T-1 firms key for Asean trade

ASEAN’S intra-regional trade has remained stagnant at 20% to 25% of total regional trade over the past two decades.

In 2024, trade among the grouping’s then 10 members accounted for just 21.2% of the total trade volume of US$3.8 trillion, significantly lagging behind the European Union’s 61.7% during the same period.

With the US-China trade war intensifying, efforts to boost intra-regional trade are more urgent than ever, but they face challenges that may take years to overcome.

What holds back intra-regional trade from advancing is complex.

The diverse levels of economic development play a significant role. South-East Asia encompasses economies like Singapore, which has evolved into a regional financial hub, and Indonesia, with its substantial domestic market.

Additionally, there are industrialised economies with diversified export bases, such as Malaysia, Thailand and Vietnam, alongside poorer members like war-torn Myanmar.

For intra-regional trade to gain momentum, Azfar Hanif Azizi, a development economist at Khazanah Research Institute, emphasises that Asean must cultivate more complex final product manufacturers of internationally competitive brands, also known as Tier-1 assemblers. These firms are the primary drivers of significant imports and exports in an era of dispersed supply chains.

Asean does not need more free trade agreements (FTAs) but rather a critical mass of Tier-1 firms, which serve as hubs in a hub-and-spoke model.

These firms, often less known to the public but recognised by investors – such as Foxconn, a key Apple contractor – are essential for driving supply chain dynamics.

While Asean is not starting from zero, with its export-reliant economies hosting original equipment manufacturers (OEMs) and electronics manufacturing services providers, these firms are overshadowed by Chinese counterparts that dominate as factories for global brands. Without a critical mass of Tier-1 hubs, intra-regional trade among Tier-2 suppliers remains limited.

Azfar contends that achieving a critical mass of hubs will establish a distinct regional division of labour, fundamentally reshaping trade patterns.

Countries with established industrial infrastructure, labour and scale such as Indonesia, Malaysia, Thailand, Vietnam and the Philippines will naturally become hubs, importing intermediate goods.

Meanwhile, Asean’s frontier economies and specialised supplier clusters within these hubs will act as spokes.

An example of this dynamic is the integrated supply chain links between Asean and China, further strengthened by the October upgrade of the Asean-China FTA. This upgrade is expected to drive increased trade and investment from China.

Total trade between the two regions rose by 9.7% to US$694bil in the first eight months of 2025, compared with the same period in 2024. For the whole of 2024, total trade grew by 7.8% to US$982.34bil.

If supply chain hubs are established in Asean, trade relations with China will transform. Countries that currently trade directly with China will instead exchange intermediate goods among themselves.

However, for this shift to be sustainable and for regional integration to have real meaning, governments must support supplier development programmes and provide targeted incentives to build local OEMs, fostering long-term, localised supply chain linkages.

“Intra-Asean trade will only rise if the spokes are successfully relocated to the region alongside the hubs,” Azfar says, while acknowledging that this strategy to localise supply chains has risks because international brands have their own approved vendor lists that Tier-1 firms are contractually bound to.

China’s superior industrial ecosystem, government support and infrastructure as well as more cohesive geography compared with Asean’s, are also harder to match.

Ultimately, Azfar asserts that for Asean to escape global geopolitics and compete on costs, its Tier-1 firms must transition to becoming brand owners. This is despite the challenges posed by established incumbents.

This involves more than just hosting supply chains or addressing regional economic integration – it requires driving economic development to elevate economies from middle-income to high-income status.

However, this transition is not without difficulties. Asean firms, often tied to international brands and focused on lower-value activities, need access to resources like capital, structural reforms and government support to move up the value chain.

Azfar suggests that Asean draw lessons from South Korea and Taiwan, which evolved from OEMs to original design manufacturers (ODMs) and eventually to original brand manufacturers (OBMs).

While acknowledging the greater challenges today, such as advanced technology making complete delinking impossible, and the impracticality of directly emulating South Korea or Taiwan, Azfar emphasises that Asean firms must carve out their own niches with more manageable barriers to entry.

Economic transformation does not require a wholesale shift up the value chain but rather the growth of a few firms that reinforce the hub-and-spoke model.

Azfar envisions a future where regional integration allows an Indonesian OBM in Java to retain high-value ODM work domestically while outsourcing lower-value manufacturing to countries like Laos or Myanmar.

This sustainable, integrated supply chain would foster wealth creation, grow the middle class, and generate demand for goods from Asean member countries, China and the West – all contingent on government support and consensus among business elites, political leaders and labour to allocate capital more productively.