An ongoing trade war with the United States, mounting anti-globalisation sentiment as well as digital disruptions are prompting China-based firms to relook their supply chains and search for new alternatives around the world.
More firms in sectors such as machinery equipment and construction are looking for new production bases as well as new markets in South-east Asia, said Mr Jimmy Koh, a managing director at United Overseas Bank.
"For machinery equipment and component makers, their main demand is in the West and in China.
"Now with the demand less certain, they are looking to distribute their products in our part of the world," said Mr Koh on the sidelines of a business seminar organised by UOB in Shanghai on investment opportunities in Asean yesterday.
Mr Koh said that the rise of anti-globalisation sentiment that resulted in Brexit and the election of US President Donald Trump in 2016 triggered a "reshuffling of cards" across industries in China. "The trade war (with the US) probably has accelerated all this," he added.
This revisitation of the whole supply chain presents opportunities for countries in Asean, but the diversity in the region can also prove to be challenging for Chinese firms.
"Asean is integrated but not homogeneous. Every country has its own characteristics and you need to find the strength that each of them has," said Mr Koh.
Firms can look to Singapore to help connect the dots in the process, he added.
But he also said the process of diversification was still in its infancy, with more firms only beginning to talk about exploring new alternatives.He noted the process would involve revisiting a whole value chain that has been established over the past 20 to 30 years, when the United States implemented an outsourcing policy that helped China become the factory of the world.
"The outsourcing policy was too successful, (firms) became too tied up in the ecosystem that (they) cannot untie," he said.
ASEAN THE BENEFICIARY
For machinery equipment and component makers, their main demand is in the West and in China. Now with the demand less certain, they are looking to distribute their products in our part of the world.
MR JIMMY KOH, UOB managing director, speaking on the sidelines of a seminar on investment opportunities in Asean.
And it will easily require five to 10 years to set up alternatives, he said.
Professor Fu Jun of Peking University, a panellist at the seminar, told reporters that the attractiveness of Asean countries is their lower labour costs and deeper connections with the Western world historically. The coastal cities in China have become very expensive for companies, he noted.
"In Shanghai, you can no longer find labour-intensive industries of the yesteryear," said the professor of political economy and public policy.
The Chinese government is encouraging these firms to go to the interior, especially the western regions, he pointed out.
But when it comes to considering a global supply chain and value chain strategy, Prof Fu thinks that Asean countries have an edge over the western regions of China as they are more international.
"So the challenge for firms in China is to choose to move to the interior parts or move out. That's a choice for the firms to make," he said, adding that it would come as no surprise to him that they would consider the South-east Asian region more favourably.