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Revamping Asia – The supply chains

Recovering from COVID-19 disruptions, Asian manufacturers are actively upgrading their supply chains and optimizing production models in response to the changing dynamics in geopolitics, trade policies and production costs.

We find plenty of investment opportunities in the remodelling of Asia’s supply chains in the course of the recovery from the pandemic disruptions. Asia’s technology supply chain is pivotal to the world, given it is the largest production base of semiconductors with 80% of global installed wafer capacity located in the region.

Asia’s exports have stayed very resilient throughout the global pandemic, as industry leaders in the region have gained market share from global competitors which suffered from the fallout of supply chain disruptions.

Asia’s web of supply chains

Asia’s supply chains are interconnected networks that link producers for raw materials, intermediate output and final products. The web of supply chains is sometimes less straightforward than one might hope. For example, China dominates the production of components for storage devices. But at the same time, China is a net importer of hard disk drives manufactured in Thailand and Malaysia. Thailand also exports similar values of hard disk drives to the US as well as China.

Many factors determine where the hubs of the supply chains are located. Some of them are financial considerations, including labour costs, tariffs, value added and income taxes, logistics costs, and others. To illustrate, South Korean electronics manufacturers built capacities in Vietnam where labour cost is lower. There are also non-financial factors such as talent, risk of disruption of production (e.g. due to natural events like COVID-19 and Fukushima earthquake), rules of country of origin and protectionism. For example, Chinese solar panel makers have shifted their productions to Malaysia to avoid EU quotas and US tariffs on products from China.

Multiple driving factors for revamping Asia’s supply chains

Partly due to limited business disruptions in the region despite COVID-19, Asia’s market share in global trade increased recently. The market share of mainland China rose from around 14% of global trade during the pre-COVID-19 period to 15% currently. The share of Asia ex-Japan including mainland China climbed by almost 1ppt to just under 17%. Apart from pandemic related products (such as gloves, masks), demand for semiconductors also increased along with the increased consumption of work-from-home gadgets and consumer electronics products, and the growth in ecommerce. Asia is, by far, the largest producer of semiconductors in the world.

JAMES CHEO

Chief Investment Officer,
Southeast Asia, HSBC
Private Banking and Wealth Management
Singapore

James Cheo is Chief Investment Officer, Southeast Asia for Private Banking and Wealth Management at HSBC. Mr. Cheo is a member of the Global Investment Committee for Private Banking and Wealth Management and also a member of the Regional Investment Committee in Asia. In his role, he spearheads the development of investment strategies across all asset classes for private banking and wealth management clients in Southeast Asia.

Prior to re joining HSBC Private Banking, James was Senior Investment Strategist at Bank of Singapore, responsible for asset allocation and thematic research. Before that, James assumed Investment Strategist roles at Barclays Wealth Asia. From 2004 to 2009, James served as Senior Economist at the Monetary Authority of Singapore, where he was part of the team that formulated policy actions for Singapore during the 2008 Global Financial Crisis.

With his knowledge and wealth of experience, his investment views are frequently sought after. He has established a strong media profile, with appearances on notable financial media including Bloomberg, CNBC, Channel News Asia, Channel 8 Mandarin News; and printed publications such as the Financial Times, Straits Times, Business Times.

James graduated with First Class Honours in Finance from Nanyang Technological University. He was awarded the Chartered Financial Analyst charter in 2007.