APAC CIO View

Since 2018, the Sino-US trade disputes sparked the rise of the “China + 1” strategy, where businesses diversify supply chains by maintaining operations in China while expanding into other markets. The COVID-19 pandemic and the Russo-Ukrainian War have highlighted the risks of relying on a single market, making the “China + 1” strategy essential for global business planning. With the US election approaching, both Kamala Harris and former President Trump have demonstrated protectionist stances against China. Trump has been vocal about a 60% tariff on Chinese goods, while Harris has pledged to continue the Biden administration’s trade policies. Given this backdrop, global companies are likely to keep investing in ASEAN countries to ensure supply chain resilience. Therefore, it is timely to revisit the current status of the “China + 1” strategy and explore new opportunities within the global supply chain.

Where are we now?

Since the US-China trade disputes began six years ago, there has been a surge in foreign direct investment (FDI) in ASEAN countries, particularly in Indonesia, Malaysia, and Vietnam. The ASEAN share of the global export market increased from 5.2% in 2018 to 6.2% in 2023. Although this gain appears modest, global companies have leveraged the unique advantages of each country to enhance supply chain resilience. Consequently, several competitive manufacturing hubs have emerged in the region, gaining significant market share in the global export market.

Vietnam, for example, has made substantial gains in the textile and electronics parts production sectors. Complementing this growth, the Vietnamese government’s transport infrastructure master plan aims to build 5,000 km of new expressways, high-speed rail routes, deep-water ports, and new international. These developments are poised to significantly enhance the country’s transportation capacity, supporting its ambition to become a regional manufacturing hub. Malaysia has become a leading hub for semiconductor manufacturing, attracting substantial FDI from major firms like . According to HSBC Global Research, electronics have driven significant investment into Malaysia since the pandemic, accounting for 64% of Malaysia’s total manufacturing FDI in 2023.^[1] As a result, Malaysia’s export share of integrated circuits and parts increased from 6.7% in 2018 to 10.2% in 2023. Indonesia, leveraging its rich nickel resources—a key component of electric vehicle (EV) battery production—is gradually becoming an integrated hub for EV manufacturing through its commodity down-streaming policy. While FDI into Thailand and the Philippines is comparatively lower, they have seen varying degrees of market share gains in the textile, electrical and electronics, and automotive industries in the global export market.

What could be the next supply chain shift?

With the US and European Union likely to adopt more protectionist stances against China, a further shift in supply chains from China to ASEAN economies is expected. Identifying industries that could benefit from the “China + 1” strategy is crucial for uncovering early investment opportunities. The Revealed Comparative Advantage (RCA) index can indicate a country’s competitive export strengths. Analyzing the RCA index helps identify industries where both China and various ASEAN countries have overlapping strengths, representing potential supply chain relocation opportunities.

Unsurprisingly, most sectors where ASEAN economies have overlapping RCA with China are in textiles and garments, electronics, and home appliances, due to lower labor costs and a relatively skilled, young workforce. Although significant investments have been made in these sectors, FDI is expected to continue, with potential for further export share gains. Future investment opportunities are likely to emerge around these sectors with established competitive advantages.

For example, Malaysia has leveraged its leading position in semiconductor assembly, testing, and packaging by setting up its first chip design hub in Selangor in August 2024, aiming to move up the value chain. The country has capitalized on the proliferation of cloud computing and the growth of the Internet of Things (IoT) to establish itself as a data center powerhouse. According to HSBC estimates, data center supply in Malaysia could reach 4.1 gigawatts (GW) by 2030, the highest among ASEAN countries.

The strong manufacturing base in the region could also boost the pharmaceutical industry, both in drugs and medical equipment, as global firms address the rapidly growing domestic market due to favorable demographics. Within the region, Singapore is a well-established innovation hub. While other markets are relatively more nascent, Indonesia is increasingly seen as a key manufacturing hub for pharmaceutical products. A surge in investment has been witnessed, with global drugmakers such as Novo Nordisk partnering with local pharmaceutical companies to package pharmaceutical goods in the country.^[2]

Renewable energy, such as solar photovoltaic (PV) and its components, could gain traction due to supply chain synergies with the region’s established electronics industry (e.g., inverters and control systems). In fact, there has been a surge of FDI in renewable energy in the Philippines, with investors from China and Switzerland, after the country started to allow 100% foreign ownership in renewable energy projects since 2022.

Another Set of Risks

While the “China + 1” strategy aims to mitigate risks associated with over-reliance on China, it could expose companies to additional operational risks. Global firms must navigate the heightened complexity of supply chains across different jurisdictions. Furthermore, China’s economic influence in ASEAN has consistently increased over the last decade, as evidenced by the higher share of FDI and trade value in ASEAN countries. This growing influence has enhanced ASEAN’s integration into regional and global markets but could also make the region more susceptible to China-related risks, potentially undermining the benefits of supply chain diversification in the future.

Nevertheless, with rising geopolitical tensions globally, ASEAN countries are likely to continue attracting FDI, representing significant investment opportunities. It is understandable that most investors are not yet heavily invested in ASEAN markets due to concerns about market size, liquidity, and currency risks. Additionally, investing in growth sectors within the secondary market is challenging, as a significant portion of ASEAN market capitalization is concentrated in banks. However, banks could be a good proxy for regional economic growth and appear to be well-positioned a key beneficiary of sustained FDI inflows.