This week, a hedge fund manager sent me some thoughts from a CEO of a publicly traded American handbag and luggage brand. Because it was all off the record, I’ll keep it simple. The CEO said they ended last year with 54% of their imports sourced in China. By the end of this year, it will be cut by more than half. Their top country for manufacturing now is Vietnam, followed by stitch-and-sew manufacturing clients in Myanmar and Cambodia, all rather quickly replacing China.
That doesn’t necessarily mean a loss of business for the Chinese company. They are just as likely to have upped and moved part of their production to southeast Asia or Mexico themselves. Many of them have been thinking of doing that anyway due to higher labor costs in China and tighter environmental regulations. The trade war has given them an impetus to move faster.
In theory, that means fewer jobs for China blue-collar workers, especially in lower-skilled manufacturing jobs like apparel manufacturing.
One of the countries that always comes out on top in all of this reshuffling is Vietnam. The country, once subject to the “domino theory” and a U.S.-versus-communism war that the U.S. lost (Vietnam is a Marxist-Leninist one-party town), is the biggest beneficiary so far of a supply chain influx. No one else comes close.
Most Asian countries have seen reductions of exports to China, as China cuts back its components imports due to lower sales to the U.S.
The trade war has had visible impacts on China’s exports to the U.S., with total shipments down 8% since October last year.
A full assessment of the trade-war effect on Asia, therefore, needs to consider Asian exports to both the U.S. and China, says Aidan Yao, the senior China economist for AXA Investment Managers, an $830 billion global asset manager.
“(Asia) has taken a big hit due to the region’s integrated supply chain centered on China, and the loss is not fully compensated by the export gains to the U.S.,” says Yao. “The combination of gains to the U.S. and losses to China suggests damages to the region’s export supply chain. Those who have gained in the U.S. market may have benefited from short-term substitution effects but might not be the long-term winners once the global supply chain is fully adjusted,” he says.
As the latter happens over time, the manufacturing base is clearly seen shifting towards other emerging Asian countries, led by Vietnam, India and Thailand, where production costs are considerably lower than China.
Long-term winners may not be the same as the short-term gainers, but Vietnam stands out among them all, based on data compiled by Yao in a report for clients this week.
Those trying to game out the winners and losers in the trade war need to examine exports from a particular country to the U.S. and to China. Because so far the absolute dollar-value change of Asia’s exports to the U.S. and China combined is showing most countries as net losers in all this due to declining sales to China, their main market.
In Asia, “Vietnam is really the only net beneficiary,” says Yao.
It is not easy for companies to reconfigure their supply chain. Many American companies have their own factories in China and have had them for decades. Closing them is a costly endeavor.
Midsize and smaller businesses that use China as a means to mass produce components needed in a product, whether it’s a baseball hat or a sound system for cars, have long-term relationships with Chinese businesses that they do not want to break.
In that sense, the China-U.S. trade war is like the bad blood between the Montague and Capulet families forcing the undesired separation of Romeo and Juliet.
“I was in China in the fall to negotiate contracts for one of our clients right when Trump slapped tariffs on $200 billion worth of Chinese imports,” says Baker Donelson attorney John Scannapieco. He is the co-leader of their global business team, helping clients caught in the trade-war zone.
His anecdotal evidence is as telling as the email from the hedge fund manager.
“When I met with them in the fall, none of them said they were thinking of moving. When I went back in November, there was also no movement on the issue even though tariffs had just kicked in. In December, I had one company getting ready to source elsewhere,” he says. “Then I went back in May. They are all thinking about it now,” he says about the Chinese manufacturers targeting new hubs in southeast Asia. Mexico is also on the radar screen.
“You’re going to see more companies exploring outside of China,” Scannapieco says. “Unless you’re in China to sell to China, why be there? It’s becoming too much of a risk.”