‘Heightened protectionism’ could see more firms exit China

7 April 2021

Manufacturing disruptions caused by the coronavirus pandemic and a mood of heightened protectionism are among the factors that could cause more multinationals to shift supply chains out of China, according to a new report.

The annual report from the ASEAN+3 Macroeconomic Research Office (AMRO), a Singapore-based research office that represents the 10 ASEAN members plus China, Japan and South Korea, said ASEAN countries could be the beneficiaries of the shift.

AMRO said industries manufacturing cars, machinery and electronics are more likely to shift production because they are sensitive to labour costs and it is easier for them to relocate.

“More multinational enterprises operating in global value chains that are highly dependent on China will seek to diversify suppliers to build resilience,” said the report.

“ASEAN economies stand to gain in attracting many of the global value chain-related investments.”

AMRO said the growth in direct investment in South East Asia since 2018 could indicate reconfiguration of production.

Examples of companies which have shifted production due to trade tensions include car parts supplier Hyundai Mobis, which moved back to South Korea to escape tariffs, and a major supplier of Apple’s wireless earphones,  GoerTek, which relocated from China to Vietnam in 2018.

The report cited figures from Orbis Crossborder which showed that 14 out of 33 Asian relocation projects went to ASEAN members, mainly Indonesia, while the rest were split between China, Hong Kong, Japan and South Korea.

Overall in 2020, the US accounted for the highest number of relocation projects.

According to the report, such shifts could continue or even accelerate in the post-pandemic period.

However AMRO said China would be difficult to replace as a manufacturing destination in the short term because of its highly efficient and integrated supply chains.

“China remains a strong contender for global value chain location because of its huge domestic market and highly developed ecosystem for manufacturing, which makes decoupling from China difficult,” AMRO said.

“To leave China or Asia altogether is not an option because growth in the coming decades will come mostly from the ASEAN+3 region. Therefore, a China+1 strategy appears to be the preferred strategy among various alternatives.”

The report also expects increased digitalisation of supply chains in the ASEAN+3 region.

“As users become ever more comfortable with new technologies, the ‘flight to digital’ will be a key factor in strengthening supply chains and facilitating global trade,” it said.

However, it added that as ASEAN economies seek to capture new investments as a result of shifts in value chains, it would need to ensure its infrastructure was in peak condition.

“In less-developed ASEAN economies, ‘new infrastructures’ such as charging stations for autonomous cars, should not displace the priority put on basic infrastructures like roads, hospitals, schools, or basic ICT,” the report stated.

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