Transcript
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Speaker: Hello and welcome to Under the Banyan Tree, our weekly podcast where we put Asia in context.
Speaker: My name is Fred Newman, the Chief Asia Economist here at HSBC, coming to you this week from New York City.
Speaker: And I'm Harold van der Linde, Head of Asia Equity Strategy, and I'm currently in Singapore.
Speaker: We've got a pack show for you today, and it's all about supply chains.
Speaker: It's a topic that's never far from the headlines, with wide-ranging implications for growth and trade.
Speaker: and of course companies and sectors in Asia and around the world.
Speaker: We're going to tackle it from various angles, starting with the big picture and working our way down to the semiconductor industry where geopolitics is shaking up established Asian supply networks.
Speaker: There's a lot to discuss, so let's begin.
Speaker: So Fred, why are we talking about supply chains?
Speaker: So there are a couple of reasons, really.
Speaker: One is, of course, the pandemic, because the pandemic has shown the fragility of global supply chains.
Speaker: There was a big shift towards demand of goods across the world.
Speaker: And, of course, supply chains couldn't keep up.
Speaker: That's now actually fading, and we see a normalization from pandemic-related demand.
Speaker: The trouble, really, is that there's a geopolitical element coming into supply chains as well.
Speaker: And that's really...
Speaker: This idea that some economies want to disentangle their dependence on certain other economies, namely the tech space, for example, there's a view that maybe one should put more emphasis on the security of a critical component that is secure supply chains.
Speaker: And that's why this idea of supply chain security, this idea of on showing fringe showing, et cetera, to have seen the headlines continues to persist.
Speaker: Okay, so what sort of investment trends, in particular foreign investment trends, do you see then across the region?
Speaker: Well, we've already seen for several years now this rejigging of supply chains being reflected in FDI flows.
Speaker: And while globally FDI flows, that is foreign direct investment inflows, have actually collapsed in recent years, into Asia they continue to be very strong.
Speaker: But there is a subtle shift here.
Speaker: ASEAN in particular, the Southeast Asia,
Speaker: continues to see very strong inflows.
Speaker: India is running at near record inflows as well.
Speaker: And to some extent, it is perhaps signaling a shift of supply chains out of China to some extent into markets like Malaysia or Vietnam, for instance, and possibly as far afield as India.
Speaker: But I believe that, contrary to common belief, there's still a lot of foreign direct investments going into China.
Speaker: Is that correct?
Speaker: Why is that the case?
Speaker: That's right.
Speaker: Actually, China continues to receive near record amounts of foreign direct investment inflows.
Speaker: Now, that probably means that globally, companies are still looking at the Chinese market as a growth market.
Speaker: So the type of investment is shifting.
Speaker: You now invest in China to really produce for the Chinese market, and you're shifting potentially some production into Southeast Asia.
Speaker: So it's kind of
Speaker: This China plus one strategy we heard a lot about, which is big multinationals continue to invest in China because of its strong growth prospects, but at the same time creating some supply chain redundancy by shifting some production into Southeast Asia in particular, where, again, Malaysia and Vietnam are probably some of the winners.
Speaker: That's interesting.
Speaker: But I suspect that this reshuffling of supply chains across Asia impacts these trade flows across the region as well.
Speaker: It does, very much so.
Speaker: So we shouldn't really think of the complete disentangling of supply chains.
Speaker: Rather, we see a shift in kind of the production base for certain types of products.
Speaker: In particular, we see very strong trade growth between China and ASEAN, that is Southeast Asia, because, yes, we're moving some production into places like Vietnam and Malaysia, but they're still using a lot of components that are actually produced in mainland China.
Speaker: And so that's why you see
Speaker: trade actually between mainland China and ASEAN being so robust, it's growing very rapidly because we're not fully disentangling supply chains here.
Speaker: Rather, we're moving some production in Southeast Asia and we still have very, very intricate production networks across the region.
Speaker: Well, if companies move from China and let's say they go to ASEAN, they have a few choices.
Speaker: Are these countries trying to make themselves attractive?
Speaker: Do they invest in harbor capabilities?
Speaker: infrastructure, education and these sort of things?
Speaker: Yeah, there's a lot of competition among economies to attract more FDI, more foreign direct investment.
Speaker: And the competition really runs along the lines of who can provide the best infrastructure, where is labor markets perhaps more flexible, where there's sufficient labor available.
Speaker: And those are all factors that really were just driving policy in these economies.
Speaker: Some are more successful at it, some are less successful.
Speaker: But a key issue that's actually emerging here is labor supply.
Speaker: So in some ASEAN markets in Southeast Asia, we're running actually a bit into labor supply issues.
Speaker: And that's why some companies are looking to India because of that.
Speaker: Because that economy, of course, has an inexhaustible, seemingly inexhaustible death of workers where companies can draw.
Speaker: Well, that's interesting because that's, of course, good news if you are in ASEAN or in India.
