The Great Corporate Migration: Southeast Asia Is Being Redivided

In May 2026, H&M, the Swedish clothing retail giant, announced a personnel change. Its Southeast Asian headquarters in Singapore would be relocated to Kuala Lumpur, Malaysia, affecting 78 positions.

Two months prior, Heineken, the Dutch beer group, also announced that it would transfer its large-scale brewing operations in the Asia-Pacific region to factories in Malaysia and Vietnam.

Local brands were not spared either. Gardenia, a bread producer, laid off 141 Singaporean workers all at once, citing the relocation of its bread production line to Malaysia to “remain competitive in an increasingly challenging global environment.”

The series of news combined easily gives the impression that the operating costs in Singapore are too high, and businesses are fleeing this most expensive city-state in the world.

Indeed, cost is part of the problem, but there are other factors.

Just across a bridge from Singapore, in Johor, Malaysia, a massive plan called the “Johor-Singapore Special Economic Zone” (JS-SEZ) is being rapidly implemented. According to official documents, eligible enterprises can enjoy a corporate income tax rate as low as 5%.

On the other side of the bridge, Singapore's standard corporate tax rate is 17%. For regional headquarters with annual profits exceeding S$100 million, a 12-percentage-point tax rate difference means tens of millions of additional Singapore dollars in annual profits directly stay in the pockets of shareholders.

Meanwhile, on the other end of the Southeast Asian continent, manufacturing investments from China are pouring into Vietnam, Cambodia, and Indonesia at a doubling rate.

Vietnam's global market share in the electronics industry has soared from 2.68% in 2016 to 4.48% in 2022, showing great prosperity.

However, if you look inside these factories, you'll find that although a large number of assembly lines are in operation, the core engineering knowledge to operate these production lines is still locked in the minds of foreign technical supervisors and on the servers of foreign parent companies.

Cambodia attracted US$2 billion in direct Chinese manufacturing investments from 2016 to 2023, but during the same period, the proportion of its manufacturing value-added to GDP only increased by 9.2 percentage points.

The economic complexity indices of Indonesia and Malaysia have hardly changed, indicating that their ability to produce complex goods has not significantly improved due to the influx of capital.

The combination of these events makes it difficult for us to easily judge right or wrong. In this wave of relocation, some enterprises have moved the location of their “taxable profits” to regions with lower costs while keeping the ability to create high added value in place; other investments have moved factories and machines, but locked the “knowledge density” firmly in their home countries. These two trends, one in the west and the other in the east, are jointly creating a new type of “industrialization illusion” in Southeast Asia. The GDP figures are growing, and the export volume is rising, but the underlying value-added ability of national wealth has not been strengthened to the same extent.

What else besides cost?

Why did H&M and Heineken make such choices?

The 5% preferential tax rate offered by the Johor-Singapore Special Economic Zone and a series of tax incentives provided by Malaysia to attract regional headquarters are the real reasons that attracted the financial directors of these multinational corporations.

In the field of corporate tax planning, there has long been an operational concept called the “dual-resident status structure.”

Its operating logic is roughly as follows: A multinational group retains its headquarters functions, strategic decision-making teams, innovation centers, and the legal ownership of intangible assets in Country A, while placing large-scale operating entities, production activities, and associated sales revenues and profits in Country B.

Country A provides a sound legal system, a network of double-taxation avoidance agreements, and a pool of high-quality talents, but the tax burden is relatively high; Country B offers low operating costs and a highly competitive effective tax rate.

By legally separating the “decision-making brain” and the “profit-generating body” between the two countries, the enterprise maintains the preferential agreements and business reputation brought by its tax resident status in Country A while transferring a significant portion of its taxable profits to the low-tax area in Country B.

The actions of H&M and Heineken almost follow this structure.

H&M clearly stated that even after relocating its Southeast Asian headquarters to Kuala Lumpur, it will still maintain an office in Singapore and continue to operate its retail business.

Heineken emphasized that Singapore will continue to serve as its “base for regional business operations, logistics, innovation, and GenAI-driven capabilities.”

In other words, what these enterprises shut down or relocate are the links that generate large-scale taxable income; what they keep in Singapore are the intangible assets that are difficult to be quantified and taxed but truly determine the long-term competitiveness of the enterprise - brand management, R & D decision-making, data algorithms, and key talents.

From Singapore's perspective, this arrangement is not a loss.

It has lost some mid-paying jobs and a portion of the physical output value in GDP accounting, but it has consolidated its position as a regional knowledge hub and a high-end service node.

The profits entering Malaysia, although increasing local economic activities and tax revenues, may not automatically translate into in-depth capacity building for local enterprises and workers. One country gets the names of “factory” and “headquarters,” while the other country retains control over the most valuable part of the regional business.

The bridge in the middle is the carefully designed tax system difference.

In particular, this cross-strait profit settlement strategy has occurred intensively during a special window period of global tax system reform. The global minimum corporate tax (Pillar Two) promoted by the Organisation for Economic Co-operation and Development (OECD) has entered the implementation stage in some jurisdictions, aiming to ensure that the effective tax rate of large multinational enterprises is not less than 15% regardless of where they operate.

