Companies in the world’s electronics supply chains are preparing to shift part of their production lines out of China to mitigate the negative effects of higher US tariffs, with Malaysia, Thailand and Vietnam emerging as preferred destinations, DBS Bank Ltd (星展銀行) said last week.
“These three economies are in a good position to undertake the electronics work transferred from China in the lower value-added segments, such as the assembly of computers, mobile phones and consumer electronics products,” Singapore-based DBS economist Ma Tieying (馬鐵英) said in a report on Thursday.
Chinese acoustic components maker GoreTek Inc (歌爾) has already shifted part of its wireless earphone assembling capacity from China to Vietnam, and Taiwanese firms in Apple Inc’s supply chains are also considering relocating their production bases to areas outside of China, local Chinese-language media have reported.
Hon Hai Precision Industry Co (鴻海精密), for instance, is reportedly mulling establishing a new plant in Vietnam to assemble iPhones and expanding existing facilities in India to produce higher-end iPhones, while Pegatron Corp (和碩), Compal Electronics Inc (仁寶) and Inventec Corp (英業達) have been looking for opportunities in Vietnam and Indonesia, reports said.
DBS said that the emerging Asian economies with existing production networks should be well-positioned to receive the electronics work transferred from China, but supply-chain companies should also take other “supply-side factors” into account when formulating relocation plans, including wage costs, labor skills, infrastructure conditions, macroeconomic stability and institutional efficiency, as well as tax and trade policies.
Based on the bank’s research, which adopted criteria such competitiveness, ease of doing business and per capita GDP, the report showed that Thailand and Malaysia are most similar to China in terms of the overall supply-side conditions to attract foreign direct investment.
Wages in India, Indonesia, the Philippines and Vietnam are lower than those in China, but these countries also lag behind China in the areas of education, infrastructure, macroeconomic conditions and contract enforcement, the report said, adding that companies venturing into these markets would need to cope with various structural challenges, such as the high costs associated with labor training, logistics, risk management and legal disputes.
“While investment diversification from China to other emerging Asian economies could well be expected, a substitution of the Chinese supply chain remains very unlikely,” Ma said.
That is because the effect of industrial clustering and economies of scale for large-scale electronics supply chains, as well as China’s huge domestic demand, would dissuade foreign companies from exiting the Chinese market completely, the economist said.
While there is hope that a trade deal between the US and China is coming, views differ on what kind of deal it would be.
A common view is that, trade deal or not, the dispute between the US and China might eventually evolve into a technology dispute, with the US setting strict investment restrictions on Chinese companies in the US and establishing more export controls on technology, while building an alliance to limit Chinese access to advanced technology.
DBS said that the intensified technology competition between the two countries might pose “a double-edged impact” on Taiwan and South Korea.
“A tech war may positively affect South Korea and Taiwan through reducing the competition pressures resulting from China’s rapid industrial upgrade,” Ma said, referring to aggressive Chinese companies in the smartphone and IC foundry industries.
“On the other hand, a tech war could disrupt the China-centered electronics supply chain and therefore hurt the upstream producers in South Korea and Taiwan indirectly,” she said
“The overall picture is especially complicated for Taiwan, which is highly involved in the Chinese supply chain and meanwhile, operates as a contract manufacturer for the upstream US tech companies,” she added.
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