Southeast Asia is the top choice for firms diversifying away from China

Southeast Asia has emerged as a top choice for firms looking to diversify production away from China, including Chinese companies, amid escalating tensions between Washington and Beijing.

“Southeast Asia is well-positioned to benefit significantly from the China+1 phenomenon as foreign and Chinese companies diversify their supply chains and operations,” said Kuo-Yi Lim, co-founder and managing partner of venture capital firm Southeast Asia Monk’s Hill. Enterprises.

“Geopolitical [tensions have] accelerated these activities, which started during the Covid lockdowns,” Lim added.

The “China Plus One” strategy aims to reduce the risks associated with total dependence on the China market or supply chain by diversifying manufacturing operations, expanding into other countries, even as companies maintain a presence in China.

This has spurred greater investment in the ASEAN bloc. Foreign direct investment in the ASEAN economies of Indonesia, Malaysia, the Philippines, Thailand, Singapore and Vietnam rose to $236 billion in 2023 compared with an annual average of $190 billion between 2020 and 2022, OCBC economists said in a May report. .

Inflows came mainly from the US, Japan, the European Union as well as mainland China and Hong Kong.

“The ASEAN-6 region has benefited from a diversification of global and regional supply chains, as well as the adoption of ‘China +1’ strategies. FDI inflows from mainland China and Hong Kong SAR to the region have increased, with manufacturing and certain services. taking the bulk of the inflows,” OCBC economists said.

Vietnam has become a key manufacturing location for Apple as the US tech giant looks to diversify its product assembly away from China.

Beijing’s tough Covid-19 measures and worker unrest at Foxconn’s main iPhone factory had largely halted production.

MacBooks, iPads and Apple Watches are reportedly being made in Vietnam.

“Vietnam’s proximity to China has long made it a preferred destination for supply chains over offshore processes that can drastically reduce production costs,” said Yinglan Tan, founding managing partner at Insignia Ventures Partners.

Vietnam is already a major research and development center for Samsung, as well as a manufacturing and export base for Samsung smartphones, according to local reports.

“Vietnam has added advantages. Its competitive labor costs, market access – it has a bunch of free trade agreements – so it makes it much easier to export to other markets, for example, the EU,” Kai Wei Ang, ASEAN economist at BofA Securities, told CNBC’s Squawk Box Asia earlier this month.

Malaysia has seen semiconductor firms including Intel, GlobalFoundries and Infineon set up or expand operations in the country in recent years amid US-China tensions.

“Malaysia has seen a resurgence in its long-standing semiconductor sector, attracting new investment from companies such as Intel,” said Lim of Monk’s Hill Ventures.

Industry watchers said Malaysia’s advantage has always been its skilled work in chip packaging, assembly and testing and relatively lower operating costs.

“It’s not just the semiconductor stories in Malaysia that are picking up. You see a lot more data center investment coming into play, especially in the last couple of months, and maybe there are other sectors, like solar, connected components with EV as well. So Malaysia is getting that breadth of investment in the country,” said Ang of BofA Securities.

The archipelago has large resources of copper, nickel, cobalt and bauxite – crucial for the production of electric vehicle batteries.

“Indonesia – that’s also another interesting country – where they hope to emerge as an integrated EV hub,” Ang said. “It’s probably still at a very early stage, but they’re looking to increase capacity throughout the supply chain.”

The Indonesian government has lured EV companies with incentives to set up local manufacturing bases.

“China+1 is not just for foreign companies in China. Geopolitics and international trade developments also push Chinese manufacturers to diversify their production geographically,” said Anders C. Johansson, director of the China Economic Research Institute in Stockholm under Stockholm School of Economics. LinkedIn post last week.

The industry ministry said earlier this month it had entered into an agreement with four Chinese companies – Neta, Wuling, Chery and Sokon – to establish Indonesia as an EV manufacturing hub.

Chinese electric vehicle maker BYD plans to start commercial EV production in Indonesia in 2026, according to local reports.

Singapore has been “a top destination” for firms looking to set up regional headquarters as well as expand across the region, according to a report by ASEAN Briefing.

“Today, this diversification has extended not only to global businesses like Apple and supply chains, but also to entrepreneurs and startups looking to build global businesses in the Asia-Pacific region,” said Tan of Insignia Ventures Partners.

“Singapore in particular has become a destination for these entrepreneurs to set up global business headquarters while still being able to, for example, raise money from the US and hire engineers in China,” Tan added.

Chinese companies including TikTok and Shein have set up regional headquarters in Singapore, which is seen as a stable base amid geopolitical headwinds.

“Singapore, with its status as a trusted hub in financial and regulatory infrastructure, will continue to attract companies seeking an Asian base in these uncertain times,” said Lim of Monk’s Hill Ventures.