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KIM Kyung-Hoon

Emerging opportunities in the Mekong River region

KIM Kyung-Hoon

July 6, 2012

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By all accounts high unemployment and debt overhang in the eurozone and US will prevent a return to robust consumer spending for several more years. Meanwhile, China will become less attractive for outsourced manufacturing as its wage inflation rate gallops at a double-digit pace. These broad trends present Korean companies with two dilemmas: finding new consumer markets and locations for affordable production. The solution may be all-inclusive: the Mekong River region in Southeast Asia.

Laos, Cambodia and Myanmar are now the latest Asian countries to try to emerge from decades of dysfunctional governance and discredited economic policies. Before the 2000s, they were known as the least developed countries, chronic underachievers in the world's fastest growing region. But now those perceptions are changing quickly.

Between 2000 and 2010, Myanmar, Cambodia and Laos recorded average annual GDP growth rates of 10.7%, 7.9%, and 7.1%, respectively. Their annual income per capita also grew rapidly to reach around $1,000, a level that is three to four times higher than in 2000. With this tremendous growth, these three countries with a total population of 90 million in 2015 are expected to become an important consumer market for Korean companies.

Cambodia is strongly driving its economic reform policies adopted in 2005 and Laos' latest five-year national socio-economic development plan is designed to attract foreign investment. The latest and biggest change can be found in Myanmar. A new civilian government came into power in 2011 and suddenly, after several decades of self-isolation, Myanmar is opening its doors and rolling back state controls.

Myanmar has oil reserves of 50 million barrels and natural gas reserves of 280 billion cubic meters and they are expected to expand as investment increases. Also, many different types of metals, such as bauxite, copper, tin, and gold are buried under this region and the largest potash fertilizer factory in Asia is currently under construction in Laos. Laos has been attracting large foreign investments from global mining companies such as Rio Tinto and Mitsui, and its hydropower sector, with a potential of more than 20,000MW, is growing quickly.

These three countries' attractiveness as a production base is also rising fast. Their working population is expected to continue expanding as they have very young populations. According to Japan External Trade Organization, the manufacturing sector wages in these countries are around half of that in Vietnam and only one-fifth compared to that in China. These countries are also actively promoting special economic zones to attract foreign investors who are looking for the "next-China" production base. Thanks to these efforts, Minebea, a Japanese firm, opened its first precision motor plant in Cambodia in 2011 and plans to invest a total of 5 billion yen in expanding the production capacity.

Lastly, their infrastructures are improving. The cost and time required to transport goods in this region are declining with China investing a huge sum of capital in these countries. China is currently building a high-speed railway network linking the Yunnan Province with Myanmar, Laos and Cambodia. With this plan, landlocked Laos dreams of becoming a land-linked country and a transport hub in Southeast Asia. Japan is also strengthening infrastructure investment in this region, for example it has granted 1.9 billion yen to finance the expansion of Laos' airport.

Investing in Myanmar, Laos and Cambodia is a long-term process. For one, the education and skill levels are low and various institutions such as regulations and business law are a work in progress. But the three nations could resemble China at the outset of its reform era ? a dynamic desire to catch-up quickly with the rest of the world. For example, Myanmar President Thein Sein aims to triple per-capita output by the end of 2016 .

Korean companies can benefit from the region's low wages and establish their brands as well. Korean cars and high-tech devices are too expensive for the populations for now, but light industry enterprises could take advantage of Korea's free trade pact with Southeast Asia to cultivate new buyers. Meanwhile, the region's natural resources hold promise for mining and oil drilling ? potential growth engines in the future Korean economy.

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