James Crabtree, known to many in India as the author of ‘The Billionaire Raj’, says that the more the West tries to move to a ‘China+1’ model for sourcing manufactured goods, the more it shoves the rest of Asia into China’s steely arms:
“Global businesses now talk about “friend-shoring”, meaning moving production towards geopolitical partners such as India, Mexico or Poland. Alternatively, they might set up facilities in south-east Asia, where most nations are geopolitically neutral between Beijing and Washington. The likes of Malaysia and Vietnam are often predicted to be winners from decoupling, able to hoover up western businesses as they leave China.
There are problems with this account, however, the first being that so far decoupling has barely begun to happen. Semiconductors are one notable exception, given successful American attempts to stop global chipmakers selling to China. But for all the talk of supply chain de-risking and resilience, similar moves in other sectors are hard to spot.
Western multinationals talk more often about a “China plus one” strategy, in which they keep making things in China but also pick another manufacturing base, Malaysia say, as a hedge….
Take Samsung. Its decision in 2020 to shift production to Vietnam means the South Korean giant now assembles millions of phones in Vietnamese factories each year. Many are then exported to the west. Many components that go into those phones are still made in China, however, so Vietnam must also import more of those too.
Vietnam’s bilateral trade with China has rocketed in recent years, with similar patterns discernible in the rest of what is sometimes called “factory Asia”. Forthcoming research from Aaditya Mattoo, an economist at the World Bank, suggests that east Asian nations have lately been exporting more to the US but also importing much more from China.
The result is a double paradox. First, rather than connecting emerging economies more tightly to the west, decoupling often leaves countries in regions such as south-east Asia more economically dependent upon China, not less. Second, while shifting supply chains around the world appears to leave the west less reliant on China, the continuing need for components that still mostly come from there means the fundamental vulnerability remains.”
If you want to read our other published material, please visit https://marcellus.in/blog/
Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
Copyright © 2022 Marcellus Investment Managers Pvt Ltd, All rights reserved.