U.S.-China Trade War Boosts Fast-Growing Southeast Asia

&l;p&g;Trade tensions between the U.S. and China are adding rocket fuel to the liftoff of Southeast Asian economies. American tariffs on Chinese-made goods have sped the shift of contract manufacturing to ASEAN countries, such as Vietnam and Thailand. Foreign direct investment in the 10-nation ASEAN region has surged in recent years, and there are signs that investors&a;rsquo; concerns over the trade war will drive even more FDI toward the region. Nikkei just published an article this month titled:&a;nbsp;&l;a href=&q;https://asia.nikkei.com/Economy/Southeast-Asia-bucks-trend-of-sinking-global-foreign-investment&q; target=&q;_blank&q;&g;&a;ldquo;Southeast Asia bucks trend of sinking global foreign investment&a;rdquo;&l;/a&g;.

Our Singapore-based VC firm is tracking these trends closely. They look like a replay of previous events in China itself, where export manufacturing and FDI helped to create both wider prosperity and a hothouse environment for high-growth tech startups. Now the torch is passing to Southeast Asia&a;mdash;fanned higher by the trade war. &l;a href=&q;https://www.economist.com/briefing/2019/01/24/globalisation-has-faltered&q; target=&q;_blank&q;&g;A recent article in The Economist&l;/a&g;, highlights that &a;ldquo; trade tensions are boosting activity in South-East Asia.&a;rdquo;

&l;img class=&q;dam-image bloomberg size-large wp-image-43209509&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/43209509/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Nguyen Xuan Phuc, Vietnam&s;s prime minister, listens to an interviewer&s;s question during a Bloomberg Television interview in Hanoi on January 18, 2019. A red-hot economy, business-friendly policies and a Communist party led by free-traders: that&s;s the elevator pitch Phuc is delivering to global investors amid the U.S.-China trade war. (Photo: Maika Elan/Bloomberg)

&a;ldquo;We are ready to grab the opportunity,&a;rdquo; Vietnam&a;rsquo;s Prime Minister Nguyen Xuan Phuc told Bloomberg in January. His country has a head start. Vietnam began making athletic shoes and sportswear for Adidas, Nike and other firms in the 1990s. Samsung now makes most of its mobile phones in Vietnam&a;mdash;amazingly, the nation has become the chief source for the world&a;rsquo;s largest phone producer, while the company is Vietnam&a;rsquo;s largest employer. And last fall, the Chinese acoustics manufacturer GoerTek announced that its production of Apple&a;rsquo;s AirPods, the company&s;s wireless headphones, will move to Vietnam, because of the trade war.

Thailand has growing clusters of vehicle assembly plants for Japanese, U.S., and Chinese auto companies, while also making components for tier 1 suppliers. Panasonic is joining the latter by shifting production of auto stereos from China. Meanwhile, the Thai electronics maker SVI has been sifting through requests from firms which, until now, had their work done in China. &a;ldquo;The trade war is good for us,&a;rdquo; SVI&a;rsquo;s chief executive,&a;nbsp;&l;span&g;Pongsak Lothongkam,&l;/span&g; said to Business Insider. &q;We have been approached by so many companies that we have to prioritize.&q;

Not all of the movement from China to Southeast Asia is in high-tech or high-value goods. Cambodia snared bicycle production for U.S.-based Kent International, whose budget-priced bikes are sold in big-box retail outlets and online. Other light manufacturing for export, such as in apparel and furniture, is picking up across ASEAN countries while Chinese volume appears to be tailing off. It&a;rsquo;s natural for these forms of production to lead a geographic shift because they can be set up in new locations faster and require less skilled labor.

But the shift is on, as reflected by multiple sets of figures. In 2012, for example, Japanese firms had more direct investment and more office and support personnel on the ground in China than in ASEAN, but the picture has flipped rapidly. Numbers from 2017 showed Japan investing $22 billion in ASEAN versus just $9.6 billion in China, while Japan&a;rsquo;s Foreign Ministry reported that roughly 83,000 expats are working in ASEAN, surpassing the 70,000 in China.

Further, it seems the U.S.-China trade war&a;mdash;mixed with uncertainty over the countries&a;rsquo; future trade relations&a;mdash;has affected key players&a;rsquo; outlooks as well as results. Late last summer, a survey of U.S. firms manufacturing in China found that 18.5% had either moved production to Southeast Asia or were considering it. Early this year, when attendees at the Asian Financial Forum in Hong Kong were surveyed on where they felt good investment returns in 2019 were most likely, 39% said Southeast Asia, 35% indicated China and 16% opted for the U.S.

Labor cost has been a fundamental driver of manufacturing to Southeast Asia. ASEAN wages can run as low as one-third to one-half those in China. This isn&a;rsquo;t the only factor, however. Production in all industries is incorporating more new technology and smart automation, and if you need to upgrade, why not start fresh in a new location instead of trying to retrofit? Here again, Southeast Asia beckons.

Our VC firm launched in Singapore seven years ago, when my partners and I saw opportunities for startup activity across the region. Now the manufacturing shift promises to take that activity to new levels. It means more Southeast Asians working with and learning about advanced technology, more need for tech solutions from industry, and more prosperous societies creating in-country consumer demand.

Which countries are poised for the greatest takeoff? Many observers favor Vietnam, which already exports vigorously ($94 billion in electrical and electronics goods alone in 2017), offers a large workforce (population over 95 million, skewed young), and has worked to build good trade relations globally. But all ASEAN nations stand to gain from increased export manufacturing. Japan&a;rsquo;s Nomura Group&a;mdash;using multi-factor measures it calls the NISI and NPRI (Nomura Import Substitution Index and Product Relocation Index, respectively)&a;mdash;sees significant upside for Malaysia, Thailand, The Philippines, Indonesia, Singapore, and Cambodia along with Vietnam.

&l;img class=&q;size-full wp-image-264&q; src=&q;http://blogs-images.forbes.com/vinnielauria/files/2019/02/Graph.jpg?width=960&q; alt=&q;&q; data-height=&q;465&q; data-width=&q;900&q;&g; Countries affected by the U.S.-China trade war (Source: Nomura Group)

Certainly, challenges still loom. Tech skills will need to grow in many ASEAN locales, including places like Vietnam and Thailand, where low unemployment means the best workers at present are already taken. Infrastructure build-out across the region will be needed, too. The World Economic Forum, in a 2018 white paper co-authored with A.T. Kearney, urged that ASEAN nations collaborate on issues like these to achieve full &a;ldquo;readiness&a;rdquo; for production growth.

And ultimately, a classic Catch-22 looms. As Southeast Asian countries become wealthier, wages will rise and their global cost advantage will fade. Tomorrow&a;rsquo;s ASEAN firms will have to compete on innovation, quality, and ability to serve their home markets. Chinese firms have benefited from China&a;rsquo;s immense domestic market, and now rely on it increasingly.

Keep in mind, though, that the ASEAN region also has a big home card to play. Its combined population of 650 million is larger than either the E.U. or the&a;nbsp;NAFTA trio of U.S., Mexico and Canada. With the U.S.-China trade war now having its effects, I&a;rsquo;m even more bullish on &l;a href=&q;https://www.slideshare.net/GoldenGateVentures/the-us-china-tradewar-a-boon-for-southeast-asia-131264136&q; target=&q;_blank&q;&g;Southeast Asia&a;rsquo;s economic potential&l;/a&g; than before.&l;/p&g;

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