When Chinese businesses begin to look at manufacturing elsewhere, its generally an indication that certain foreign – and especially American investors into Asia should start to do the same.
Chinese based manufacturers have been relocating part, or all of their businesses into the ASEAN region – and the manufacturing hubs in Cambodia, Laos, Indonesia, Malaysia, Myanmar, the Philippines, Thailand and Vietnam for much of the past two years. Why?
Partially this is driven by the US-China tariff war, which does not impact on businesses based in ASEAN.
One way around the problem is to shift production and sell to the US from another, nearby country such as Vietnam, the Philippines, or Indonesia.
Another reason is that Chinese wages have grown, and countries such as Cambodia, Laos, and Myanmar can offer rock bottom wages albeit at a production cost of lower productivity. Others, such as the Philippines, hit a sweet spot; low wages, but improving infrastructure that will only get better over time.
Then there is, paradoxically, the China market itself – huge, growing and with a massive middle-class consumer base.
The ASEAN nations have a Free Trade Agreement with China – meaning Chinese companies can find it less expensive to evolve their China operations to sales and distribution centres, shift production to ASEAN, and export back to China.
ASEAN itself also has free trade amongst its members as well as a Free Trade Agreement with India. Shifting production to ASEAN then makes a great deal of sense.
On the Belt & Road Initiative, projects in ASEAN that fall under this banner are also increasing.
Xi Jinping, China’s President unveiled ambitious plans in 2013, along with his ASEAN counterparts to build a series of roads, railways, ports and industrial parks linking the country to other parts of Asia.
This is largely well underway, a few sidesteps considered. Since then, China’s outward investment in the Belt & Road countries – including ASEAN – has risen faster than its total outward investment.
Looking purely at Chinese investment and construction contracts in South-East Asia – the ASEAN region – these have nearly doubled to US$11 billion in the first half of 2019, from US$5.6 billion in the second half of 2018, an effective doubling of trade volume.
Many of these infrastructure projects are based on upgrading or building new transport and energy links, and are mostly in Cambodia and Vietnam, which both shares a land border with China, Indonesia, which offers huge manufacturing potential but needs infrastructure in the form of roads, rail and port upgrades put in place, and Singapore, which is co-developing projects with nearby Indonesian and Malaysian islands, intended to be free trade export zones catering largely, but not exclusively, for Chinese manufacturers wishing to place a legitimate “Made in Indonesia” label on their production.
In terms of the export manufacturing trade, and circumnavigating the U.S tariffs, Chinese and foreign investments from China are also shifting to ASEAN as they move parts of their supply chain to the region to circumvent the higher American tariffs; the main beneficiaries being Malaysia, Thailand and Vietnam.
New registered foreign direct investment from China and Hong Kong into Vietnam surged by 200% in the first seven months of this year. An example of this is GoerTek, one of Apple’s main contract manufacturers, who have invested US$260 million to establish a plant in Vietnam to make the popular AirPod wireless earbuds.
The region is also getting a boost from new industries. The China Global Investment Tracker noted that Chinese investment in South-East Asia’s tech sector hit US$2.5 billion in the first half of 2019, surpassing the total amount for 2017.
The Malaysian Investment Bank Maybank has noted that China’s venture capital investment in ASEAN start-ups rose more than fourfold to US$667 million in the first half of this year, while prominent Chinese VC firms such as Qiming Ventures and CGV Capital — backed by Alibaba, Xiaomi and Meituan-Dianping — are also opening offices in Singapore.
The “China Plus One” concept – keeping China-based operations open to service the Chinese domestic market, while shifting all or part of production elsewhere – has been around for over a decade now.
All that the US-China tariff war has done is accelerate that – which has been part of the point, so as to minimize supply risk away from China alone.
Although the process has been handled by Washington DC in a somewhat brutal manner, the result has been the same, and something that American businesses should take note of – always follow Government policy.
In this case, it’s simple – move your US market production facilities to ASEAN.