Insight: Supply chain reaction: trade war refugees race to relocate to Vietnam, Thailand

ITC Neocloud

28/11/2018 23:00

* Global companies shift production, supply chains out of
China
    * Strong competition for suppliers, facilities in emerging
Asia 
    * Vietnam, Thailand popular choices but face constraints
    * Infrastructure bottlenecks, labour shortages, red tape
hold
firms back

    By Farah Master, Orathai Sriring and Anne Marie Roantree
    HONG KONG/BANGKOK, Nov 29 (Reuters) - Fred Perrotta spent
four years building a network of Chinese suppliers for his line
of trendy backpacks, but as soon as the United States announced
tariffs on almost half of its Chinese imports, he started
looking for suppliers in other countries. 
    That process is now so far advanced it would be too late to
reverse it even if U.S. President Donald Trump and his Chinese
counterpart Xi Jinping call a truce in their growing trade war
at this week's G20 summit, the 33-year-old said.
    Perrotta's company, Tortuga, is joining what industry
experts say is the biggest shift in cross-border supply chains
since China joined the World Trade Organisation in 2001.
    The shift is creating stiff competition to secure new
facilities in neighbouring countries and rebuild supply chains
outside of China, home to a fifth of global manufacturing.
    "Everyone is nervous and scrambling around," Perrotta said
by phone from Oakland, California, where he recently took
delivery of the first samples from a potential new supplier in
Vietnam. 
    "Long-term, we will probably shift everything."  
    The scramble is driven by the risk of more, and higher, U.S.
tariffs on China, and fears that nearby emerging economies can
only accommodate new businesses on a "first come, first served"
basis.
    Vietnam and Thailand are emerging as preferred destinations,
but they still face capacity constraints ranging from red-tape
to skilled labour and limited infrastructure.
    
    FRENZIED ACTIVITY 
    Reuters interviews with more than a dozen company
executives, trade lawyers and lobby groups in various industries
revealed a frenzy of activity across Asia in recent months:
executives are requesting product samples, touring industrial
parks, hiring lawyers and meeting with officials.
    In June, Hong Kong-listed furniture maker Man Wah Holdings
 1999.HK  bought a factory in Vietnam for $68 million and said
earlier this month it plans to almost triple its capacity to
373,000 square meters by the end of 2019. 
    "The acquisition is to mitigate the risks posed by tariffs,"
Man Wah said in a statement.
    Vietnam-based industrial real estate developer BW Industrial
says inquiries have surged since October, and all its factories
are now leased out.
    "The manufacturers are from all over the world but they all
have production plants in China and need to start production
ASAP," Chris Truong, a sales manager at BW Industrial told
Reuters.
    In Thailand, SVI Pcl  SVI.BK , which provides electronics
and manufacturing solutions, said it has just selected four new
deals worth about $100 million with existing customers who have
operations in China. 
    "The trade war is good for us," CEO Pongsak Lothongkam said.
"We have been approached by so many companies that we have to
prioritise."
    KCE Electronics  KCE.BK , Southeast Asia's biggest maker of
printed circuit boards (PCBs), has been contacted by U.S.
companies who want to seek a new supplier to replace one in
China, CEO Pitharn Ongkosit told Reuters.
    "It’s a good opportunity. Many customers have contacted us
to ask about our products and prices. But there are no sales yet
as it will take time," he said.
    Stars Microelectronics Pcl  SMT.BK , another Thai
electronics manufacturing services provider, is also getting new
business. 
    "Two (or) three companies will start moving their production
base (out of China) to us soon," CEO Peerapol Wilaiwongstien
said.
    Cambodia is also attracting interest, with Parsippany,
NJ-based bicycle maker Kent International Inc shifting Chinese
production to the Southeast Asian country.
    “We have a big business in the United States,” Arnold
Kamler, the company’s majority owner and chief executive told
Reuters. “There is no choice but to as rapidly as possible look
to move production away from China.” 
        
