Beyond relocation: Can SEA capture more than manufacturing?
As supply chains relocate across the region, the real challenge is turning production growth into long-term technological and economic gains.
When global companies started looking for alternatives to China, Southeast Asia seemed like the obvious answer. It was close, cost-competitive, and ready. The region is now producing more, exporting more, and hosting more of the world’s supply chains than ever. But producing more and capturing value from what you produce are different things — and that gap defines SEA’s real challenge
This is the tension at the center of the so-called “China Plus One” strategy, the practice among multinational corporations of maintaining operations in China while establishing a presence elsewhere to reduce geopolitical exposure. SEA has become the “elsewhere”. But becoming the “elsewhere” is not the same as transformation.
The uneven windfall
Southeast Asia did not suddenly become a prime destination. The region had spent years building conditions that made it an attractive alternative to China. So when MNCs started looking for alternatives, the infrastructure, trade agreements, and geography were already in place. In a 2025 investment report by the Association of Southeast-Asian Nations (ASEAN), it was noted that investments have surged $226 billion annually.
In 2022, ASEAN created the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement among all member states and dialogue partners, including mainland China, Japan, South Korea, Australia, and New Zealand. RCEP reduced costs for companies to establish production in the region by standardizing rules of origin, eliminating tariffs on most products, and liberalizing trade rules.
Moreover, RCEP deepened the integration between Chinese manufacturing and Southeast Asian production in ways that made the region more complementary to China than competitive with it. Much of the investment that followed arrived with Chinese inputs, Chinese capital, and Chinese supply chain logic embedded in it. SEA became a more efficient node in a China-centered network rather than an independent one. This matters for the value capture question because the terms of participation were largely set elsewhere.
Vietnam, in particular, has emerged as a major beneficiary in this expansion as it has captured investments amid economic transitions and disruptions in China. In 2025, the country recorded 8.2 percent GDP growth, the highest quarterly performance since 2011, excluding the post-pandemic rebound. According to investment consulting firm Dezan Shira & Associates, manufacturing drove the expansion, attracting over US$72.83 billion in newly registered foreign investment across 6,783 projects between 2019 and 2025.
“We are witnessing a clear strategic shift as global companies increasingly view Vietnam as a regional hub. We see more businesses relocating their supply chain focal points to Vietnam from other markets to handle export manufacturing and regional distribution services,” says Remco Enders, managing director of logistics company DSV Solutions.
Much of Vietnam’s expansion has concentrated on export-oriented assembly such as electronics, garments, and footwear. This is where the margins are thin, and the value flows back to the brand owners, the chip designers, and the IP holders elsewhere. Vietnam’s growth is also heavily tied to a handful of large anchor investors; Samsung alone accounts for a substantial share of Vietnamese exports, over 13% - 25%, which means the headline numbers may be masking concentration risk as much as they are reflecting broad industrial development.
Malaysia’s economy, on the other hand, accelerated to 5.2 percent growth in the third quarter of 2025 due to a strong performance in electronics. Investments, however, increased with data centers, advanced manufacturing, and semiconductors attracting more MNCs. Combined with Thailand, the two countries recorded approximately US$43.9 billion in reported investments, though Thailand’s economic picture was considerably less encouraging, growing at just 1.2 percent in the third quarter, its slowest rate in four years, as manufacturing contracted and export growth decelerated despite investments.
The Philippines is a stark contrast. In the same quarter, the Philippine economy expanded by just 4 percent, its slowest growth since the COVID-19 lockdowns. Foreign investment approvals fell by 48.7 percent year on year, extending a sharp decline that had run through all three quarters of 2025.
This was not for lack of trying. Philippine Economic Zone Authority Director General Tereso Panga reported fruitful investment meetings in Xiamen, Chongqing, Shenzhen, and Dongguan, pointing to concrete wins
”The Aoxing group, based in Dongguan, an OEM for projector equipment, projector screen, and audio-visual products for global brands like HP, Epson, and Skyworth, has chosen the Philippines for its redundant manufacturing facility intended for the US export market,” Panga said.
The causes were compounding as corruption scandals involving public infrastructure projects damaged investor confidence at precisely the moment the country needed to project stability, while a succession of typhoons disrupted harvests, consumer spending, and economic activity more broadly.
The limits of relocation
When a factory moves from Shenzhen to Ho Chi Minh City, the production moves. The next question is what follows after?
The honest answer, so far, is not much of the value. Much of the investment redirected into Southeast Asia remains concentrated in mid-level segments of global value chains such as assembly, component manufacturing, and testing. These are not trivial roles as they employ millions of people and generate real economic activity. But they are also the segments where the margins are thinnest. The segments where the highest returns are, such as research and development, remain elsewhere.
