ASEAN could benefit from US-China trade spat due to supply chain rethink

27 November 2018 4 min. read

The nations of Southeast Asia could be set to benefit from the growing US-China trade war says  Bain & Company, as companies continue to reassess their supply chain options.

‘There are no winners in a trade war,’ KPMG’s Chief Economist for Australia Brendan Rynne recently repeated in reference to the growing US-China trade spat. But perhaps not everyone agrees with the often repeated mantra, with Bain & Company partner Satish Shankar suggesting there could ultimately be significant benefits for ASEAN nations as global companies reassess their supply chain strategies – a view backed by PwC Asia Pacific Chairman Raymond Chou.

Speaking in an interview with CNBC, Satish Shankar, a managing partner of Bain & Company's Southeast Asia practice and expert in agribusiness, advanced manufacturing, and transportation among other areas, said that although there will likely be some short-term pain in the region as a global and US exporting hub, the nations of ASEAN could be set to significantly benefit in the long-term as a result of the US-China trade conflict.

The windfall will come courtesy of a supply-chain upheaval as companies reassess their options, a process already underway for many – such that should trade tensions relax Southeast Asia will still likely capitalise. “The process is already underway and the experience companies are having in places like Vietnam and Thailand has been positive,” Shankar told CNBC, adding that supply chain diversification in of itself is good business practice to avoid risk through disruption.ASEAN could benefit from US-China trade spat due to supply chain rethink“I believe the future is in distributed supply chains, where you’re not relying on just one or two sources of a particular product given the uncertainty involved,” he said, adding that he didn’t believe such a strategy necessarily translated to fragmented supply chains. “You can still have scale in many of these regions, and you’ll still have specialisation with certain parts or products being built in certain places because the ecosystem has been well developed.”

Still, the impacts of the US-China trade dispute may be felt in the shorter-term: “Certain intermediate exports that go into China, and then onto the U.S., are going to be impacted in industries such as textiles and electronics,” Shankar said. “However, in the long term, we feel pretty confident that ASEAN is a very attractive alternative supply chain base for companies looking to diversify away from China.”

The broader sentiment of a Southeast Asian boon has been backed by PwC Asia Pacific Chairman Raymond Chou, speaking on the sidelines of the recent Asia-Pacific Economic Cooperation CEO summit in Papua New Guinean capital Port Moresby (for which the Big Four acted as an official knowledge partner) in a separate interview with Chinese international English-language news channel CGTN.

Responding to the question of where the manufacturing hub will be going forward, Chao said, “I think they will be more local-to-local, and in Southeast Asia clearly, as we’ve already seen some of that happening. Vietnam is one, Malaysia is another, where people are making alternative backup plans already.” The PwC chairman however adds a caveat: “The constraint is obviously that there are numbers of factors play here – labor cost, tax rules and capacity.”

A recent report from McKinsey & Company argued that ASEAN manufacturers could recapture the market through digital technologies – projected by the firm at a potential regional worth of up to $627 billion in productivity gains by 2025 – citing rising wages in China (the average daily wage cost for a manufacturing employee in China in 2016 stood at $34.40 compared to $7.80 in Indonesia for example) and the country’s transition toward a domestic consumption-based economic model.