Southeast Asia’s Industrial Crossroads: Adapting the Flying Geese Model for a New Era
Indonesia’s ambitious plan to secure $600 billion in investments across minerals, oil, gas, and fisheries hinges on a delicate balance: integrating domestic firms into upgraded value chains while navigating the complex currents of US tariffs and Chinese outward investment. This scenario isn’t unique to Indonesia; it encapsulates the broader challenge facing Southeast Asia as the decades-old Flying Geese Model (FGM) encounters unprecedented turbulence.
Originally conceived by Kaname Akamatsu in the 1930s, the FGM describes how industrial activity migrates from advanced to less-developed economies as cost structures shift. For decades, Southeast Asia benefited from this pattern, absorbing industries from Japan, South Korea, and Taiwan. But today, China’s dominance and evolving geopolitical forces are forcing a re-evaluation of this established framework.
The Shifting Geese: China’s New Role and Western Tariffs
The post-World War II era saw a clear progression – from textiles to automobiles and electronics – as Japan led the way, followed by its neighbors. However, since the early 2000s, China’s rise has fundamentally altered the landscape. China isn’t just absorbing manufacturing; it’s actively exporting lower-technology industries, like garments to Bangladesh and nickel processing to Indonesia. Some analysts argue this represents a new variant of the FGM, driven by Chinese investment through initiatives like the Belt and Road Initiative (BRI).
This shift coincides with aggressive Western, particularly US, tariff regimes. The Trump administration’s policies prompted Chinese firms to utilize transshipments through Vietnam and Mexico, leading to threats of further penalties. Currently, reciprocal tariffs average 19% for Vietnam and other ASEAN states, adding significant complexity to regional trade. As a result, Southeast Asian nations are caught between leveraging Chinese investment and mitigating the risks of US trade actions.
Three Pillars of Adaptation: Commodity Policies, Economic Zones, and Network Integration
Southeast Asian policymakers are responding with three key industrial policy tools. First, commodity-based industrial policies, exemplified by Indonesia’s ban on raw nickel exports to attract investment in refining and EV battery production. This strategy has already attracted over $7 billion in Chinese BRI investment and secured over half of global refined nickel output.
Second, the proliferation of special economic zones (SEZs) – over 1,600 across Southeast Asia – continues to be a crucial mechanism for attracting foreign direct investment (FDI) and creating jobs. From Thailand’s border SEZs to Vietnam’s expansive industrial parks, these zones offer fiscal incentives and institutional support. Dedicated parks for nickel, EVs, and semiconductors are emerging in Indonesia, Malaysia, and Thailand.
Third, production network integration remains vital. Embedding within multi-country value chains allows nations to access technology, diversify exports, and build resilience. However, the threat of US transshipment penalties is prompting strategic realignments. Vietnam might prioritize direct negotiations with the US, while Cambodia seeks deeper integration with China.
The Rise of Nickel Downstreaming: A Case Study
Indonesia’s nickel downstreaming policy provides a compelling example of the new FGM in action. By banning raw nickel exports, the country has incentivized Chinese investment in processing facilities, creating a vertically integrated industry. This strategy, while successful, highlights the potential for dependence on a single investor and the need for robust domestic capabilities. The World Bank offers further insights into the complexities of commodity-based industrial policies.
Beyond the Geese: Sustainability, AI, and the Future of Industrialization
The FGM, even in its updated form, needs further refinement. Long-term factors like artificial intelligence (AI) and geopolitical rearrangements demand a more holistic approach. Simply chasing lower labor costs is no longer sufficient. Future success requires integrating climate and sustainability imperatives, fostering innovation, and enabling collective action between China, the US, and Europe.
AI, in particular, presents both opportunities and challenges. While it can enhance productivity and efficiency, it also threatens to automate jobs and exacerbate existing inequalities. Southeast Asian nations must invest in education and training to prepare their workforces for the future of work.
Furthermore, the focus must shift from simply attracting FDI to fostering domestic innovation and building resilient supply chains. This requires strengthening regional cooperation, promoting technology transfer, and investing in research and development.
Frequently Asked Questions
Q: Is the Flying Geese Model still relevant today?
A: While the original model needs updating, the core concept of industrial migration remains relevant. However, the dynamics are far more complex due to China’s rise, geopolitical tensions, and the emergence of new technologies.
Q: What are the biggest risks facing Southeast Asian economies?
A: Over-reliance on China, vulnerability to US tariffs, and a lack of investment in innovation are key risks. Failure to address these challenges could hinder long-term growth.
Q: How can Southeast Asian countries attract more sustainable investment?
A: By prioritizing environmental, social, and governance (ESG) factors, promoting green technologies, and creating a favorable regulatory environment for sustainable businesses.
Q: What role does regional cooperation play in navigating these challenges?
A: Stronger regional cooperation within ASEAN is crucial for coordinating industrial policies, negotiating trade agreements, and building resilient supply chains.
Southeast Asia stands at a pivotal moment. Agile policymaking, strategic integration into global networks, and targeted investments in upgrading domestic capabilities will be essential for navigating the turbulent waters ahead. The future isn’t about simply following the flight path of the geese; it’s about charting a new course for sustainable and inclusive growth. What strategies will Southeast Asian nations prioritize to secure their economic future? Share your thoughts in the comments below!
