Supply chains: shifting sands

At its peak in the third quarter of 2017, Asia (excluding China) accounted for 23.5 per cent of world exports. At the same time, mainland China’s share stood at 13 per cent.

“If anything, mainland China’s trade share got a boost in the aftermath of the COVID-19 pandemic.”

These supply chain shifts, however, have not impacted mainland China’s dominance in global trade.

Sino-US trade tensions may have given a boost to intra-Asia shifts (for example, Taiwan-based or South Korea-based companies expanding into ASEAN countries) but mainland China’s trade dominance continues.

If anything, mainland China’s trade share was boosted in the aftermath of the COVID-19 pandemic. Mainland China’s quick recovery from the pandemic, at a time when other Asian economies are still battling resurgences, has allowed it to remain dominant in global supply chains. Additionally, capitalisation on medical and personal protective equipment (PPE) demand augmented its aggregate exports.

Overall, mainland China now accounts for 14 to 16 per cent of global trade (through 2020 and 2021). Meanwhile, Asia ex-China’s share is steady around 22 to 23 per cent.

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The RWI/ISL Container Throughput Index shows severe global trade disruptions hit ports in mainland China at the outbreak of the pandemic. But since then, Chinese ports have rebounded swiftly to pre-pandemic levels, firming despite setbacks in May and December 2020.

On the other hand, ports outside mainland China have subsequently experienced deeper disruptions. While throughput is now accelerating, it still lags that of Chinese ports.

Structural advantage

There are barriers to a growing share for Asia ex-China. Significant upfront investments, complex supply chain relations and high intangible asset values may prohibit firms from diversifying their sources of supply in sectors such as electronic equipment or automobiles.

Value chains involving homogenous inputs may become more diverse post-pandemic but highly specialised and complex supply chains are harder to diversify.

For example, the right-shoring of regional supply chains accelerated the integration of the ASEAN Quad (Philippines, Thailand, Malaysia and Vietnam) into the global electronics ecosystem. This, however, has not compromised mainland China’s leadership.

The right-shoring strategy is focused on placement of business processes that provide the optimal combination of cost and efficiency. As a result, the low value-added manufacturing activities will continue to shift to locations among the ASEAN Quad while mainland China ascends the value chain.

More than 45 per cent of export orders of Taiwan-based companies were manufactured in mainland China and Hong Kong in 2020, up 0.7 percentage points from 2019.

According to Nikkei Asia’s analysis, mainland China replaced Taiwan as Apple’s top supplier for the first time in 2020. Among Apple’s top 200 suppliers, 51 were based in mainland China and Hong Kong (compared with 42 in 2018) while Taiwan-based suppliers came in second with 48 suppliers (compared with 47 in 2018).

Mainland China is moving to a new kind of dominance. Its increasingly skilled labour force, access to strategic raw materials and highly developed manufacturing capabilities enable its ecosystem to pivot towards high-tech production with a focus on tech sophistication and cost efficiency.

COVID constraints

The resurgence of COVID-19 cases, coupled with relatively slow vaccination progress, has seen many major Asian economies outside mainland China undergo multiple rounds of lockdowns and restrictions in 2021.

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Concerns have been fuelled by recent events such as the temporary closure of industrial parks in Vietnam in late May/early June and subsequent reduced operational capacities.

Movement restriction orders in Malaysia saw Japanese electrical and electronic equipment manufacturers in Singapore unable to procure raw materials and parts from suppliers, according to a Japan External Trade Organisation report. Foxconn, a leading Taiwan-based contract electronics manufacturer for Apple, shut down facilities in India and Vietnam.

Restrictions on international travel are also a constraint. With travel either suspended or heavily restricted, companies are unable to relocate trained staff to start or manage operations in other facilities.

This ‘drive-break-drive-break’ pattern for economic activity across Asia ex-China has temporarily constrained the region’s potential to take full advantage of supply chain shifts. While supply chain right-shoring will continue organically, COVID-19 resurgences and restrictions will limit its pace and extent.

Bansi Madhavani is a Senior Economist at ANZ

This article was originally published on ANZ’s Institutional website