Page 28 - FoodFocusThailand No.171 June 2020

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levels of complexity by themselves, they remain
dependent on intermediate products imported from
countries that own advance technologies. Given
this, their attempts to diversify risks from being too
dependent on certain production clusters of
intermediate products in the region are quite limited.
Looking ahead, the COVID-19 pandemic, which
is hammering large countries, which are export
destinations of industrial products, has reinforced
the fragility of supply chains as countries are heavily
dependent on certain production clusters of
intermediate products. This along with pressure from
possible trade tariffs imposed by the US will likely
accelerate companies’ consideration of relocating
key production bases out of China. It has been found
that ASEAN nations enjoy several advantages over
China, including trade privileges granted by many
countries, such as the US and European Union,
plus lower labor costs. These advantages may help
offset ASEAN’s disadvantage in logistic costs
somewhat. KResearch has summarized several
interesting issues concerning changes seen in
China-ASEAN supply chains, as follows: medium manufacturing technologies. Currently, manufacturing capabilities of ASEAN are
• It may be worthwhile to relocate production inhibited by limited knowhow in the production of complex products and dependency on
bases from China if a host country has the policy of manufacturing technologies and intermediate product imports. As a result, ASEAN may
safeguarding products imported from China, and its be able to produce only some products in lieu of China, in particular downstream products.
industry overall remains labor intensive. Cambodia, Production base relocation from China can be classified into two models:
Myanmar and Lao PDR could benefit from attracting 1. Production base relocation from China to market products in ASEAN: Such a move
investments in safeguarded products because of has been undertaken by Chinese companies to seek low-cost production sources relative
the low labor costs relative to China, and trade to China, and new markets in place of those affected by the trade war. These Chinese
privileges, which may help companies to offset the companies manufacture electrical appliances without the need to rely on advanced
lofty logistic costs arising from production relocation. technologies, and auto-parts that are not overly complex. They have also moved production
Cambodia, Myanmar and Lao PDR may benefit bases, for instance auto-tires, to other countries in order to take advantage of locally-
from trade privileges granted to them as poor produced raw materials with the aim of reducing manufacturing costs. Other factors
countries, in particular under the Everything But prompting Chinese companies to relocate production bases include the host country’s
Arms (EBA) initiative, and import tax exemptions policy of protecting local industry. For instance, a Chinese iron and steel company has
without any quota set on certain product categories. diversified its production to Indonesia so as to expand its production and take advantage
These include textiles and garments that have had of abundant energy and mineral resources that are lower in costs than in China.
their production bases relocated from China. These 2. Production base relocation from China to manufacture products for export to key
ASEAN nations continue to enjoy an advantage of markets outside of ASEAN. Under this model, companies in China may consider tax
being a nearshoring location because such privileges under the trade agreements that the production sources in ASEAN have received,
production still requires raw materials from China, plus their production costs. This model represents a diversification of production base with
which stands to benefit from its advantage in the aim of reducing risks from being solely dependent on production bases in China. In
manufacturing. addition, the levels of technologies and complexity of products under this model are higher
• There will be limited production relocation of than the first model; therefore, the production of such products requires technologies or
downstream products that have the potential to intermediate product imports from upstream manufacturers. Production base relocation
generate profit and are not dependent on labor from under this model may be undertaken by multinational companies already invested in
China because it still has advantages in production ASEAN and China to expand existing production bases, avoid the impact of trade tariffs,
and logistic costs. A majority of downstream seek security for their supply chains, and find new low-cost production sources in order
products are capital intensive, including iron; China to build their competitive advantage against products manufactured by rival Chinese
remains competitive in the production of such companies. Items may include finished electronic products, namely electrical appliances,
products. portable electronic equipment, auto-parts with moderate complexity and medical equipment
• Reshoring is highly likely for the manufacturing that is not overly complex.
of products that affects the security of production In summary, although ASEAN, being one of the world’s important production sources,
chains or high-tech products with inherent intellectual has the potential to attract companies to relocate production bases from China, there are
property risks, in particular products manufactured numerous factors that are involved in such changes in supply chains. Among them include
by robots and machines, plus those that are highly reshoring to reduce risks stemming from supply chain disruption, production costs and
sensitive to supply chain disruption. Reshoring is market access. These factors will continue to affect the decision of companies to move
also likely for upstream products in the electronic out of China. Regarding the manufacturing potential of ASEAN countries, it has been found
industry using advanced technologies, such as they have capabilities to produce many types of finished products to replace those
semiconductors, and hi-tech industrial products, manufactured by China via intermediate product imports from China or countries that own
such as alloys and composite materials. technologies. ASEAN nations, however, may be able to manufacture some categories of
• ASEAN may partially benefit from the intermediate products, using regionally-sourced raw materials, suggesting that they will
relocation of production bases of products using continue to be dependent on intermediate products.

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