The 2019 novel coronavirus outbreak is expected to drive more multinational companies to shift their production bases from China in a bid to mitigate the effects of supply chain disruption, benefiting nations like Taiwan and Vietnam, DBS Bank Ltd (星展銀行) said on Thursday.
The outbreak is creating uncertainty for companies in the Chinese market and weakening their confidence in the Chinese government, ranging from governance, healthcare infrastructure, mass communication, environmental protection and other related issues, the bank said.
Taiwan has benefited from the US-China trade dispute and obtained pledges of domestic investment worth NT$716 billion (US$23.76 billion) from 170 companies as of last week since a government program was launched at the beginning of last year, while foreign direct investments approved by the government last year hit the fourth-highest level on record, totaling US$11.2 billion, the latest Ministry of Economic Affairs data showed.
However, disruption to manufacturing in China due to the coronavirus has raised concerns over the negative spillover effects on economies involved in the regional supply chain, including Taiwan, South Korea, Vietnam and India.
Singapore-based DBS economist Ma Tieying (馬鐵英) said that the global textile and electronics sectors would be most vulnerable to disruption in the Chinese supply chain in the short term.
“Taiwan, South Korea and Vietnam would be hit the hardest, either in the form of a delay of downstream production or a shortage of upstream raw materials supply,” Ma said in a report.
However, from a long-term perspective, multinational companies might begin to doubt China’s growth sustainability and move to reshuffle their supply chain, if the Chinese public governance and crisis management capabilities fail the test this time, Ma said.
Still, the risk of supply chain disruption cannot be underestimated, as China imports most intermediate goods from Taiwan, Japan and South Korea, and ships its intermediate products mainly to Japan and South Korea, followed by India and Vietnam, DBS said.
Moreover, the market is concerned about industrial supply and demand disruptions caused by the coronavirus, if component suppliers in China are forced to suspend production for a longer period, while decline in consumer confidence might affect replacement demand, it said.
The bank’s research indicates that China accounts for 30-40 percent of total exports of textiles and footwear products, as well as 20 percent of global exports of machinery and electrical equipment.
In the electronics supply chain, China also plays a significant role, as, for instance, about half of Apple Inc’s 800 global production bases are in China, ranging from speakers, batteries and flat panels to semiconductor packaging and testing, DBS said.
“Taiwan and South Korea rely the most on China for their exports of intermediate products — more than 40 percent of the related exports are destined for the Chinese market,” Ma said. “Vietnam stands out in terms of dependence on China for the supply of intermediate goods — more than 30 percent are sourced from China.”
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