Think Southeast Asia is taking a backseat? Think again: Singapore, Malaysia and the rest are booming by exporting to China.

Dell, the world's biggest personal computer maker, recently began building a new plant in Asia on a sprawling site adjoining an existing big plant. The two plants, where 95 percent of Dell's total global notebook PCs are assembled, aren't located anywhere near China. They're actually in Penang, an island in northern Malaysia.

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A few hundred yards away is Intel's biggest facility outside the U.S. It produces more than a third of the world's latest microprocessors, many of which find their way into those Dell computers. Another of Dell's neighbors in Penang is Intel's fierce competitor, AMD.

Just over an hour's drive away, rice paddies near the town of Kulim were cleared last year for semiconductor giant Infineon Technologies' new $2 billion wafer fabrication plant. The German chip giant chose Kulim over Shanghai because of lower overall costs. At Tanjong Pelepas, a southern Malaysian port near Singapore, Flextronics International, one of world's largest contract manufacturers, is building its biggest consumer electronics manufacturing facility--a 1.2-million-square-foot industrial park to complement its half a dozen plants in the country. Flextronics is growing its Malaysian footprint to 25 percent of total global capacity, up from 20 percent, in order to reduce its dependence on China, where 38 percent of capacity is now located. In addition, southern Malaysia's costs are 17 percent lower than around Shanghai.

"Southeast Asia is a key base for global manufacturers like us," says Peter Tan, Asia CEO for Flextronics. "Sure, China is important, but nobody wants to put all their eggs in one basket," says Tan, a Singaporean who has overseen the company's expansion in Asia, including China, for nearly five years.

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Long written off as the backwater of the world's most dynamic economic region powered by the twin engines of China and India, Southeast Asia is re-emerging from the shadow of its giant neighbors. "The emergence of China as the factory to the world, and India as the back office of the world, has somehow created a misconception that Southeast Asia is fast becoming some sort of an economic or manufacturing wasteland," says Chua Hak Bin, an economist with DBS Bank in Singapore. "Far from it. The region is thriving, with economies growing at 5 percent to 9 percent a year."

Forget hollowing out. Surprisingly, the region's biggest new growth driver is manufacturing. "Industrial output in much of Southeast Asia has been growing at near double digits in recent years," says Manu Bhaskaran, Asia director for the Washington, D.C.-based Centennial Group in Singapore. Southeast Asian factories are churning out everything from electronics components and finished goods to chemicals, as well as processing agricultural commodities, thanks in part to growing demand from India and China, recovery in Japan, and new markets in Eastern Europe and the oil-rich Middle East.

Politics Aside, Money Flows

Despite political turmoil in Thailand and the Philippines, Southeast Asia has continued to draw capital and foreign direct investment. In 2004, the region saw the steepest increase in foreign direct investment since before the 1997-1998 financial crisis, with fresh FDI inflows rising 48 percent to $26 billion in 2004 from $17 billion in 2003. Though final data for 2005 hasn't been published yet, preliminary figures show little sign of slowing. China is itself emerging as a big investor in Southeast Asia, with investments of more than $1 billion every year for the past three years.

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Singapore, Malaysia, Thailand, Indonesia and the Philippines have long been among the most open and trade-dependent economies in the world. By linking themselves to the global grid of manufacturing and services, Southeast Asian economies have remained nimble and adaptable parts of a fast-changing international supply chain. Many of Southeast Asia's small and medium-size industrial companies grew out of outsourcing contracts from multinationals such as Hewlett-Packard, Seagate, Intel and Motorola.

Take disk drives, for example. Fifteen years ago when hard drives were just for personal computers and IT gear, Southeast Asia made 90 percent of them. Since then, MP3 players and video iPods have dramatically expanded the market for hard disk drives. Today, nearly 20 percent of the drives go into such consumer products. Singapore, Thailand and Malaysia still account for 80 percent of total global production of hard disks and hard drive media, even as China has emerged as a center where drive makers source some of their low-end components. Most of the components produced in China are actually made by Southeast Asian companies that have built plants in China to stay as competitive suppliers to the likes of Seagate, Maxtor and Hitachi.

Magnecomp, one of the world leaders in suspension assemblies components used in hard drives, is expanding in Thailand. Singapore-based Seksun, which makes covers for hard disk drives at plants in China, Malaysia and Singapore, is expanding in Thailand as well. "As suppliers to the world's top disk drive makers, we make components where they are needed," says Felix Ong, chairman and CEO of Seksun.

