News Risk Management05 Dec 2018

Global:Supply chains shift due to US-China trade wars

05 Dec 2018

Cross-border supply chains are shifting, as manufacturers turn away from Chinese suppliers with the ongoing US-China trade war.

Both sides may have reached a breakthrough just earlier this week in slashing some tariffs, but the sourcing of new suppliers already began months ago for some companies.

The shift is creating stiff competition as firms from all over the world seek to find new production facilities in neighbouring Asian countries and rebuild their supply chains outside of China, which makes up a fifth of global manufacturing, reported Reuters.

This is driven by the risk of greater US tariffs on China, and the fears that the nearby emerging economies can only accommodate limited new businesses. Those seeking to grab a share of the China pie must also deal with red tape and infrastructure bottlenecks in these countries.

In particular, Vietnam, Thailand, Cambodia and Malaysia, may benefit as multinational corporations (MNCs) and Chinese firms build new plants and expand their capacities, said a report from Maybank Kim Eng,

However, Vietnam and Thailand, emerging as the preferred destinations, still face capacity constraints ranging from red-tape to skilled labour and limited infrastructure.

The re-sourcing of suppliers to other countries marks an acceleration of an already established trend of China’s economy moving towards services, consumption and high-tech production.

“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’,” Reuters quoted American Apparel & Footwear Association executive vice-president Stephen Lamar as saying, commenting on the effects of the current trade tensions.

Shifting production can take years to sort out with logistics, legal and accounting issues in hitherto unfamiliar markets. 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 labor costs, UBS said in a note.

Some segments, like automotive manufacturing, will be tougher to move as China has already achieved sophistication, said trade lawyer Sally Peng of Sandler, Travis&Rosenberg in the Reuters report. 

Nevertheless, businesses may adjust the supply chain to limit volatility to their business, and some Chinese firms may be left out when the trade war ends.

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