Vietnam and India have seen an explosive surge of investment from Chinese companies shifting their production capacity abroad as they try to minimise the affects of the trade war, research by Goldman Sachs has found.
“The trade tariffs between the US and China serve as a pressing driver for companies to have part of their production overseas”, said the investment bank’s report issued last Thursday.
Cheap labour and land costs are the main driving force behind relocation of factories, but the threat of trade tariffs has made the push more keen, the report said.
The landscape of the technology supply chain in the Greater China region is changing as companies that make components for smartphones, computers and other high-tech products increasingly move their manufacturing facilities out of China.
More than 34 listed companies within that supply chain have set up or are building production capacity in Southeast Asia, according to the report, which is based on interviews with companies.
Vietnam and India emerged as “the two most popular destinations for new production sites” among companies in the tech supply chain across China and Taiwan, the survey found.
Vietnam’s newly registered foreign direct investment (FDI) capital from China jumped by 4.6 times year on year to reach US$1.56 billion yuan during the first five months of 2019, according to the General Statistics Office of Vietnam.
India’s FDI inflow from China grew 137 per cent in 2018 from the previous year, exceeding US$391 million, according to the country’s Department of Industrial Policy and Promotion.
AAC Technology, a Hong Kong-listed electronic components producer based in Shenzhen, will have new factories in Vietnam and the Philippines ready as soon as late 2019, the report quoted management from the company as saying.
The firm supplies acoustic components for smartphones, and lenses to US phone maker Apple and its Chinese competitor Huawei, mainly from its production bases in mainland China.
However, the company’s management said that about 10-15 per cent of acoustics revenues are being generated in Vietnam currently, with new capacity to be gradually added in 2020.
Shenzhen-listed cable assembly company Luxshare has only 3 per cent of its revenue directly linked to the US market, but is also extending its production sites to Vietnam and India. The company’s second factory in Vietnam is aiming to start production by June 2020.
Luxshare set up an Indian subsidiary in early 2019, and plans to start production by the end of the year, the report said.
Taiwanese multinational electronics giant Hon Hai has 14 affiliates in India, covering manufacturing, logistics, maintenance, sales and marketing. It also has six affiliates in Vietnam, and has one more planned with investment worth US$16.6 million, the company announced in January, the report said.
The report highlighted some of the challenges of moving into the region. The first, it said, is the long lead time: it takes three to six months for a new site to be evaluated and at least 18 months for factory set-up before production can begin.
The second challenge is the complexity of operation, as coordination of procurement, logistics, and production across multiple locations “can create inefficiencies”. The third is workers’ skill levels and culture integration.
Because of these drawbacks, the analysts believe the manufacture of high-end components like semiconductors is unlikely to move to Vietnam. Smartphone and PC production is more likely to be moved to Vietnam and India.
More from South China Morning Post:
- Inside China Tech: Here's how the US-China tech war is affecting small electronics companies
- While Huawei will be bruised by tech war, some Chinese suppliers could suffer a knock-out blow