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Global companies are eyeing Asian alternatives to Chinese manufacturing

Ino 1987 Panasonic A risky bet on China. At the time, the electronics giant’s home country, Japan, was a global manufacturing powerhouse, while China’s economy was no bigger than Canada’s. So when the company set up a Chinese joint venture in Beijing to make cathode ray tubes for its televisions, it drew attention. It wasn’t long before other consumer electronics giants from Japan and elsewhere flocked to China to take advantage of its abundant and cheap labor. Three and a half years on, China has become the linchpin of a multi-trillion-dollar consumer electronics industry. In 2021, its exports of electronics products and components will reach $1 trillion, out of a global total of $3.3 trillion. Today, it takes a brave company to avoid China.

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However, a growing number of foreign companies, under the dual pressure of business and political pressure, are beginning to muster the courage to, if not leave China entirely, at least look beyond China for growth. Chinese labor isn’t so cheap anymore: Between 2013 and 2022, manufacturing wages doubled to an average of $8.27 an hour (see chart). More importantly, the deepening decoupling of technology between China and the United States is forcing manufacturers of high-tech products, especially those involving advanced semiconductors, to reconsider their dependence on China.

The number of Japanese companies operating in China will drop from about 13,600 to 12,700 between 2020 and 2022, according to research firm Imperial Database. On January 29, it was reported that Sony plans to shift production of cameras sold in Japan and the West from China to Thailand. South Korean company Samsung has cut its workforce in China by more than two-thirds since a peak in 2013. US computer maker Dell plans to stop using Chinese-made chips by 2024, according to reports.

The question facing Dell, Samsung, Sony and their peers is: where to make things? No other country can offer China’s vast manufacturing base. Taken together, however, the patchwork of Asian economies offers a strong alternative. It stretches in a crescent shape from Hokkaido in northern Japan, through South Korea, Taiwan, the Philippines, Indonesia, Singapore, Malaysia, Thailand, Vietnam, Cambodia and Bangladesh, all the way to Gujarat in northwestern India. Its members have clear advantages, from Japan’s high skills and deep pockets to India’s low wages. On the face of it, this is a useful division of labor opportunity, with some countries manufacturing complex components and others assembling them into finished products. Whether it will work in practice is the great test of the nascent geopolitical order.

This alternative Asian supply chain – called Altasia – looks to be on par with China in terms of weight, if not better (see map). Its 1.4 billion working-age population dwarfs even China’s 950 million. Altasia has 155 million highly educated people between the ages of 25 and 54, compared with China’s 145 million — and, in stark contrast to an aging China, their ranks appear to be growing. In many parts of Altacia, wages are much lower than in China: Manufacturing wages in India, Malaysia, the Philippines, Thailand and Vietnam are less than $3 an hour, about a third of what Chinese workers now demand. The region is already an export powerhouse: its members sold $634 billion worth of goods to the U.S. in the 12 months to September 2022, surpassing China’s $614 billion.

Altasia is also more economically integrated. All but India, Bangladesh and Taiwan have beneficially signed the Regional Comprehensive Economic Partnership (RCEP)Regional Economic Partnership Agreement, which also includes China). By harmonizing the rules of origin of the various existing trade agreements in the region, the agreement creates a single market for intermediate goods. This in turn eases the regulatory hurdles of complex supply chains running through multiple countries. Most Altasian nations are members of the Indo-Pacific Economic Framework, a new U.S. initiative. Brunei, Japan, Malaysia, Singapore and Vietnam belong to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)CPTPP protocol), which also includes Canada, Chile, Mexico, and Peru.

Japanese companies that have been building supply chains in Southeast Asia for decades have created a model for the Altas economy. More recently, Japan’s wealthy Altas neighbor South Korea followed its example. Total 2020 direct investment by South Korean companies in Brunei, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam — countries that, along with unstable Myanmar, make up the Association of Southeast Asian Nations (ASEAN).asean)—Bangladesh reached US$96 billion, narrowly surpassing South Korea’s investment in China. Just a decade ago, South Korean companies had almost twice as much investment stock in China as Altasia. Samsung is the largest foreign investor in Vietnam.Last year, South Korean automaker Hyundai opened its first asean factory to produce electric vehicles in Indonesia.

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Now, more non-Altasia companies are eyeing the region, often through their Taiwanese contract manufacturers. Taiwan’s Foxconn, Pegatron and Wistron, which assemble devices for companies like Apple, are investing heavily in Indian factories. The share of iPhones made in India is expected to rise to a quarter by 2025, from about a twentieth last year. Two Taiwanese universities have teamed up with Indian firm Tata, which has ambitious plans in high-tech manufacturing, to offer courses in electronics for Indian workers. Google is shifting outsourced production of its latest Pixel smartphone from China to Vietnam.

More complex manufacturing, especially semiconductors, which is fraught with geopolitics, is also moving to Altasia. Malaysia already exports about 10% of the world’s chips by value, more than the United States. asean Countries account for more than a quarter of global IC exports, easily surpassing China’s 18%. And that lead is growing. Qualcomm, an American “fabless” chipmaker that sells microprocessor designs for others to make, opened its first research and development center in Vietnam in 2020. Qualcomm tripled its revenue from Vietnamese chip factories, many of which belong to global giants such as Samsung, between 2020 and 2022. Earlier this month, Ho Chi Minh City’s local government announced it was seeking $3.3 billion in investment from Intel (although it later removed the US chip giant’s name from an online statement).

China’s great advantage has historically been its large single market, intertwined with good infrastructure that adds value without the need for suppliers, workers and capital to cross borders. So for Altasia to truly compete with China, its supply chain will need to become more integrated and efficient.Although Regional Economic Partnership Agreement Although it lubricates commercial development within Altas to a certain extent, the flow of goods faces more obstacles than within China. Its member countries will need to play to their comparative advantages.

Currently, the infrastructure to connect them is rudimentary at best. Picky regulations and national ambitions can easily disrupt alternative supply chains. Altasia’s poorer countries are not necessarily keen on a rational division of labor that would allow them to play a larger role in the lesser parts of the electronics supply chain. Giving up all Chinese-made parts is next to impossible. U.S. e-bike startup Thamlev shifted production from China to Malaysia in 2022 to avoid 25 percent U.S. tariffs, but still needs to import Chinese components. As a result, it took a month for its e-bikes to reach American riders.

The prospects for deeper integration within Altasia and with large consumer markets in rich countries are murky. Altasia’s future may depend on its 1.4 billion population, and India doesn’t seem eager to join Regional Economic Partnership Agreement. While India has signed up to the US Indo-Pacific framework with its Altasian neighbors, it has opted out of the initiative’s trade provisions. These are unattractive by any means: America is in a protectionist mood, offering neither tariff cuts nor better access to its vast market.one asean Policymakers likened the agreement to a doughnut with little substance in the middle.

Altasia will certainly not replace China anytime soon, let alone overnight. For example, in January this year, Panasonic announced a significant expansion of its business in China. But over time, China may become less attractive to foreign manufacturers. China’s labor isn’t getting cheaper, nor is it producing more graduates.The United States may still realize that reducing its dependence on China in practice requires closer ties with friendly countries, including joining CPTPP protocol, whose predecessor collapsed after the U.S. withdrew in 2017. As an emerging alternative to China, Altasia is unmatched.

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