines at 52%, Malaysia at 51% and Thailand at 46%.
However, in terms of productivity and efficiency, many challenges still need to be overcome.
“As wages go up, you realise that you can’t make money selling T-shirts anymore, you have to move to selling iPads or something more sophisticated. And eventually, you move into the transition period. The services industry has become incredibly important part for major economies in the region in order for them to move with forward momentum,” said Andrew McBean, a partner at Grant Thornton based in Bangkok, in an interview with Asia Focus.
He noted that the Foreign Business Act in Thailand, particularly the parts related to the services industry, is considered quite protective compared with laws related to manufacturing. Therefore, the competitiveness landscape for the services sector is not really improving, leading to poor productivity.
“Education, competitiveness and many other things boil down to productivity. We haven’t got sufficient productivity in the service industry. If there was more competition from world-class companies, I think there would be a lot of changes,” he said.
“We haven’t got sufficient productivity in the service industry. If there was more competition from world-class companies, I think there would be a lot of changes”
ANDREW MCBEAN
Partner, Grant Thornton
“You can’t really increase your productivity unless you become more competitive.”
Banking and telecommunications, particularly in Thailand, are the two sectors Mr McBean highlighted, noting that once there is more opening up to international competition, it may help increase the efficiency of the sectors. Above all, he pointed out, education and training will be the essential elements that determine how efficient and well-equipped the future workforce will be.
This view is supported by Su Sian Lim, an HSBC Asean economist, who said that in order to make the development transition smoothly, first and foremost a country needs to have a strong educational foundation.
“The problem for Thailand is the transition. In the process of development transition, you need to have a certain level of education, which in this case has to be beyond the secondary level in order to create better competitiveness,” she told Asia Focus. “It also needs to be fuelled by strong policy support, in which the government sets a clear direction for its development agenda.”
In Singapore, the financial hub of the region, the government has always had clear policy goals, she noted.
Major economies in the region must realise that wage pressures will no longer allow them to follow the same development model. To improve productivity in services, she suggested the applying the right technologies could help foster business progress in a much more effective manner.
“Technology and its application through software can be very useful to improve efficiency in the services sector. It can be used to manage the flow of trade as well as internal development within the organization.”
The labour shortage, meanwhile, also has a big impact on the services industry across the region. According to Eric Hallin, general manager of the Rembrandt Hotel and Towers in Bangkok, one of the biggest challenges he finds in the tourism and hospitality business is finding human capital.
“We don’t have enough labour for the whole industry, particularly in Thailand. And that to a certain extent makes productivity more difficult to achieve. This leads to the fact that we need to import labour from neighbouring countries,” he said.
Reliance on foreign labour is another significant disadvantage major Asean economies face. Bob Fox, vice-chairman of the European Asean Business Center (EABC), suggested that there two simple ways to fix this issue.
“First, we need to move up the value chain and make our workforce do higher-skilled jobs. The second is to start to encourage our own citizens to do lower-skilled jobs that they have been shunning for quite some time,” he said.
In order to lessen the scale of the labour shortage, Duncan Buchanan, the CEO of Marsh PB Co (Thailand), an insurance broker and strategic risk advisory firm, said that attracting young talent and retaining existing staff are extremely crucial.
“Healthcare and employee benefits are very important. Service provider companies need to be up to speed in terms of offering packages and benefits to compete with other institutions,” he said. “We have to make sure we pay them well, offer them a great career, promote them to the position they aspire to and care for their lives and families.”
Mr Buchanan noted that flexible benefits are becoming more accepted, whereby companies offer their employees the ability to customise their own benefits in a way that will fit their lives the most, depending on which stage of life each employee is in.
“People in their early careers may care more about training, overseas exposure and holidays, while people in mid-career may seek benefits that will cover their children’s education or their house spending,” he said.
“Flexible benefits are quite popular in Singapore and Hong Kong, while Malaysia and Thailand are also starting to embrace this model. This will help both attract new workers and retain talented employees.”
Marc Spiegel, regional managing director of Vinarco International, a technical consultancy service, noted that governance is also crucial if the region is to unlock its service industry’s potential.
“Transparency is one of the biggest concerns in most of the countries in the region. [Corruption has increased over the last decade and that is going to cause a huge problem. If that component is built-in, we will not have enough money to invest in what we need, as well as to get the type of labour we need from other countries,” said Mr Spiegel.
Physical connectivity and freer flow of human capital are crucial for the region to improve its productivity in service sector, he added.
“To unlock the capacity of the region in terms of economic activity, we need to make sure that the infrastructure is in place. It’s a chicken-and-egg thing all around. We need to ensure that the region provides the ability for people to move around and the talent can be exported and imported. If we don’t create good physical connectivity, we won’t be able develop the overall economy of the region.”