Speaker: Because you've got employment, it means you can consume differently as well.
Speaker: You've got wages coming up maybe.
Speaker: Do we see evidence of that as well?
Speaker: Very much so.
Speaker: There's linkages to the local economy.
Speaker: And economists talk about backward and forward linkages of foreign direct investment.
Speaker: And if a foreign company comes in, hires workers, it has spillover effects into the local economy.
Speaker: And so very much so in places across ASEAN, but also increasingly in India.
Speaker: There is a sense that this foreign direct investments coming in is producing employment opportunities, helping to lift consumption and so benefits really the wider economy.
Speaker: One remarkable thing is just how resilient this FDI flow has been in recent years right through the pandemic.
Speaker: And that's maybe a reason why Asia broadly has that resilience, despite all the vagaries in global markets currently from the Fed hiking interest rates to potential recession risks elsewhere.
Speaker: we really see FDI providing that extra amount of resilience for local growth, for balance of payments.
Speaker: And that's an ongoing story, really.
Speaker: And we're looking potentially at another record year of foreign direct investment into emerging Asia.
Speaker: Okay, very good, Fred.
Speaker: We're going to take a quick break here, folks.
Speaker: We'll be looking at supply chains from the bottom up in just a moment.
Speaker: But first, though,
Speaker: We want to take this opportunity to invite you to join HSBC's Global Emerging Markets Forum, which will take place online from the 13th to the 30th of September.
Speaker: Over three weeks, policymakers, thought leaders, corporates and our team of experts here at HSBC Global Research will be sharing their views on the outlook for emerging markets.
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Speaker: So Harold, you've looked at supply chains as well.
Speaker: What specific angle are you taking in your analysis?
Speaker: Yeah, what we've done is to look at supply chains from the bottom up.
Speaker: So we've looked and spoken with companies and said, why have you moved your production to this location or that location?
Speaker: And there seem to be four factors that always come up in those discussions.
Speaker: The first one is simply cost.
Speaker: You go to the place where it's cheaper to produce, but that's not always the overriding factor.
Speaker: A very important factor is what we've called competencies.
Speaker: Competencies means it's nice to say, well, let's go to a place where labor is much cheaper, but are they well trained?
Speaker: Can they actually work in your factory?
Speaker: If you have a semiconductor facility, do they have engineers over there, a sufficient number of engineers?
Speaker: It's not only that.
Speaker: It is also, for example, if you make a product and use plastic, you need certain plastic on the very specific kind of quality or particular specifications.
Speaker: you might not be able to get that in another location.
Speaker: So companies very often are part of a network and these competencies, raw materials, labor supply, consultants, you name it, is important as well.
Speaker: A third factor that always comes up as well, or very often comes up, is companies want to be close to their customers.
Speaker: So for certain industries, it doesn't make sense to go far away because they need to be close to their customers and understand what their customers are doing.
Speaker: The auto industry is maybe an example.
Speaker: Risks.
Speaker: to move to another country or the availability of finance or getting money in and out of a country are factors that sometimes play a role as well.
Speaker: So you're describing really a number of factors that determine supply chains, how they operate, what factors are really determining where companies put their particular production locations.
Speaker: Is there a degree of inertia, if you will, that once you have established certain supply chains, there's a type of stickiness to it so that
Speaker: actually you're not going to see supply chains move as quickly as the headlines might suggest.
Speaker: Absolutely.
Speaker: This is very important because, as I mentioned, very often people say, well, you know, the cost of labor goes up in one country, factories are going to move to another country.
Speaker: They only look at one of these factors that determine it, but they don't look at the other factors that I mentioned, their competencies, risk, being close to consumers and these sort of things.
Speaker: So let's take, for example, the auto industry.
Speaker: They have to deal with higher labor costs.
Speaker: They could move out to another country and go there.
Speaker: But do they have the engineers there?
Speaker: Can they get the components there?
Speaker: Do the suppliers, can they move as well?
Speaker: Do they have the finance to move?
Speaker: All these issues come at play.
Speaker: So what you see, the auto industry is a nice example, actually, that they don't even want to move.
Speaker: They need to stay close to the consumers to understand their consumers.
Speaker: So they stay.
Speaker: But you see that part of their network, so some of the component makers or the
Speaker: the makers of components, for components and these sort of things, they're moving out to Vietnam or Thailand or Malaysia and elsewhere and set up there.
Speaker: And that impacts the trade that you were referring to.
Speaker: And the ones that have to stay or want to stay, for example, in China, they're going to deal with these higher costs through maybe automation and these sort of things.
Speaker: So is it fair to say that labor costs are less of a determining factor really in driving supply chains or the allocation decision
Speaker: buy companies, it's a word to put new production sites?
Speaker: Are we overstating the importance of labor costs here?
Speaker: Yeah, I think so.
