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

27 November 2018

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.

Global trade shifts as developing market dynamics take hold

17 April 2019

Global trade intensity is on the decline, according to an analysis from McKinsey, with shifts in trade goods and supply hinting at increased maturity in emerging economies.

As global trade becomes increasingly fraught, wider market changes may be missed. According to a McKinsey & Company study, global trade intensity is declining as developing economies, particularly China, increasingly consume domestically produced products. As more demand shifts to developing economies, this trend is expected to continue. Meanwhile, ‘intangibles’ are taking up an increasingly large share of global trade, shifting the trade dynamics away from manufactured goods.

Global trade has seen a massive increase in demand for goods and services produced in far flung parts of the world. Globalisation saw decades of expansion to global trade, with various countries becoming breadbaskets or producers of specific goods. Yet, now the form of trade is changing, with intangibles increasingly becoming part of the trade value chain. The share of services trade is increasing at a rate more than double that of goods.Global value chains becoming more knowledge-intensiveThe past decades have seen increased shift to intangibles in global value chains, with spending on brands, software, and intellectual property (IP) growing as a share of revenue. The shift is part of a wider shift to a knowledge economy. Pharma and medical devices companies as well as machinery and equipment companies, for instance, have the highest share of intangibles, at 66.3% and 29.3% of their capitalised spending in 2016.

This is largely reflective of their patents and other IP. Meanwhile, labour intensive goods such as food and beverages, rubber and plastics and paper and printing, have considerably lower levels of intangibles as part of their value chains, at 2.3%, 3.1% and 3.9% respectively. Agriculture and mining see capitalisation of around 5%. IT has the highest level in the knowledge intensive sector at 13.7%, while professional services stands at 3.5%.Developed economies output to developing economies boomedThe study also notes that recent decades have seen a boom in demand for high production value goods exports to developing economies. As such, the share of advanced economies exports to advanced economies has decreased, from 77% in 1995 to 59% in 2017, while, in total, advanced economies’ exports to developing countries grew from $1 trillion in 1995 to $4.2 trillion in 2017.

Here, the most in demand segment from advanced economies is machinery and equipment, with a net increase of $450 billion between 2000 and 2017, while computers and electronics saw an increase of $364 billion in the same period – with more than half of the $573 billion in total accounted for by demand from China. Chemicals and auto also increased significantly, by a respective $351 billion and $262 billion.Developing countries increase share of global consumptionDemand from emerging economies is also set to grow significantly, as large-scale demographic shifts begin to take shape. The world’s share of consumption has shifted away from advanced economies at scale since 1995, falling from then 81% to 62% in 2017. This is expected to fall further, to 49% of the world’s total by 2030. China in particular is set to pick up pace, representing 16% of all consumption by 2030, with the rest of developing Asia to make up 10%.

The impact on supply and value chains will be significant, according to McKinsey. The shift in consumption could see emerging markets consume two thirds of manufactured goods by 2025, with the firm citing significant shifts in cars, building products, and machinery. One of the consequences of the shift is that more and more of what is made in China is sold in China. This has already had a net effect on the country’s trade intensity, which has fallen as domestic demand picked up.

“Although trade tensions dominate the headlines, deeper changes in the nature of globalisation have gone largely unnoticed,” states the report. “China and other developing countries are consuming more of what they produce and exporting a smaller share. Second, emerging economies are building more comprehensive domestic supply chains, reducing their reliance on imported intermediate inputs. Lower global trade intensity is a sign that these countries are reaching the next stage of economic development.”