Can Laos become Southeast Asia's next manufacturing hub?

As Chinese companies increasingly seek expansion opportunities abroad amid rising trade tensions between Beijing and Washington, Laos is trying to present itself as a prime location for these firms to set up their manufacturing units.  

Amata, a Thai developer known for its industrial parks in Thailand and Vietnam, recently announced the launch of a significant project in Laos, aimed at drawing manufacturers looking to relocate from China.

In an interview with Nikkei Asia last month, Amata's founder and chairman, Vikrom Kromadit, underlined the importance of overseas expansion, saying it's a potential "lifeline" for these companies.

In its 2024 brochure, Amata listed incentives such as tax exemptions that investors in the Laos project would enjoy.

The move also signals a possible shift in regional manufacturing dynamics.

A promising location?

Jimmy Chen, vice president of the Thailand-Taiwan Business Association, said Laos is a promising industrial location for Chinese manufacturers.

"Due to Laos sharing the [border] with China, I believe it will definitely attract Chinese manufacturers. Also, Thailand has higher manufacturing costs as compared to Laos due to the higher standard of living there," he told DW.

"Both China and Thailand have heavily invested in the development of Laos as well, as they also see great potential there," Chen added.

Tim Scheffman, a German national living in Vientiane, is the CEO of LTS Ventures, a Laos FinTech company. He said he is optimistic Laos can become a manufacturing hub in the coming years.

"Laos has the potential to become a manufacturing hub in the region. It has a great strategic, central location in the heart of Southeast Asia,” he told DW, pointing to its membership of the Association of Southeast Asian Nations, the 10-member bloc that has over 660 million people.

But he added that a limited human resource capacity and an inefficient banking sector could present hurdles. "If an investor is willing to bring automation, training and flexibility, then Laos can be a great place for manufacturing," Scheffman said.

Laos faces a raft of economic challenges

A landlocked country of about 7.5 million people, Laos is rich in natural resources.

But the nation's economy has been struggling with a raft of problems in recent years.

It has massive foreign debt, a depreciating currency and soaring inflation, which is hovering at about 25%.

Laos has also become increasingly dependent on China for investment and loans in recent years, with major infrastructure projects being financed through Chinese loans. 

Bilateral ties have deepened with the construction of Chinese-funded hydroelectric projects as well as the building of a $6 billion (€5.43 billion) high-speed railway that links to railways in southwest China's Yunnan province and eventually will be connected with a line running to Bangkok and the Gulf of Thailand.

But the debts resulting from these projects have been a heavy drain on the country's resources.

Experts say Laos is facing debt distress, with payment obligations surpassing $1 billion a year and total borrowing amounting to about 125% of its economy, with half owed to China.

No comparative advantage?

Laos, which has a per capital GDP of around $2,000, wants to integrate more with the regional economy to overcome the challenges.

But questions remain as to whether the single-party communist state can pull it off.

Zachary Abuza, a professor at the National War College in Washington who focuses on Southeast Asia, said Laos has "very little in the way of comparative advantage compared to countries it is surrounded by: China, Vietnam and Thailand."

"To be a manufacturing hub you need a few things, such as an educated and trained work force, macro-economic stability and a steady supply of energy. Laos only has the latter," he added.

Another issue facing investors when they consider investing in Laos is corruption.

"Laos is plagued with rampant official corruption," said Abuza.

"While that is the case in many other countries, companies usually think that the economic benefits they offer, such as market access, make it worth it. But I just don't see that happening in the case of Laos, whose total economy is worth under $20 billion — it is a paltry market."

Edited by: Srinivas Mazumdaru