Author: Dr CHHORN Dina, Centre Director at CDRI’s Centre for Development Economics and Trade

Key messages

• Southeast Asia’s traditional manufacturing model, replicating the East Asian industrial pathway, is losing relevance amid rising wages, demographic shifts, and global fragmentation.

• Geo-economic shocks and trade tariffs signal a deeper shift, placing the region at the centre of global decoupling dynamics.

• Future strategies must shift, moving beyond low-end assembly toward services, digital economy, green agriculture, and empowered MSMEs.

• Shifting the tradition requires strategic imagination, not replication, through embracing regional strengths, deeper ASEAN and regional cooperation, and inclusive growth.

Southeast Asia has long been known as “The World’s Factory,” fuelled by a young workforce, low production costs, and regional integration. Vietnam rose as a key player in electronics manufacturing; Cambodia and Myanmar advanced in garments and light assembly, though Myanmar’s progress was later disrupted by a coup d'état. Malaysia and Thailand excelled in automotive and electronics industries. Singapore emerged as the region’s innovation, finance, and logistics hub. Meanwhile, Indonesia, ASEAN’s largest economy, leveraged its resource base and domestic market to drive growth, with a strong focus on digitisation and emerging sectors such as electric vehicles.

However, the world is changing, and Southeast Asia’s traditional comparative advantages are no longer sufficient in an era increasingly shaped by geopolitical risk and a rapidly fragmenting global economy.

The Fragmented World Is No Longer Hypothetical

What was once considered a theoretical concern, “geo-economic fragmentation,” has now become a reality, most notably with the recent imposition of US tariffs. Since the global financial crisis of 2008, the world has been reshaped by a sequence of economic and political disruptions: Brexit, the US-China trade war, the COVID-19 pandemic, and the Russia-Ukraine conflict. These events did more than damage the global economy; they fractured it.

The structural shift, however, began even earlier, more quietly and steadily. In 2016, China’s GDP surpassed that of the United States in purchasing power parity (PPP) terms. This was not just a statistical milestone - it marked a deeper transition in the global centre of economic gravity, challenging both the existing status quo, either in terms of the current global order or internal economic balances.

In April 2025, the United States announced a shocking new wave of tariffs, some exceeding 3,500 percent, targeting Southeast Asian exports particularly in solar technology, electronics, and textiles. These measures are no longer isolated acts of protectionism but part of a broader shift: the decoupling of Western economies from China and its surrounding economic network. Southeast Asia, once a neutral corridor, is now caught in the crossfire.

Southeast Asia’s Manufacturing at a Crossroads

Southeast Asia’s once-booming manufacturing sector now finds itself at a critical crossroads. Internally, countries grapple with rising wages, demographic shifts, and a new generations, like Gen Z, with a maturing middle class whose aspirations no longer align with low-end factory work. Externally, the region contends with tightening trade barriers, intensifying protectionism, technological disruptions, and the consolidation of supply chains around geopolitical alliances.

While some countries, most notably Thailand, Malaysia, and Vietnam, have made notable strides in high-tech exports, the region as a whole is struggling to transition from basic assembly to sophisticated production. The barriers to entry into high-value manufacturing, ranging from intellectual property monopolies and technological complexity to rigid global standards, are growing increasingly unpredictable.

East Asian Success Becomes a Myth?

For much of the post-World War II era, East Asia’s development pathway followed a recognisable development trajectory. Japan’s post-war industrial transformation in the 1950s was followed by the rise of the Four Asian Tigers, namely Hong Kong, Singapore, South Korea, and Taiwan, and later by China’s meteoric ascent in the 1990s. This roadmap was characterised by rapid export-oriented industrialisation, human capital development, and strong state-led modernisation. This model followed a clear path, from low-cost manufacturing such as garments and steel, to mid-tech industries like electronics and machinery, and eventually to advanced sectors including smart machines and high-tech products.

That development model inspired not only Thailand, Malaysia, Indonesia, and the Philippines, but also late entrants such as Vietnam and Cambodia to liberalise their economies in the 1990s and promote labour-intensive exports. However, unlike their predecessors, these countries now face what is often referred to as the “mid-industrial trap”: not fully informal, yet still far from globally competitive.

This is not just an economic reality, it’s a strategic imperative. According to the United Nation’s industrial classification, only one country in the world, China, possesses all 39 major industrial categories, 151 medium-level systems, and 525 minor sectors. This is an industrial ecosystem that no other nation has been able to replicate. Southeast Asia must therefore rethink its development pathway, potentially by integrating more strategically with China-centred production networks.

Shifting the Tradition: A Call for Strategic Imagination

Rather than following legacy models, Southeast Asian countries must design forward-looking development strategies that reflect their specific comparative advantages.

Here’s how:

• Diversify beyond manufacturing by advancing high-value service sectors such as logistics, tourism, and education, while investing in the creative and digital economy. Sectors like e-commerce, fintech, and digital platforms offer scalable, inclusive growth.
• Revitalise sustainable agriculture and agro-processing. With climate risks intensifying, the region has an opportunity to lead in regenerative farming, organic exports, and eco-certification, supported by smart technology, traceability systems, and strong food security strategies.

• Empower micro, small, and medium-sized enterprises (MSMEs), which make up between 88.8 percent and 99.9 percent of businesses, through formalisation, digitalisation, clustering, and certification to better integrate them into regional and global value chains.

• Reframe foreign direct investment (FDI) strategies to move beyond passive investment attraction. Countries should actively shape FDI by providing a high-quality business environments, low tax rates, and world-class infrastructure to strengthen domestic capacity, ensure knowledge transfer, and create joint ventures that benefit local firms.

• Deepen regionalism. Trade agreements like RCEP and CPTPP provide a foundation, but ASEAN must go further by leveraging these tools to build innovation ecosystems, industrial complementarity, and a unified voice on digital governance and sustainability standards.

Looking Forward

Global fragmentation is no longer a theoretical concern; it is a new reality. Southeast Asia must revise its manufacturing strategies accordingly. The future of the region may not mirror like the past. For example, for Cambodia, its comparative advantage may not lie in replicating industrial models, but in leveraging its rich historical and cultural heritage, the friendliness of its people, and in the development of related sectors such as services, hospitality, and sustainable agriculture.

Shifting the tradition is not about rejecting the past, but about building a more resilient, inclusive, and regionally grounded future.

This article draws on the author’s contributions to the World Salon X Columbia Global Dialogue, ‘Adapting to the New Normal: Strategies for Success in Southeast Asia’s Evolving Manufacturing Sector’, held virtually on 2 May 2025.