As China has sucked in more capital and built huge new capacity, economies that once tried to manufacture everything are increasingly either specializing in key niches or moving upscale, or supplying goods and services to the new factories in China and elsewhere. "We no longer see the rise of China as an economic threat," Indonesia's President Susilo Bambang Yudhoyono said in an interview. "We see it as an opportunity to supply whatever China wants." Yudhoyono says that the faster China grows, the better it is for the rest of the region.

Singapore's Jackspeed is a case in point. It makes leather upholstery such as car seats for the automotive industry. Think China is emerging as the new big auto powerhouse from Asia? Well, as Jackson Liew, Jackspeed's CEO, tells it, his firm provides leather seats to car makers in China from its plants in Southeast Asia.

China's fast-paced growth is showing in the region's huge trade surplus. While the U.S. ran a huge $200 billion trade deficit with China last year, Southeast Asian countries have an ever-growing trade surplus-$25 billion last year, up from $4.8 billion in 2000. Indeed, demand has been so strong that Southeast Asian economies just can't produce enough to satisfy China's growing hunger. The Chinese are importing everything from oil, gas, rubber, palm oil, tin, coal, fruits and vegetables to Thai-made components for its car industry, microchips made by Intel and AMD in Malaysia for its computers, and chemicals for its plastic factories.

Newly Liberalizing?

Then there is the rest of Southeast Asia--Vietnam, Cambodia, Laos and Burma--where a gradual China-like opening is unleashing an investment boom and buildup of industrial capacity.

The leader is Vietnam, whose economy grew 8.4 percent last year and is forecast to grow 8.6 percent this year. Vietnam isn't just the world's newest sneaker capital or a country benefiting from low-end garments like T-shirts. Japan's Canon has several printer and copier plants in Vietnam, and Intel recently announced an up to $600 million investment in Ho Chi Minh City to build semiconductor plants. Korea's Samsung Electronics is looking at relocating some of its low-end consumer electronics production from southern China to Vietnam, where costs are up to 50 percent lower.

Little wonder, then, that the hottest stock market in the world over the past year has been the Ho Chi Minh City bourse whose total market capitalization has increased from a mere $250 million 16 months ago to $1.5 billion currently. Kevin Snowball, a director of PXP Vietnam Asset Management, predicts the market's size will probably double over the next six months. "Vietnam today reminds me of China 10 years ago," says James Koh, CEO of Singapore-based furniture maker Koda, which has two-thirds of its production in Vietnam. "Anything China can do, Vietnam can do cheaper and better." Koh spent years scouting for opportunities in China, then settled on Vietnam.

Southeast Asia is also a beneficiary of the global oil boom. Malaysia, Vietnam and Brunei are all net exporters of oil. Indonesia, an OPEC member and now an oil importer, is hoping to rejoin exporting nations. Even Thailand, also a net importer, has in recent years developed as one of the region's biggest oil refining and petrochemical locales, rivaling Singapore, South Korea and Taiwan. Malaysian oil giant, Petronas, which derives more than a third of its revenues from overseas, is now Asia's most profitable company ahead of Japan's Toyota Motors and South Korea's Samsung Electronics.

In addition, Southeast Asia is eyeing global tourism's biggest prize: first-time middle-class tourists from China and India. The region is spending tens of billions on infrastructure from hotels to new theme parks. U.S. operators such as Harrah's, MGM and Las Vegas Sands are bidding to build two casino resorts in Singapore worth $5 billion, complete with a Guggenheim Museum, a permanent Asian home for Cirque du Soliel, a Universal Studios theme park, and a new convention center.

But Southeast Asia is spending even more on research and development. Singapore has committed $4.6 billion over the next five years to sustain R&D in key high-tech sectors, including photonics, material technology, microelectronics and design, as part of its ambitious Science and Technology Plan 2010.

That's on top of the billions Singapore is spending to turn itself into a cutting-edge biotechnology hub. Singapore, which actively encourages stem cell research, has identified life sciences including health care, pharmaceuticals and biotech as one of its four industrial pillars. In 2003, the government announced that it would set aside $1.85 billion for the development of biomedical sciences over the next five years. Alan Coleman, the head of the research team that cloned Dolly the sheep in Scotland, now works in Singapore as CEO of ES Cell International. Singapore also hopes to roll out a Next Generation National Info-comm Infrastructure, capable of speeds of up to 1 gigabyte-per-second, by 2008.

As long as Southeast Asia has 600 million people and an efficient infrastructure, there will be plenty to keep its factories humming and its economies growing.

Rapid Growth

GDP growth rates in Asia

           2005  2006 *

China      9.9%  9%

Vietnam    8.4%  8.6%

Indonesia  5.3%  6.5%

Thailand   4.5%  6.2%

Malaysia   5.6%  6%

Singapore  5.7%  6%

Source: Government reports

* forecast