In recent years, Southeast Asian governments have viewed the “China plus one” strategy as their best chance to escape the middle-income trap. As global manufacturers looked to diversify away from China because of rising costs, trade tensions and supply-chain vulnerabilities, Indonesia, Thailand and Malaysia seemed perfectly placed to benefit.
The promise was simple and compelling: new factories would arrive, more formal jobs would be created, wages would rise in tandem with higher productivity and decades of disappointing growth would give way to economic upgrades. This story is now colliding with a harsher reality. The anticipated wave of transformative foreign investments has been smaller than hoped, while a flood of cheap Chinese goods is hurting local industries. Wage growth remains weak, factory closures are spreading and political frustration is rising.
The source of the problem is not China. It is that domestic politics and institutional weaknesses in much of Southeast Asia have prevented countries from turning external opportunity into industrial progress at home.
Thailand shows the gap between headline success and underlying weakness most clearly. Its Board of Investment recorded a decade high in applications for electric vehicles, electronics and digital projects. Yet average manufacturing wages have been flat since mid-2023. Traditional vehicle production fell nearly 20 per cent last year even as the transition to EVs disrupted an entire network of suppliers built around the internal combustion engine. More than half the workforce remains in low-productivity informal jobs. Despite attracting new investments, Thailand’s growth forecasts have been repeatedly revised downwards to just 1.8–2 per cent.
Indonesia’s situation is more dire. The country possesses the scale, resources and young population that should make it a major winner from supply-chain diversification. Instead, business confidence has collapsed. Major business groups report being pressured to buy “patriotic bonds” and face land seizures justified by vague environmental claims. A new financial-sector law has weakened central bank independence.