For example, Malaysia has carved out a genuinely significant position in the global chip industry, commanding 13% of the global market share and ranking as the 6th largest exporter. Yet the founder market, where chips are actually designed and fabricated at the highest levels of precision, remains dominated by the United States, Taiwan, South Korea, and Japan, with over 63% of global market share. This is because semiconductor manufacturing has a distinct value hierarchy: design and IP at the top, fabrication in the middle, and assembly, testing, and packaging at the bottom. The firms that own chip designs, such as Nvidia, Qualcomm, and AMD, capture the largest margins because intellectual property is infinitely replicable at near-zero marginal cost.
Moreover, when it comes to who captures the revenue from semiconductor sales, the United States accounts for 46 percent of the global market, South Korea 21 percent, Japan 9 percent, Taiwan 8 percent, and China 7 percent. The rest of the world, Southeast Asia included, shares the remaining 9 percent.
This middle layer position offers opportunity but also limits, as it attracts capital, creates employment, and capacity that can serve as a base for upgrading. Economies that stabilize as assembly and intermediate manufacturing hubs without developing deeper technological capabilities can find themselves locked into roles that are difficult to escape.
Infrastructure has also compounded this constraint. Research on Vietnam and Malaysia’s seaports has noted that while there has been increased demand even during the pandemic, bottlenecks have stalled recovery due to inadequate infrastructure, equipment, and low loading/unloading productivity. Cat Lai in Ho Chi Minh City has faced severe congestion due to a 30% surge in cargo volumes.
According to research from the Universiti Teknologi in Malaysia, identified port congestion, hinterland connectivity, and uneven FDI distribution as systemic threats to the region’s competitiveness. The ASEAN secretariat separately noted that the member states have varying customs procedures and standards for warehousing, making cross-border logistics difficult.
Infrastructure matters because these constraints act as a ceiling on how much value the region can capture from the investment flowing in. A factory can relocate, but if goods cannot move efficiently, cost competitiveness can prove to be difficult. More critically, moving up the value chain requires attracting more sophisticated industries, and those industries are more sensitive to logistics reliability than low-cost assembly is.
Then there are the tariffs. Despite producing more, Southeast Asia has not been exempt from the US reciprocal tariffs. Major trading partners such as Malaysia, Indonesia, the Philippines, and Thailand have had tariffs set at 19 percent, and Singapore has 10 percent. Other products from the region, such as coffee and bananas, have been exempted because the US does not grow them.
“Southeast Asia’s tariff advantage over China persists for now, but depends on shifting US–China dynamics. Pending US Supreme Court rulings on tariff authority may further entrench uncertainty, leaving businesses to brace for continued trade volatility in 2026,” says John Goyer, Vice President for Southeast Asia and Oceania, at the U.S. Chamber of Commerce.
What would a real benefit look like?
The middle position is not a permanent sentence. One could argue that it is a starting position, and a few states in the region have already decided they do not intend to stay there.
For example, Indonesia, being the world’s largest producer of nickel, had for years exported raw ore at low prices while the value-added processing happened outside the country. In 2020, the government made a deliberate and costly decision to ban the export of unprocessed nickel ore entirely, forcing companies to process domestically if they wanted access to Indonesian nickel.
Vietnam is taking a different path towards the same destination. Hanoi has aggressively been investing in workforce development to transition its electronics industry from low-cost assembly to higher-value-added activities, targeting a significant role in the global semiconductor and tech supply chain by 2030. In 2024, the Vietnamese government issued Decision No. 1017/QĐ-TTg, which outlines the Program on Semiconductor Industry Workforce Development to 2030, with a vision to 2050 to train between 30,000 and 50,000 engineers by 2030.
These are not guarantees. Indonesia’s downstream strategy depends on sustained political will and global commodity demand that can shift. Vietnam’s engineering pipeline will take years to produce results, and the gap between training engineers and building a domestic semiconductor design industry is significant.
Both countries are making bets. But the bets matter, because they mean that Indonesia and Vietnam are making active choices about what kind of economy they want to be on the other side of this disruption, rather than simply receiving whatever the disruption sends their way.
The rest of the region faces the same choice, with less time than it might appear. The tariff environment is volatile, and infrastructure gaps are becoming wider. And the window in which Southeast Asia can leverage its current strategic relevance to move up the value chain, rather than simply consolidate its position within it, will not stay open indefinitely.
This article reflects reporting and analysis made by The Southeast Asia Pacific Frontier. If you have additional context, a different take, or a perspective we’ve missed — whether you’re a researcher, a policy practitioner, or someone living with these realities on the ground — this is an evolving story and we’d like to hear from you. Drop a comment below or get in touch.
About Matthew Parra
Matthew is a student at the University of Santo Tomas and the founder and Executive Director of The Southeast Asia Pacific Frontier — an independent analytical platform dedicated to rigorous, evidence-grounded analysis of Southeast Asia and the Pacific across economics, society, and geopolitics.
