U.S.-China Trade War Boosts Fast-Growing Southeast Asia22/02/2019
Trade tensions between the U.S. and China are adding rocket fuel to the liftoff of Southeast Asia's economies. American tariffs on Chinese-made goods have sped the shift of contract manufacturing to ASEAN (Association of Southeast Asian Nations) countries, such as Vietnam and Thailand. The increase in foreign direct investment into the 10-nation regional trading bloc has been underway for a number of years, however, the trade war continues to drive even more capital into the region. Nikkei just published an article this month titled: “Southeast Asia bucks trend of sinking global foreign investment”.
Our Singapore-based venture capital firm is tracking these trends closely. They look like a replay of previous events in China itself, where export manufacturing and FDI helped to create both wider prosperity and a hothouse environment for high-growth tech startups. Now the torch is being passed to Southeast Asia—fanned higher by the trade war. A recent article in The Economist, highlights that “[U.S.-China] trade tensions are boosting activity in South-East Asia.”
“We are ready to grab the opportunity,” Vietnam’s Prime Minister Nguyen Xuan Phuc told Bloomberg in January. His country has a head start. Vietnam began making athletic shoes and sportswear for Adidas, Nike and other firms in the 1990s. Samsung now makes most of its mobile phones in Vietnam—amazingly, the nation has become the chief source for the world’s largest phone producer, while the company is Vietnam’s largest employer. And last fall the Chinese acoustics manufacturer Goertek announced that its production of Apple’s Airpods wireless headphones will move to Vietnam, because of the trade war.
Thailand has growing clusters of vehicle assembly plants for Japanese, U.S., and Chinese auto companies, while also making components for tier 1 suppliers. Panasonic is joining the latter by shifting production of auto stereos from China. Meanwhile, the Thai electronics maker SVI has been sifting through requests from firms which, until now, had their work done in China. “The trade war is good for us,” SVI’s chief executive, Pongsak Lothongkam, said to Business Insider. "We have been approached by so many companies that we have to prioritize."
Not all of the movement from China to Southeast Asia is in high-tech or high-value goods. Cambodia snared bicycle production for U.S.-based Kent International, whose budget-priced bikes are sold in big-box retail outlets and online. Other light manufacturing for export, such as in apparel and furniture, is picking up across ASEAN countries while Chinese volume tails off.
But the shift is on. In 2012, Japanese firms had more direct investment and more personnel on the ground in China than in ASEAN, but the picture has flipped rapidly. Numbers from 2017 showed Japan investing $22 billion in ASEAN versus just $9.6 billion in China, while Japan’s Foreign Ministry reported that roughly 83,000 expats are working in ASEAN, surpassing the 70,000 in China.
Further, it seems the U.S.-China trade war—mixed with uncertainty over the countries’ future trade relations—has affected key players’ outlooks as well as results. Late last summer, a survey of U.S. firms manufacturing in China found that 18.5% had either moved production to Southeast Asia or were considering it. Early this year, when attendees at the Asian Financial Forum in Hong Kong were surveyed on where they felt good investment returns in 2019 were most likely,39% said Southeast Asia, 35% indicated China and 16% opted for the U.S.
Labor costs have been a fundamental driver of shifting manufacturing to Southeast Asia. ASEAN wages can run as low as one-third to one-half those in China. But this isn’t the only factor. Production in the majority of industries is incorporating new technology and smart automation. If you need to upgrade, why not start fresh in a new location instead of trying to retrofit? Here again, Southeast Asia beckons.
I launched my VC firm in Singapore seven years ago when my partners and I saw huge opportunities for startup activity across the region. Now the manufacturing shift promises to take that activity to new levels. As we witnessed in China, the growth in the manufacturing economy contributed to 87% of private sector R&D in the early years, not only promoting innovation and productivity in the country but subsequently creating a budding technology sector for future growth. This manufacturing shift towards the ASEAN region will mean more Southeast Asians working with and learning about advanced technology and more prosperous societies creating in-country consumer demand.
Which countries are poised for the greatest takeoff? Many observers favor Vietnam, which already exports vigorously ($94 billion in electrical and electronics goods alone in 2017), offers a large workforce (population over 95 million, skewed young), and has worked to build good trade relations globally. But all ASEAN nations stand to gain from increased export manufacturing. Japan’s Nomura Group sees significant upside for Malaysia, Thailand, The Philippines, Indonesia, Singapore, and Cambodia along with Vietnam.
Certainly, challenges still loom. Tech skills will need to improve in many ASEAN locales, including places like Vietnam and Thailand, where low unemployment means the most talented workers at present are already taken. Infrastructure build-out across the region will be needed, too. ASEAN countries are facing an increasing infrastructure deficit mainly due to rapid urbanization and population growth. The World Economic Forum, in a 2018 white paper co-authored with A.T. Kearney, urged the ASEAN nations to collaborate on issues like these to achieve full “readiness” for production growth.
As a whole, Southeast Asia is not entirely safe from the effects of the U.S.-China trade war. The benefits mentioned above might take a long time to fully come into effect and until then, the region may suffer in the short run from lower trade volumes and a lack of investor confidence. Given both the U.S. and China are major export markets for Southeast Asia, lower trade volumes from China could negatively affect countries that are more reliant on international trade, like Singapore, Malaysia, Thailand and Vietnam.
And ultimately, a classic Catch-22 looms. As Southeast Asian countries become wealthier, wages will rise and their cost advantage will fade. Tomorrow’s ASEAN firms will have to compete on innovation, quality and ability to serve their home markets. Chinese firms have benefited from the immense size of their domestic market, and now rely on it increasingly.
Keep in mind, though, that the ASEAN region also has a big home card to play. Its combined population of 650 million is larger than either the EU or the U.S.-Mexico-Canada NAFTA trio. With the U.S.-China trade war now having its effects, I’m even more bullish on Southeast Asia’s economic potential than before.