Asian alternatives
The quest for greater diversification, concerns over US-China trade tensions, heightened geopolitics and intensifying nationalism may nonetheless compel some companies to move part of their supply chains out of China. Should this occur, other Asian economies offer viable production locations. Recent findings by BofA suggest that Southeast Asia will be one of the biggest beneficiaries of the realignment of supply chains as companies perceive it to be a viable alternative to China. See Fig. 2.
The Institute of International Finance believes that countries with similar production intensity within the same sectors are better positioned to capture existing production from China. Fig 3 shows the concentration of local value-add or the share of each country’s domestic contribution to their total exports in the different sectors.4
Vietnam and India appear well placed to compete in textile exports. In fact, Vietnam’s textile exports rose 10% in 2019 during the US-China trade dispute6. Besides textiles however, India could become more important for labour-intensive production such as iPhone assembly. Vietnam is also poised to become a major production hub for Apple peripherals such as AirPods and Apple Watch. While Fig. 3 suggests that Indonesia’s and Malaysia’s competitiveness lies in producing lower end consumer goods, Lilian See, Eastspring Malaysia’s Head of Research begs to differ. She points to the recent manufacturing facilities set up by Lam Research and Smith + Nephew as a testament to Malaysia’s ability to move up the value chain.
Lam Research, a US company that designs and manufactures semiconductor processing equipment recently added Penang to its list of global production locations which include the US, South Korea and Austria7. Meanwhile, the first batch of production for Smith + Nephew, a British multinational medical equipment manufacturing company, from its Penang plant is expected sometime in 20208. In Lilian’s view, Malaysia’s ability to meet the stringent demands of the highly regulated medical devices industry showcases the country’s robust and high-quality supply chains.
Meanwhile, Korea and Taiwan seem to be the only two economies which can compete in higher end manufacturing. Taiwan may become a critical location for global tech giants’ Research & Development given Google’s and Apple’s recent investments in Taiwan for datacenters, system integration, new display technology, chipset and optical electronics. Meanwhile, Thailand, well known for its food supply chain, appears to have few contenders in that segment.
Besides manufacturing capabilities, the ease of doing business, government policies, the quality of infrastructure and labour are also other important considerations. The 2019 Global Competitiveness Report shows that Asian economies in general are ranked in the top 50% among 141 countries, with a number of economies ranked within the top 30. See Fig. 4.
Eastspring Vietnam’s Head of Fixed Income believes that Vietnam’s edge lies in its relatively large and young labour force, competitive wages, political stability and supportive policies. She expects the trend of moving production out of China, which had started as a result of rising US-China trade tensions, to continue.
Meanwhile Dr Somjin Sornpaisarn, TMBAM-Eastspring’s CEO believes that plans to build out Thailand’s high-speed rail network, ports and airport as part of the Eastern Economic Corridor (EEC) development, will help lift the country’s competitiveness. The EEC aims to revitalise Thailand’s Eastern Seaboard, which has been the country’s industrial production powerhouse for the last 30 years. Dr Somjin sees the EEC as a viable production base for companies looking to diversify their supply chains.