Asia Pacific businesses are caught in the crossfire of the US-China trade war. No matter how the conflict ends, trade patterns in the region are likely to change permanently and it will be those businesses with the most strategic foresight that stand to benefit.
We are witnessing a new type of global trade war between the US and China, with tariffs levied on products largely for broader policy objectives, most notably to control new technology and influence purchasing. While the conflict had cooled temporarily since June’s G20 meeting in Osaka, when both sides agreed to relaunch trade talks, the eventual outcome remains no clearer.
On the surface, the trade war is taking its toll on the region, compounding broader economic uncertainty and dampening confidence across Asia Pacific (APAC).
Indeed, Grant Thornton’s latest International Business Report (IBR) shows that net optimism among APAC businesses has fallen 8pp since the second half of 2018 and is more than 50% lower than the first half of last year.
Businesses need to think about how they can secure growth in the face of a possible permanent disruption to trade. This requires them to grapple with the challenges of supply chain disruption, transformative technology, and the increase in regulations and compliance that can bar access to new markets.
The trade dispute has a mixed impact across the region
The economic fortunes of countries differ across the region with the trade war affecting separate economies in different ways.
At the frontline of the dispute in Asia is China, which has seen the number of firms reporting economic uncertainty as a constraint on growth nearly double from 32% to 60% since H1 2018. Other Asian countries are also in the line of fire for US tariffs. President Trump has threatened tariffs on Japanese auto imports unless the two countries reach a trade deal, which may also involve a commitment from Japan to build more automotive factories in the US.
Singapore is signalling that it could be in a technical recession, being a trading nation with strong links to China, while deeply entrenched in the current lacklustre phase of the electronics cycle. Economic uncertainty in Singapore has risen to 50% in H1 2019, up from 36% in Q2 2018. The Australian economy is also slowing down with interest rates at historic lows of 1% and the government looking to fuel growth by inward infrastructure investment.
Parts of emerging APAC are benefitting
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However, some emerging economies stand to benefit as businesses tactically pivot their manufacturing. Founder and senior board adviser of Grant Thornton Vietnam, Ken Atkinson, says: “Vietnam has already seen an acceleration, due to the shift in manufacturing of items such as garments, footwear and power tools, because of the current trade tensions between the US and China. In the first five months of 2019, Vietnam attracted a record US$ 16.5 billion in new foreign direct investment (FDI) with 30% of that coming from Hong Kong and investments from mainland China increasing.[i] The leading beneficiary of this FDI is, in fact, manufacturing and processing.”
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In Indonesia, Tommy David, head of tax at PT Grant Thornton Strategic Consulting, says there is a common belief that the trade war may bring benefits to the country as international businesses looking to relocate production facilities and tap into new sources of supply. Some of the domestic industries could enjoy an uplift, for example furniture, textiles, steel, shoes, smartphones and plastics.
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It’s neighbour, Malaysia, is already enjoying such benefits, with manufacturers setting up operations in the country to sidestep tariffs, according to Narendra Jasani, country managing partner of Grant Thornton Malaysia. The timing is fortuitous for Malaysia, which has seen its palm oil and petroleum export revenues hit by lower prices.
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In the Philippines, business leaders were more upbeat than anywhere else in the region, with 84% saying they were optimistic about the outlook of the economy. Marivic Españo, chairperson and CEO of P&A Grant Thornton in the Philippines states: “A big driver of growth comes from the digital economy, which is forecast to grow from $5 billion in 2019 to $21 billion by 2025 and the government’s ambitious commitment to infrastructure development powering domestic demand.”[ii]
Identify and reduce risks in the supply chain
The challenge for businesses scaling to meet demand from shifting trade is not only the time it takes to move manufacturing capacity from one country to another but also the issue of the supply chain. Supplier networks in the region are getting increasingly complicated, and sophisticated approaches will be needed to manage these effectively. Businesses are assessing the trade war’s impact on their suppliers as well as their markets. While they may be able to reduce risks by reviewing their customs processes and mapping their supply chain, more fundamental changes may be necessary.
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Rodger Flynn, APAC regional head, network capabilities Grant Thornton International says: “You have to evolve. Everything is up for negotiation. You need to ask, how secure are your traditional supply chains? Those relationships with suppliers that may have been forged over many years could be challenged now. So you need to watch the signalling from the major economies, particularly the US.”
Having multiple supply chains is more critical than ever. Until recently, businesses sourcing goods and materials from China typically operated a ‘China plus one’ supply chain strategy, which involved a secondary supplier in a different country in case of disruption. That may no longer be sufficient to keep goods moving.
Flynn says: “The question is how permanent is this trade war going to be and what long-term impacts will it have on the supply chain? If you’ve got your China plus one now, are you going to need a plus two or potentially a plus three but on a smaller scale?”
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Dr Tim Klatte, head of Shanghai forensic advisory services at Grant Thornton China, says:
“It is in the best interest of Chinese businesses to focus on the long game and take it slow in terms of US-related investments. Right now, it is especially important for Chinese businesses to recognise that they don’t need to put all of their eggs in one basket. I have seen leading companies already diversifying investment into other geographies. Evidence of investment diversification as a viable option for China is plentiful, and many Chinese businesses have already implemented this strategy.”
Businesses also need to ensure they have the capacity and competencies within their organisation to manage those changing and alternative supply chains. At the same time they need to embrace technologies such as automation of processes to reduce upfront costs, increase efficiency and make good use of data.
Be strategic about the new wave of technology
Technology has become a central problem in the US-China relationship, muddying the distinction between economic competitiveness and national security. This was seen in the US decision to blacklist Huawei earlier this year. The conflict has weighed heavily on the tech and electronics industries of both countries, with no clear sign of how to resolve this.
The APAC region is one of the most advanced when it comes to launching and incubating new technologies, and is leading the development of 5G - a potential game-changer for many businesses in the region. While China’s technology capabilities have advanced at break-neck speed, the US has struggled to keep up.
Despite the trade war, investment in technology expectations in the region shows a mixed picture with most Southeast Asian nations anticipating a significant lift. Indian businesses expect a net increase in tech investment of 75% and Indonesian business a net rise of 74% over the next 12 months. In China tech investment is expected to increase by net 41% and in Malaysia by net 9%, according to the IBR.
Chetan Hans, director – financial reporting advisory services at Grant Thornton Singapore, notes