ASEAN poised to increase share of global trade as manufacturers seek more resilient supply chains

Singapore and other ASEAN economies may have a unique opportunity to increase their share of world trade as an increasing number of global manufacturers seek to move sourcing of supplies and production out of China.

The trend is not new, but China’s disruptive Covid-19 lockdowns and intensifying tensions with the United States have added a sense of urgency among multinational companies seeking more resilient and conflict-free supply chains.

Supply chains act like veins through which global trade flows. The increasing efficiency of this intertwined web has for decades guided investments into cost-effective production, and then smoothed the flow of finished products to willing consumers.

But this arrangement is buckling under the pressure of geopolitics and increased competition for investments and jobs.

The Hong Kong-based Pacific Basin Economic Council, Monash University Malaysia and consultant KPMG recently published a joint study on the subject of shifting supply chains in the Asia Pacific region. The study, based on a sample of 132 companies that are considering changing or have already altered their supply chain destinations between 2018 and 2023, found geopolitics taking the lead as the top concern over tariffs that started to rise as the US-China trade war intensified.
 

Experts believe the reconfiguration of supply chains provides ASEAN companies the incentive for vertical integration – taking direct ownership of various stages of production rather than relying on external suppliers.

This vertical integration, which can also boost intra-ASEAN connectivity, trade and capital flows, is important because companies seeking an additional or alternative base of production and source of supplies will be hesitant to move to a region where most of their vendors and partners are also dependent on imports from China.

Moody’s Analytics research showed that nearly 70 per cent of multinationals worldwide are ramping up their investments in supply chain risk detection, which involves seeking third-party risk management and supplier due diligence tools.

This shows that as global players future-proof their businesses from reputational damage, sanctions and supply shocks, they will look closely at the vulnerabilities of their vendors as well.

Mr Tom Kidd, a Singapore-based partner of consultants Bain & Company, said: “As global businesses are looking to diversify their supply chains outside of China, that’s a very clear opportunity for businesses in Southeast Asia to essentially gain share versus Chinese businesses and play a larger role in the global supply chain.”

However, competing with China is a tall order. In 2021, China accounted for over 15 per cent of global goods exports. In comparison, ASEAN’s share was only 7.8 per cent. China’s dominance of global goods exports follows decades of strong foreign direct investment that helped it scale up manufacturing and the skill set of its labour force.

At the same time, China has lost cost competitiveness in many industries as it maximised the potential of its cheap migrant workforce, which is now shrinking. As wages rose, the cost of a host of manufacturing inputs soared as well.

Meanwhile, increasing emphasis on weaning away growth drivers from trade to domestic consumption – the dual circulation economy – means China’s overall policy framework of incentives and subsidies is now more tilted in favour of producing higher-value goods and services that are less price sensitive.
 

In the past decade, several foreign and even Chinese producers of lower value-added industries such as footwear and garment manufacturing have moved to Vietnam, Cambodia and Myanmar – a strategy popularly known as “China-plus-one”. But even these offshore operations remain heavily reliant on imports from China of inputs and capital goods that are essential to them.

Japanese companies that were among the first movers under the China-plus-one strategy found that their manufacturing facilities in ASEAN were still sourcing 13.5 per cent of raw materials and parts from China, noted a 2021 report by the Mercator Institute for China Studies, a German think-tank.

Meanwhile, their factories operating in China sourced more than 90 per cent of inputs locally, and the rest from Japan, making them less vulnerable to external shocks, it said.

Mr Stewart Paterson, research fellow at Hinrich Foundation, said the rise in China’s cost base and its intent to move up the value chain give an opening to some Southeast Asian economies to replace China in the global value chain.

“However, breaking the dependency on China will involve a far higher degree of vertical integration and intra-ASEAN connectivity,” he noted.

Mr Paterson said China’s imports from ASEAN rose by about 56 per cent from 2011 to 2020. In the same period, ASEAN’s imports from China grew by 94 per cent.

Taking into account the US$700 billion (S$930 billion) rise in ASEAN’s combined gross domestic product (GDP) over the same period, it becomes obvious that every US$100 of ASEAN GDP growth was accompanied by US$20 of imports from China. That shows ASEAN’s marginal propensity to import from China is 20 times higher than China’s marginal propensity to import from ASEAN.

“Trade flows over the past decades suggest measures to facilitate trade between China and Southeast Asia have an asymmetric impact. The goods tend to flow south, and earnings flow north. Greater intra-ASEAN trade can alter this dynamic,” Mr Paterson said.

Boosting intra-ASEAN trade will become even more important as the world’s largest economies – the US, China and the euro zone – increase their efforts to localise their supply chains and production.

The Monetary Authority of Singapore’s latest Macroeconomic Review report said that the US and China together accounted for more than 70 per cent of total semiconductor investments in 2021, underpinned by domestic investments amid the push for greater localised sourcing.

This trend could intensify over time, as seen by direct investment flows. “Greater (localised) sourcing among the US and China could have an adverse impact on electronics and overall output in the rest of Asia,” it said.

While the April report showed Singapore has maintained its share of around 6 per cent in global electronics exports from 2017 to 2021, the lack of gain in the share is notable as well.

Experts like Mr Paterson believe ASEAN could increase its footprint in global manufacturing output by putting to greater use the diversity of its 10 economies, some of which offer a cheaper cost base while others higher productivity, innovation and the access to higher-value chains.

Source: The Straits Times © SPH Media Limited. Permission required for reproduction.