Speaker: We often overstate the importance of labor costs.
Speaker: And it's not just the cost of labor, it's the quality of that labor, but it's also the quality of the raw materials that you can get.
Speaker: Can you ship your stuff out of a harbor there?
Speaker: All sorts of other factors that play a major role there.
Speaker: And that means that the supply chains are simply more sticky, as you mentioned, Fred.
Speaker: than people like to think, or the movements are much slower than very often what many people expect it to be.
Speaker: Now, one industry that's often mentioned where there's a big reshuffle potentially is a tech space and specifically semiconductors.
Speaker: And we already talked about the geopolitical sensitivities here.
Speaker: Have you looked at the tech space and what do you see there in terms of supply chain rejigging?
Speaker: Yeah, so there's a couple of things going on.
Speaker: First of all, China has really tried to make a big move to get into semiconductors.
Speaker: I used to live in Taiwan 20 years ago, and the talk was there, hey, the Chinese are really investing.
Speaker: They're going to compete with, for example, the Taiwanese.
Speaker: But we're 20 years later, and still they haven't really caught up.
Speaker: So some of the Taiwanese have really, and Koreans as well, have really stayed at the forefront of technology there and do that out of Taiwan.
Speaker: Now, the issue now here is that
Speaker: geopolitics play a role here, whereby they have American and Chinese consumers.
Speaker: So what you see here is that some of these companies are moving some of the production to, for example, to America and say, okay, we'll set up a plant in America in order to service our American clients, or they go, for example, to Europe and do that over there.
Speaker: So there, the movements of supply chains is really driven by, you could say, geopolitics.
Speaker: What it also means is that, for example, if you have one nation, say America and China,
Speaker: going from different technologies, and we've seen this in the past, for example, in the mobile space, that, yeah, you need different chipsets for that as well.
Speaker: So they might have one factory that makes chips for handsets, for American handsets, that uses a particular technology, and another factory somewhere else that makes it for the Chinese, using a very different technology as well.
Speaker: So you get dual-track technologies emerging in some of these industries as well.
Speaker: So you're talking about the risk really of splitting technology into different realms where we have rival technologies develop in different markets potentially over time.
Speaker: That should be highly inefficient.
Speaker: It sort of requires a duplication of production processes, different standards potentially developed.
Speaker: Is that a big headwind then when we think about the tech sector or is this actually opportunity?
Speaker: Yeah.
Speaker: That is a cost for the world.
Speaker: It is an inefficiency that we have to deal with and consumers probably have to pay for that at some point in time.
Speaker: And what you also see, for example, in the Chinese auto industry, they work on the assumption that they can't get particular chipsets from the US anymore.
Speaker: So they have to rejig their car design in order to deal with the chipsets that is available to them.
Speaker: You mentioned cars.
Speaker: Obviously, the new trend is towards electric vehicles.
Speaker: Is there a risk here of dual technologies also developing in the EV space?
Speaker: Absolutely.
Speaker: I think telcom equipment, semiconductors, EVs are some of the examples of industries where dual technology is most likely going to emerge.
Speaker: And there might be other industries that are not easily identifiable at the moment where this will happen as well.
Speaker: So Harold, really lots to talk about around supply chains and the issue is much more nuanced, I think, than the headlines would certainly suggest.
Speaker: But stepping away from supply chains and economics and markets, how are you spending the rest of your summer?
Speaker: What's on your mind at the moment?
Speaker: Well, as you know, I was in Indonesia and I've been visiting all sorts of temples.
Speaker: I met an historian there who's just done a translation of a
Speaker: a book written by a Buddhist in the 14th century and I got a copy of that.
Speaker: So I'm going to read that.
Speaker: That's part of my personal research efforts into the rise of what is called the Majapahit Empire in Indonesia.
Speaker: So that's going to be on my reading list while I'm on the plane over the next couple of weeks.
Speaker: But you're there in New York.
Speaker: What keeps you busy?
Speaker: What is on your mind?
Speaker: What's on my mind is I came down with COVID-19.
Speaker: The coronavirus finally caught up with me here in New York City.
Speaker: I managed to evade it for over two years now, but I think eventually it tracks us down one way or the other.
Speaker: And so this is my turn.
Speaker: And so really what's on my mind at the moment is getting over the hump and organizing my travel back to Hong Kong without any further glitches.
Speaker: So that's really on my mind for the coming days.
Speaker: Well, that's sad to hear, Fred, so I hope you will get over that hump very quickly and stay healthy.
Speaker: But that's all we've got time for on this episode of the Banyan Tree.
Speaker: Hopefully, you've now got a clear understanding of just how important supply chains are to Asian economies, but also how sensitive they are to various forces and how much of a ripple effect you can see for industries and economies if these networks are forced to shift.
Speaker: Thank you, everybody, for joining us this week.
Speaker: We hope you enjoyed it and see you again next week on The Banyan Tree.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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