COVID-19: FDI dynamism in South and Southeast Asia

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Changing economic orders in Asia

In the last decade, Asia has emerged as the world’s foreign investment growth engine — despite a 5 percent contraction in FDI, Asia is the largest FDI recipient in the world in 2019. It hosts approximately 30 percent of global FDI inflows with the top five recipients being China, India, Indonesia, Hong Kong, and Singapore. Inflows to South Asia had increased by 10 percent to $57 billion, with 20 percent growth in FDI to India. In the same vein, Southeast Asia had recorded a growth in inflows by 5 percent to an all-time high of $156 billion, driven by massive investments in a few countries, particularly, Vietnam, Indonesia, and Singapore.

FDI chart Indonesia

However, UNCTAD estimates that the COVID-19 pandemic will lead to a drastic contraction in FDI globally — FDI is estimated to decrease by almost 40 percent in 2020. Post-2005, the pandemic will cause global FDI to fall under the $1 trillion mark for the first time. Projections indicate that FDI in developing Asia will decrease up to 45 percent.

China’s economic growth has been severely impacted due to the drastic steps taken globally to contain the pandemic.

After the US, China has recorded the highest FDI receipts in 2019 with inflows reaching a value as high as $141 billion. China’s economic growth has been severely impacted due to the drastic steps taken globally to contain the pandemic. The growth rate has come down to 6.2 percent in the second quarter of 2020 — the lowest in almost three decades. Retail spending and fixed-asset investment — two major growth drivers — have also come down significantly.

Further, since 2019 China has been embroiled in a trade war with the US, prompting companies to relocate their manufacturing units from China to other nations, and the imposition of high tariffs and restrictions on Chinese imports. FDI inflows to China in the first quarter of this year were reported to have dropped by 13 percent to $31 billion, as compared to the first quarter of 2019 (except the financial sector). In particular, investments from the European Union dropped by 29.10 percent. Further, while investment from countries along the Belt and Road Initiative (BRI) rose by 7.9 percent, with more countries going into economic crises, the stalling of BRI may deter investor confidence.

Retail spending and fixed-asset investment — two major growth drivers — have also come down significantly.

Even prior to the pandemic situation, there has been evidence of a flight of manufacturing capital from China. This shift in supply chains is seeing two manifestations — ‘re-shoring’ (moving back to the parent company’s domestic location) and ‘near-shoring’ (shifting to a substitute country within the same region). In the latter, South and Southeast Asia, mainly the economies of Taiwan, Vietnam, Thailand, and India have emerged as the manufacturing hub substitutes. While the US-China trade war played a major role in fueling this sentiment, companies have also begun seeking supply-side diversification and resilience to counter rising wage levels in China and the supply-side shock the pandemic has presented. Companies across the US, Japan, South Korea, and the EU with current Chinese bases are looking for alternatives or additional manufacturing hubs within the region. At an international level, the US and Japanese policies seem to be supportive of such a shift as depicted in the following table.

Table 1: International Policy Signals

CountryPolicy Signalling
JapanIn early April 2020, the government earmarked a stimulus package of $2.3 billion to help its manufacturers shift production out of China to relocate to alternate locations or move back to Japan.
USThe imposition of tariffs applied exclusively to Chinese goods worth $550 billion between 2018-20. Multiple statements by President Trump suggest that American companies immediately search for bases other than China to avoid tariffs.

Investments shift out of China

Apple has signaled its major suppliers to shift 15-30 percent of production out of China and the company itself is planning to shift 20 percent of its production into India. In line with this, Wistron (a Taiwan-headquartered manufacturing partner for Apple) has set aside $1 billion for expansion in India, Vietnam, and Mexico. Delta Electronics has undertaken investments of $9 million and $500,000 in India and Vietnam respectively, in a bid to shift production and trading capacities out of China. Pegatron, the iPhone assembling company is also shifting its manufacturing capacities back to Taiwan. Further, American companies such as HP and Dell are planning to shift approximately 30 percent of their notebook production to Southeast Asian economies. Japan’s Nintendo also seeks to shift a portion of its Nintendo Switch game system production to Vietnam.

“Best Country to Invest In 2020”

Apple has signaled its major suppliers to shift 15-30 percent of production out of China and the company itself is planning to shift 20 percent of its production into India.

Apart from tech-companies, manufacturers of automobile parts, footwear, and equipment are also keen to diversify or shift their supply chains. The following table outlines some companies that have shifted out of China in the recent past or undertaking the process of doing so. Vietnam appears to reap the maximum benefits, followed by Thailand. India and Taiwan appear to be preferred destinations.

Table 2: Companies Shifting Production out of China

CompanyOriginPlanned ShiftIndustry
Brook SportsUSVietnamFootwear
Casio ComputersJapanThailandWristwatches
Citizen WatchJapanThailandWristwatches
Compal ElectronicsTaiwanTaiwanElectronics (Apple supplier)
Delta ElectronicsTaiwanIndia/VietnamElectronics (Apple supplier)
FoxconnTaiwanIndia/VietnamElectronics (Apple supplier)
Funai ElectricJapanMexico/Philippines/ThailandElectronics
GoertrekChinaVietnamAcoustic Components (Apple Supplier)
GoogleUSVietnam/Taiwan/MalaysiaElectronics (Nest, Pixel)
GoProUSMexicoVideo Camera
G-TektJapanJapanAuto parts
Harley DavidsonUSIndia/ThailandAutomotive
Hewlett PackardUSTaiwanPCs
Iris OhyamaJapanSouth KoreaFans
KayamaticsHong KongMalaysiaConsumer Robotics
KeihinJapanJapanAuto parts
KomatsuJapanJapan/Thailand/USConstruction equipment
Merry ElectronicsTaiwanThailandElectronics
MitsubaJapanVietnamAuto parts
Mitsubishi ElectricJapanJapanElectronics
NidecJapanMexico/ThailandAuto/home appliance parts
NintendoJapanVietnamGaming consoles
PegatronTaiwanIndia/VietnamTelecom equipment (Apple supplier)
Procon PacificUSIndiaPackaging
SamsungSouth KoreaVietnamElectronics
Steve MaddenUSCambodiaFootwear
Sumitomo Heavy IndustriesJapanJapanRobot components
TCLChinaVietnamElectronics (TVs)
Toshiba MachineJapanJapan/ThailandInjection molding machine
Von WellxGermanyIndiaFootwear
WistronTaiwanIndia/Vietnam/MexicoElectronics (Apple supplier)

1To conclude the ongoing pandemic has highlighted in a pronounced way, the dilution of the Chinese dependency of developed economies such as the US, Japan, Germany, etc. While Singapore has already been an early gainer in this domain, the state governments in India such as that of Telangana and Tamil Nadu are stepping up in attracting foreign firms to Hyderabad and Chennai respectively. A big question that looms large in this scenario is that, whether India will be able to substantially leverage these investments departing China.

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