If the 5% preferential tax rate in the JS-SEZ lacks substantial business activities as support, it is likely to face pressure to make up the tax in the future.

This policy expectation itself has, in the short term, accelerated some enterprises to relocate their profit centers to low-tax areas before the rules are fully tightened and equip them with sufficient physical operation shells, even if they are just regional procurement offices, shared service centers, or lightweight processing lines.

Professor Alvin Lim of Singapore Management University pointed out in an interview that “since the beginning of 2026, there has been an obvious shift of operations to Malaysia among these companies,” which is precisely the combined reaction of this series of policy signals.

However, are the investors attracted by the 5% tax rate those who are willing to take root in the long term and drive the upgrade of local technology and management capabilities, or are they just arbitrage capital looking for the next tax haven? The current evidence is not sufficient to give a definite answer, but the precise separation of the “brain” and the “body” across the Johor Strait has clearly shown one thing: in the global industrial chain reshuffle, the settlement place of profits is more flexible and more hidden than the location of factories.

The factories have come, but the brains remain in the home country

In Southeast Asia, greenfield manufacturing investments from China are also pouring in at an unprecedented speed. From 2020 to 2023, China's average annual greenfield foreign direct investment in ASEAN's manufacturing industry reached US$12.9 billion, more than twice the average of US$6.1 billion in the previous three years.

Vietnam, Cambodia, and Indonesia have attracted particularly prominent amounts. Vietnam's electronics components, semiconductor, and communication equipment sectors alone have absorbed one-third of China's direct manufacturing investments.

If we only look at the export data, it seems to be a victory.

Vietnam's global market share of electronic products has climbed from 2.68% in 2016 to 4.48% in 2022, with an absolute increase of up to 67%.

The proportion of Cambodia's manufacturing value-added to GDP has also been steadily increasing, and the proportion of factory employment in total employment has risen accordingly. Everything seems to be replicating the “flying geese pattern” industrial transfer that started in Japan in East Asia forty years ago.

However, there is a gap revealed by the Economic Complexity Index (ECI).

The ECI measures not the total export volume of a country but the knowledge diversity and uniqueness contained in its export basket. If a country's exported products mainly rely on high-knowledge-density intermediate products imported from other countries and only complete the final assembly process in its own country, even if the export amount is high, the improvement of the ECI will be very limited.

The real data shows that among the five ASEAN countries that have received the most direct Chinese manufacturing investments, the ECI scores of Malaysia and Thailand have hardly changed from 2016 to 2023, and those of Indonesia and Cambodia are significantly lower than the global median, indicating that their deep-seated ability to produce complex goods and services has not increased in sync with the increase in the number of factories.

The root of the problem lies in a key break in the knowledge transfer process.

Foreign investors have transferred capital goods, namely factories, equipment, assembly lines, and testing instruments, to the host country. These physical assets are tangible and are included in the local GDP statistics.

However, the “process knowledge” required to operate these capital goods, such as the process parameter setting logic on the electronic assembly line, the compensation algorithm for equipment calibration, and the verification process when introducing new materials, has not been systematically passed on to local engineers and technical workers.

The core technical personnel and management processes of many Chinese investment projects still highly depend on the expatriate employees and internal systems of the Chinese parent company. Local Vietnamese employees often perform the action sequences specified in the standardized operation manual, and they rarely have the opportunity to access and digest the underlying engineering logic.

This situation is significantly different from the knowledge diffusion path that occurred when Japanese enterprises transferred their manufacturing industries to Southeast Asia in the 1980s.

At that time, Japanese enterprises not only transferred production lines but also systematically exported methods such as “on-site improvement,” total quality management, and joint cultivation of suppliers. Foreign engineers were stationed for a long time and co-built the entire ecosystem of quality management with local enterprises. This round of the relocation of Chinese manufacturing industries occurs under completely different business rhythms and geopolitical backgrounds.

The primary driving force for enterprises is often to maintain their market share in Europe and the United States under the increasing tariff barriers imposed by the United States on China.

This “passive relocation” naturally comes with a psychological assumption that it is safer to keep the core processes and technical knowledge in the home country, and it is sufficient for overseas bases to complete the final assembly and obtain local certificates of origin.

This is the case in Cambodia.

From 2016 to 2023, China's total greenfield investment in Cambodia's manufacturing industry was US$2 billion. In 2016, the base value of Cambodia's manufacturing value-added was US$3.2 billion, and its merchandise exports were US$8.5 billion. The scale of investment is not small.

However, during the same period, the proportion of Cambodia's manufacturing value-added to GDP only increased by less than 10 percentage points, and the economic complexity index still remains deep in the negative range.

These facts imply that the investment has mainly expanded the production capacity of existing product categories rather than catalyzing new production categories with higher knowledge content.

From clothing and luggage to simple electronic assembly, workers have moved to a different workshop, but the knowledge content of the country's overall production capacity has not achieved a qualitative leap.

If we use a concept to summarize this situation, it should be called “knowledge flow interruption.”