    DISRUPTION
    The re-sourcing and relocation efforts mark an acceleration
of an already established trend as China's economy shifts
towards services, consumption and high-tech production.
    "We are on the cusp of the biggest sourcing disruption that
we have seen in a generation," said Stephen Lamar, executive
vice-president of the American Apparel&Footwear Association,
whose more than 1,000 members contribute over $400 billion
annually to U.S. retail sales. 
    "The No. 1 thing I hear from companies is along the lines
of: 'For years we have been talking about diversifying from
China and now we have to actually do it'."
    Shifting production can take years to complete: firms need
to secure funding, find the right suppliers, sort out new
logistics - all while dealing with new legal and accounting
issues in a country they may not know well.
    "Any relocation away from China is going to be very slow and
very uncertain," said Aidan Yao, senior Asia EM economist at AXA
Investment Managers. 
    Low tech goods and low value manufacturing would be the
quickest to migrate while higher value-added exports in the
machinery, transport and IT category would likely take decades
to relocate due to high R&D costs and competitive Chinese labour
costs, UBS said in a note earlier this month.     
    Yet a regional client poll by Citi conducted in the last
month showed more than half of them already adjusting their
supply chain to limit upheaval to their business. 
    China's sophistication in areas such as automation means no
one country can replace China, said trade lawyer Sally Peng of
Sandler, Travis&Rosenberg. 
    "So everyone is looking for that China Plus One, Plus Two,
Plus Three country strategy, all the way to Africa," she said.
    Companies hold out little hope for a truce in the trade
dispute when Trump and Xi are due to meet on the sidelines of
the G20 summit in Buenos Aires this week. 
    Indeed, Trump said on Monday he expected to move ahead with
raising tariffs on $200 billion in Chinese imports to 25 percent
from the current 10 percent.  urn:newsml:reuters.com:*:nL2N1Y11LO
    While Chinese export data shows little sign yet of an impact
from the trade war, some economists say that is because
companies are rushing to get shipments out ahead of more
tariffs. 
           
    COLLATERAL VICTIMS
    To be sure, smaller emerging Asian economies are not
necessarily licking their lips about the prospect of the trade
war between the world's top two economies worsening. 
    Growth has slowed in the third quarter across Southeast
Asia, as well as in Taiwan, Japan and South Korea, with
officials partly blaming the trade war for it.
    Thailand's exports of electronic integrated circuits, for
instance, rose 4 percent to the United States in October but
fell 38 percent to China. Vietnam's manufacturing sentiment
indicator is the highest in Asia but is well off its peak. 

    A lack of infrastructure is also a problem for countries
seeking to pick up business.
    Thailand is 41st in World Bank infrastructure quality
rankings, Vietnam is 47th, compared to China's 20th ranking.
    Bangkok is seeking to address that with its Eastern Economic
Corridor, an ambitious $45 billion development project which
plans improvements to deep water ports, airports and railways.
    Beyond infrastructure bottlenecks, red tape - particularly
in Vietnam - remains hard to navigate and skilled labour is not
easily available.
    Vietnam's unemployment rate is 2.2 percent. Thailand's is
even lower. 
    "The proportion of unskilled labour in Vietnam remains large
and there hasn't been any effective plan to improve this issue,
and I don't see any significant change in five or even 10
years," said the vice chairman of the Vietnam Electronic
Industries Association, Nguyen Phuoc Hai.
    "Whether cheap labour will remain one of Vietnam's
advantages in the face of the fourth industrial revolution is
questionable."
 ($1 = 32.9800 baht)

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Asia manufacturing: Vietnam stands out    https://tmsnrt.rs/2PMSvzi
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 (Reporting by Anne Marie Roantree, Farah Master, Noah Sin and
Marius Zaharia in HONG KONG; Orathai Sriring in BANGKOK; Khan Vu
and James Pearson in HANOI; Rajesh Kumar Singh in CHICAGO;
Editing by Marius Zaharia and Lincoln Feast.)
 ((annemarie.roantree@thomsonreuters.com; +852 97387151; Reuters
Messaging: annemarie.roantree.thomsonreuters.com@reuters.net))