Indonesia and Thailand's competition over Toyota factories illustrates the challenges ASEAN faces in coordinating regional investment and industrial policy, with member states using incentives and restrictions to attract investment.

The Association of Southeast Asian Nations (ASEAN) has spent decades lowering trade barriers and linking supply chains, but investment and industrial policy remain largely coordinated at the national level, with member states competing for investment.

Earlier this month, Jakarta publicly urged Toyota to consider shifting its regional production base from Thailand to Indonesia, with Finance Minister Purbaya Yudhi Sadewa offering incentives and regulatory concessions to attract the Japanese carmaker.

"I'll give you every incentive you want," Purbaya said, questioning why Thailand remained ASEAN's automotive manufacturing hub when Indonesia, Southeast Asia's largest economy with nearly 290 million people, has yet to develop its large domestic market into a regional manufacturing base.

Thailand has attracted more global carmakers than Indonesia over the past decades, partly due to its established industrial ecosystem and export infrastructure, he said, while Indonesia has faced difficulties competing because of less attractive incentive packages.

Bangkok has since responded by planning to overhaul its auto excise regime to support local production and discourage imports from carmakers without local factories in Thailand. The new rules, covering both combustion-engine and electric vehicles, are expected to take effect by the end of the year.

Existing trade arrangements already make trade between ASEAN countries relatively competitive, said Nandi Juliyanto, president director of Toyota Motor Manufacturing Indonesia (TMMIN), meaning that "relocating factories does not necessarily make the price of a car cheaper".

Governments seek to create jobs and attract capital to their respective economies, while competition between member states can affect ASEAN's efforts to increase economic integration.

"There's a difference between competing for new investment coming into ASEAN and competing to move an existing factory from one ASEAN country to another. The latter may produce very little additional value for ASEAN as a whole," said John Low, managing partner at Roland Berger Southeast Asia and Australia. "Different countries have different strengths, but if these advantages can be connected, ASEAN becomes much more attractive than any individual member state," Low told the media, recently.

Southeast Asia has attracted foreign direct investment in sectors including manufacturing, EVs, technology, data centres and artificial intelligence over the past year. The restructuring of global supply chains represents an economic opportunity for the region, Low said, but ASEAN would need to position itself as a region to attract more investment while allowing member states to specialise in areas where they have an advantage.

ASEAN formally established the ASEAN Economic Community (AEC) in 2015, building on the ASEAN Free Trade Area (AFTA) to create a single market and production base with freer flows of goods, services, investment, capital and skilled labour across the region. Its 2026-2030 economic plan seeks to deepen that integration and strengthen ASEAN's role in global supply chains. Trade among the member states totalled US$4.37 trillion in 2025, up 13.6% from a year earlier.

However, intra-ASEAN trade accounted for 20.5% of that total, little changed since 2003, according to ASEAN data. University of Indonesia international trade expert Ruth Elisabeth said ASEAN should focus on building a regional automotive value chain, allowing countries to specialise in areas where they have an advantage rather than competing for the same factories.

"What needs to be avoided is competition turning into a race to the bottom in incentives," Ruth told the media, recently.

Governments and multinational companies both influence investment outcomes: governments determine investment conditions, while multinational companies decide where to locate production based on supply-chain efficiency. ASEAN could therefore focus less on attracting individual factories and more on developing a specialised regional automotive value chain, she said.

The AEC and ASEAN Single Window have supported market integration and trade facilitation, but industrial and investment policy remains largely national and "relatively limited", she said. ASEAN lacks the supranational authority to replicate the European Union's policy interventions, she said, but the bloc could improve transparency, coordinate industrial policies and develop regional projects in strategic sectors through initiatives such as the ASEAN Industrial Projects Based Initiative.

Weak collective power

A similar dynamic was evident in trade negotiations last year, when ASEAN negotiated separately with the United States over the so-called "Liberation Day" tariffs. Washington, the region's largest external source of FDI, sought lower trade barriers and greater access for US goods, while tariff rates ultimately settled at similar levels of 19-20%.

The European Union has also been negotiating with ASEAN countries individually for free trade agreements, with Singapore and Vietnam already having agreements with Brussels, while Thailand, Malaysia and the Philippines are negotiating their own. The Indonesia-European Union Comprehensive Economic Partnership Agreement (IEU-CEPA) is targeted for signing in October.