Asia to stay on top as supply chains diversify

Whether in the form of ‘re-shoring’, ‘near-shoring’ or ‘friend-shoring’, we believe the regionalisation of supply chains will likely continue to gather momentum. To the extent their focus shifts from cost optimisation to building supply-chain resilience, companies may see an increasing need to relocate their production facilities. This may imply sustained inflows of foreign direct investment (FDI) and increased corporate capital spending in the destination countries. For example, Korea’s Samsung, the largest global memory chip maker, has lately pledged to invest USD228 bn in a new semiconductor complex in its home country in the years up to 2042. In our view, FDI inflows into Asia will continue to be stronger than for the other two major economic regions (Europe and the Americas), as they have been in the past decade. 

Emerging industrial hubs, including the ASEAN countries, India and Mexico, may see a gain in their market shares of global exports—particularly in labour-intensive sectors as corporates seek to diversify production capacities under ‘China Plus One’ strategies.

That said, reducing dependence on China is easier said than done, especially for industries that rely heavily on technologically advanced inputs (including high-density interconnect circuit boards, precision castings, quality synthetic fabrics and so on), where China has an edge as it moves up the value chain.Building new industrial ecosystems and supplier infrastructures comparable to what China has to offer will take enormous amounts of time and capital. Furthermore, China’s vast and growing consumer market will likely encourage businesses to maintain or even to grow their presence there. As a result, China will likely remain a top global manufacturing powerhouse, with some of the more labour-intensive industries being replaced by higher value-added sectors.

It is also worth noting that, despite ongoing supply-chain relocation, the complimentary trade relationship between China and the ASEAN economies may tighten further. The establishment of the Regional Comprehensive Economic Partnership (RCEP) in January 2022 could be an additional catalyst in this process. Accounting for one-third of global GDP and trade, the RCEP has been hailed as the world’s largest free-trade agreement and is expected to enhance Asia’s regional economic integration by improving the overall business environment, harmonising tariffs and coordinating efforts to attract more foreign direct investment in the years to come.