Executive Summary
Talks of decoupling and moving supply chains away from China have dominated headlines, particularly in light of the US-China trade tensions and Covid-19 pandemic. However, the reality is much more nuanced. Shifts in supply chains have been different across industries, with some sectors expanding production in China and others shifting parts of production to other Asian countries. Going forward, top global and even Chinese companies, particularly those in higher-value supply chains, will likely adopt a “China plus 1” strategy. They will maintain a supply chain in China focused on supplying the large domestic market and simultaneously diversify manufacturing to other Asian countries to supply the US and other restricted markets. Overall, developing Asia will be the primary beneficiary of any future potential decoupling.
China is the FDI leader for inflows and outflows
According to the World Investment Report by the UN, China was the largest recipient of foreign direct investment (FDI) inflows in 2020, accounting for 27% of total global FDI inflows. Companies continue to invest in China, despite the on-going trade and geopolitical tensions. China is also the leader in FDI outflows, making China the largest investor worldwide. These figures indicate that decoupling on a large scale away from China has not yet occurred.
Deepening of supply chains in China
Companies that derive significant sales revenues from China have increased their investment in China in recent years, as part of their ”in China for China” strategy. In particular, global players in advanced manufacturing such as high-tech and automotive sectors, have deepened their supply chains in China.
For example, Apple has increased the number of its suppliers in China this year. Of its top 200 global suppliers, over 25% are based in China and over 80% have at least one production facility in China. Similarly, Tesla, the world’s most valuable car company, has built a Gigafactory in Shanghai, as one of its primary global production facilities. Over 90% of the parts for its “Made-in-China” Model 3 and Model Y are sourced from Chinese suppliers. These cars will be sold to customers in China, Asia and Europe.
Manufacturing shift out of China to Rest of Asia
Companies in labor-intensive industries such as apparel, footwear and toys have already been shifting their supply chain out of China to other Asian countries in the last ten years. Companies like Nike, Adidas and Hasbro have moved to Vietnam, India and Bangladesh primarily because rising labor costs in China, rather than for geopolitical or trade tensions.
Other companies in manufacturing and assembly have expanded their manufacturing to other Asian markets, as part of their “China plus 1” strategy. For example, LG, Sharp and Foxconn have increased their capacity by building production facilities in Vietnam, Thailand and Indonesia, while maintaining their manufacturing base in China. This enables them to access new markets and avoid US tariffs, and in parallel retain their foothold in China.
The shift in investment to Asia is reflected in the most recent figures released by the UN, where FDI flows to Asia increased to US$535 billion in 2020 (and dropped in all other regions). Asia is now the region with highest amount of FDI inflows, accounting for 54% of global direct investment.
Overall, China remains a priority market for most multinational companies. As such, decoupling from China en-masse will be unlikely in the short term. Future shifts in supply chains by global players will likely benefit other Asian countries.The ACATIS QILIN Marco Polo Fund is well-positioned to capture both Asia and China investment opportunities.