COVID-19: FDI dynamism in South and Southeast Asia

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.

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 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

Country	Policy Signalling
Japan	In 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.
US	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.

Source: Bloomberg and China Briefing

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.

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 too appear to be preferred destinations.

Table 2: Companies Shifting Production out of China

Company	Origin	Planned Shift	Industry
Asics	Japan	Vietnam	Footwear
Asustek	Taiwan	Taiwan	PCs
Apple	US	India/Vietnam	Electronics
Brook Sports	US	Vietnam	Footwear
Casio Computers	Japan	Thailand	Wristwatches
Citizen Watch	Japan	Thailand	Wristwatches
Compal Electronics	Taiwan	Taiwan	Electronics (Apple supplier)
Dell	US	Taiwan/Vietnam/Philippines	PCs
Delta Electronics	Taiwan	India/Vietnam	Electronics (Apple supplier)
Foxconn	Taiwan	India/Vietnam	Electronics (Apple supplier)
Funai Electric	Japan	Mexico/Philippines/Thailand	Electronics
Goertrek	China	Vietnam	Acoustic Components (Apple Supplier)
Google	US	Vietnam/Taiwan/Malaysia	Electronics (Nest, Pixel)
GoPro	US	Mexico	Video Camera
G-Tekt	Japan	Japan	Auto parts
Harley Davidson	US	India/Thailand	Automotive
Hasbro	US	India/Vietnam	Toys
Hewlett Packard	US	Taiwan	PCs
Iris Ohyama	Japan	South Korea	Fans
Kayamatics	Hong Kong	Malaysia	Consumer Robotics
Keihin	Japan	Japan	Auto parts
Komatsu	Japan	Japan/Thailand/US	Construction equipment
Kyocera	Japan	Vietnam	Printers
Merry Electronics	Taiwan	Thailand	Electronics
Mitsuba	Japan	Vietnam	Auto parts
Mitsubishi Electric	Japan	Japan	Electronics
Nidec	Japan	Mexico/Thailand	Auto/home appliance parts
Nintendo	Japan	Vietnam	Gaming consoles
Panasonic	Japan	Malaysia	Electronics
Pegatron	Taiwan	India/Vietnam	Telecom equipment (Apple supplier)
Procon Pacific	US	India	Packaging
Samsung	South Korea	Vietnam	Electronics
Sharp	Japan	Vietnam	PCs
Skechers	US	India/Vietnam	Footwear
Steve Madden	US	Cambodia	Footwear
Sumitomo Heavy Industries	Japan	Japan	Robot components
TCL	China	Vietnam	Electronics (TVs)
Toshiba Machine	Japan	Japan/Thailand	Injection moulding machine
Von Wellx	Germany	India	Footwear
Wistron	Taiwan	India/Vietnam/Mexico	Electronics (Apple supplier)

Source: Authors’ own, compiled from 9to5 Google, Nikkei Asia Review, NNA Business News, Rabo Bank and other media reports.

To conclude, the ongoing pandemic has highlighted in a pronounced way, the dilution of the Chinese dependency of developed economies such as 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 on these investments departing China?

• Economics and Finance
• China
• India
• The Pacific, East and Southeast Asia
• Automobile Parts
• COVID-19
• FDI
• Fixed Asset Investment
• Growth Drivers
• Retail Spending

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