Asia’s supply chains have been tested over the past year, but their resilience has shone through as they’ve emerged relatively unscathed from the impacts of the COVID-19 pandemic.
In this interview with Unravel, Oxford Economics’ head of Asia Economics Louis Kuijs, speaks with us about longer-term changes in supply chains in Asia, reasons for the region’s resilience, and whether the quest for resilience in supply chains will result in a loss of efficiency. He also speaks about the tech war, and the possible implications on the region’s economies as the possibility of two supply chains for tech products such as semiconductors appears increasingly likely.
Unravel: Do you see any long-term/ permanent changes in supply chains in Asia owing to the pandemic?
Louis Kuijs: We definitely expect some long-term changes with regards to supply chains and the roles played by various Asian countries in them, resulting from sources such as the attempts of some countries in the West to decouple from China. Some businesses also want to hedge and not be dependent on one source of supplies or one economy.
When the pandemic broke out, there was a lot of speculation and there was a lot of worry in the West, about relying so greatly on China, a country that was at that time undergoing a huge COVID crisis.
If you go back to March or April last year, we saw quite a bit of additional speculation that some of the trends I’ve referred to, would accentuate. But now if you look at what has actually happened in the past 14–15 months, then you see that if anything, the opposite has happened. China’s global share of trade has actually increased further. A few other Asian economies such as Taiwan have also seen their share of global trade increase, while there hasn’t been a change for other Asian economies. It is really outside of Asia where countries have seen their share of global trade decrease, but that’s probably a short-term effect of the pandemic.
The global trade in electronics has been very strong, boosted by work-from-home, but also by everybody’s desire to buy gadgets in this period. I think the boom in electronics and tech exports has served Asia well. I also think that the US and some countries in Europe have been more affected by supply chain bottlenecks than Asian economies. So I would say that we still expect some further impacts of these forces, such as the attempts to decouple from China, but I’m not sure the pandemic will be a game changer by itself.
Unravel: As you’ve just alluded to, there’s a general sense that Asian supply chains have withstood the impacts of the pandemic better than expected. What are your thoughts?
Mr Kuijs: I agree. I think it is quite interesting to note that in quite a few Asian economies, manufacturing has been doing relatively well given global demand, but the service sector has been very weak because it is much more reliant on contact between people.
Again, I’ll refer quite a bit to China to answer this question, because it is close to where I work, and it is a big one. I think it is interesting because very early when the COVID-19 outbreak began, the government started talking about making sure it could defend its role in global supply chains and it took several measures to execute that policy. These range from cutting some fees and putting in place some tax reductions, but also some very simple, pragmatic things like making sure goods can make it to the ports notwithstanding restrictions on people’s movement.
Some other Asian governments have followed suit. The Malaysian government has been pretty good in working with international manufacturers to say, “look, we need to make sure that there are certain restrictions we want to impose, but if you can show us what kind of protocol you’ll follow in your factories, we could sign off on production still being possible”. I think this imperative to defend their roles in global trade has been followed by many in Asia.
Unravel: We hear a lot about making supply chains more resilient. In the quest for resilience, will efficiency and cost have to be compromised on?
Mr Kuijs: There are things we know and things we don’t yet know. We do know that many western governments, particularly the US, are pushing quite hard for the reshoring of supply chains, but also to simply tell businesses and departments of government that they cannot use Chinese products of some kinds. If you forbid your companies and government agencies to source from the cheapest, most efficient suppliers, there are industries where the price of the next decent quality provider would be only 10-15% higher. But in other industries the next best offer could be much more expensive. In the case of the US Pentagon’s shift away from Chinese drones, the impact was quite spectacular – a recent study showed that when China was cut out from the supply chain, the drones became 10-14 times more expensive.