The capital goods have been relocated across borders, but the implicit knowledge to operate these capital goods has been blocked outside the national border.

As a result, the industrialization of some Southeast Asian countries shows a characteristic of “broadening” rather than “deepening”: the number of manufacturing sectors and factories has increased, but the endogenous ability of the entire economic system to create unique knowledge and climb the technological ladder has not been correspondingly strengthened.

This model may be sustainable in an era of smooth globalization, low tariff barriers, and loose rules of origin. However, once the external trade conditions tighten, its vulnerability will be quickly exposed.

When the tariff tool targets the “triangular supply chain”

In the trade policy toolbox of the United States in recent years, there is an increasingly sharp tool called the “substantial transformation” origin review.

Its core function is to determine whether a product has undergone sufficient manufacturing processes in a third country so that its origin can be changed from the original country to the third country.

In today's highly refined global division of labor, this procedure directly determines which country's tariff rate a product should be applied.

In the early stage of the intensifying trade friction between the United States and China, a common countermeasure was to transport Chinese intermediate products, such as semiconductor devices that have completed wafer manufacturing and partial packaging, or electronic products that have completed the assembly of core modules, to Vietnam, Malaysia, or Mexico. There, the final shell assembly, testing, and packaging are completed, and then the products are exported to the United States as locally originated goods, thus avoiding the high punitive tariffs on Chinese products.

This practice has an image name in the industry, called “supply chain cleaning.”

It does not require real technology transfer, only a workshop with basic assembly capabilities and a certificate that meets the format requirements of the rules of origin.

However, when the US Customs and Trade Regulatory Department began to tighten the recognition criteria for “substantial transformation,” the foundation of the entire model was shaken.

According to a more stringent review logic, if the core wafer manufacturing of an electronic product is still completed in China, Malaysia only performs the back-end packaging and testing, and Vietnam is only responsible for the final assembly and labeling, then the essential manufacturing process of this product still occurs in China, and its origin may be re-determined as China, thus subject to high tariffs.

In this way, export-oriented investments that only place the last process in Southeast Asia to obtain the “ASEAN Certificate of Origin” will face direct business risks. Once the tariff cost is added, the profit model of the entire project will no longer exist.

On the surface, this policy trend seems to be a precise blow to tariff evasion, but it also poses an extremely difficult question to the industrialization process in Southeast Asia.

On the one hand, the tariff pressure forces Chinese enterprises to move more substantial manufacturing processes to Southeast Asia, rather than just outsourcing the simplest assembly processes.

If this “deep localization” can be truly implemented, it is bound to drive the transfer of some process knowledge, forcing foreign investors to train middle-level engineers who can understand the process logic locally and even gradually allocate R & D resources here. This is precisely the external impetus required for the leap from “injection” to “innovation” in the World Bank's “Investment - Injection - Innovation” framework.

On the other hand, the investment required for deep localization far exceeds that of an assembly workshop.

It requires a stable power supply, a qualified industrial water treatment system, the local supply capacity of precision molds and fixtures, a large number of technical personnel who can read engineering drawings and adjust production parameters, and a predictable trade policy environment. The current geopolitical uncertainty is seriously eroding this last condition.

Enterprises do not know whether the next round of tariffs will suddenly be adjusted in six months or whether the review criteria for rules of origin will continue to tighten. This leads them to tend to “wait and see” when making investment decisions and temporarily maintain a light-asset layout that meets the minimum compliance requirements, rather than making large-scale investments in local R & D and deep processing facilities that can bring real knowledge spillovers.

In the end, an almost paradoxical cycle is formed. The shallow assembly model established to avoid tariffs is being precisely targeted by the tariff rules, while the deep localization that should have been catalyzed by the tightened rules is being suppressed by the uncertainty of the rules themselves.

The result of this cycle is that a significant part of the production capacity is locked at a fragile balance point of “just enough to obtain the certificate of origin.” Once the wind direction of trade policy changes again, this production capacity will face the risk of being uprooted, and the host country can hardly obtain long-term capacity building from this experience except for some factory rental fees.

While the tariff tool precisely targets the triangular supply chain, it also inadvertently exacerbates the structural dilemma of “knowledge flow interruption.”

Are the electric vehicle and AI tracks old wine in new bottles or a real upgrade?

While the dilemma of shallow localization in the traditional manufacturing field remains unsolved, many Southeast Asian countries have begun to cast their hopeful eyes on the new generation of industries - electric vehicles, power batteries, and artificial intelligence infrastructure.

Thailand, Indonesia, Malaysia, and Vietnam are all using tax incentives, land concessions, and market access conditions to attract electric vehicle and battery manufacturers from China, South Korea, Japan, and the West to set up operations.

Indonesia, which boasts the world's largest nickel reserves, has frequently mentioned that it wants to become a global hub for electric vehicle batteries.

Meanwhile, Singapore, Malaysia, Thailand, and Indonesia have announced the construction of large-scale data center parks, hoping to ride on the wave of AI computing power.

These layouts are reasonable in direction and very appealing in narrative.

However, if we look at them from the perspective of the “knowledge flow interruption” discussed earlier, we will find that there is a path