Business people will be quite reluctant to jump on board these reshoring bandwagons and it is easy to see why. For businesses, as you say, efficiency and costs are absolutely key. For business people, political winds can blow the way they want, but as long as they are legally allowed to do something that’s good for their bottom line, it is not so easy to persuade them to do otherwise. But if you’re a government agency or department and have been forbidden to buy from a particular country, you don’t really have an option.
Take for example, Apple. The Trump administration put a fair bit of pressure on Apple to be less dependent on China as far as its supply chain goes, but if you look at the list of suppliers Apple publishes each year, there has been very little movement out of China. If anything, China is the country with the largest number of new suppliers on the list this year.
There are some areas where politics overrides economics, but the economy is big and I would expect that most areas of the economy can be quite hard for governments to push for because it is costly. You don’t want your consumer to have to pay 50% more for items that comprise a big portion of their consumption basket.
My personal assessment is that we will see some further adjustment of supply chains as governments push for them in what they deem strategic sectors – for example, medical supply chains, and probably also in high-tech areas like semi-conductors.
Unravel: Changing track a little bit. In your view, will talks between Taiwan and the US have an impact on the semiconductor supply chain in the region and beyond?
Mr Kuijs: I think semiconductors are indeed one of these exceptions that governments feel very strongly about and consider very strategic; and they are willing to spend a lot of money, and are willing to arm-twist. The US is kind of bribing and cajoling Taiwanese companies and other companies to invest in the US. Europe is trying as well, but I think it will be less successful.
While the US is such a big market and is very important for many companies, I do not think this will be very efficient. But that said, I do think we will see more semiconductor production in the US in the next 10 years than we did in the past 10, simply because the government is willing to spend so much money and is willing to really twist arms. It is willing to go far to make this happen.
Unravel: Can you tell us a little bit more about this from a Chinese perspective. Given China and Taiwan have such deep economic ties despite their political differences, how do you see these developments impacting China?
Mr Kuijs: Clearly, Taiwanese companies such as TSMC, and other companies, generally really don’t want to have to choose sides and would much rather spend a lot of money in both the US and in China and have two separate supply chains. This would be preferable to being told they cannot do business with China. I think the US successfully telling Taiwanese companies to stop engaging is still far off. It’s too difficult and I don’t think they will succeed. But I do think that, unfortunately, the trend in tech and particularly in semiconductors is really one of a fragmentation of supply chains, where you will see something like a US or a US+Europe supply chain, and there will be something like a China or a China+a large part of Asia or China+a small part of Asia supply chain. But I think this is not settled yet.
As I’ve mentioned, business people really don’t want any of this, but they’re being forced to move in this direction by these security and political requirements. I think it is clear that Europe doesn’t want to choose sides. I’ve spoken with a lot of businesses in Europe, and in Germany, where companies have extensive business in China and are doing really well, so they don’t want to choose, but in my view, the political pressure in Europe is such that the business lobby has lost sway. So now, if compelled to choose sides, European economies will follow into the US camp. Asian economies such as South Korea, Japan and Singapore will put up a harder fight to not be drawn completely into the US camp.
While none of this is very clear yet, it is clear that we are moving from the very efficient—but also probably too good to be true—one supply chain for the whole world to a more fragmented one in sectors that governments such as the US feel strongly about. Clearly, there are sectors they don’t really care about, and would rather have people buy cheap stuff in Walmart, where we are not likely to see supply chains change too much.
Louis leads the Asia-Pacific macro team and its research. He contributes to S&P Global Ratings’ macro-credit narrative and represents the firm in events, conferences, and the media, delivering its insights and thought leadership to the marketplace. Before joining S&P Global Ratings in 2022, Louis held senior positions in both the public and private sectors, including at the International Monetary Fund (IMF) in Washington DC, the World Bank in Beijing, and at the Royal Bank of Scotland and Oxford Economics in Hong Kong. While with the World Bank, he led the China Quarterly Update, headed the Bank’s mid-term review of China’s 11th Five Year Plan, and led research on China’s saving and investment, rebalancing, and long-term growth and structural change.