klee3_Photo by Tan YunfengVCG via Getty Images_smart factory Photo by Tan YunfengVCG via Getty Images

China's Loss Can Be Southeast Asia's Gain

The pandemic-induced disruption of global supply chains has accelerated the exodus of manufacturing from China. Other countries in Asia, particularly South Korea and Vietnam, stand to benefit from this trend, and should take steps to encourage relocation and reshoring.

SEOUL – COVID-19 has exposed the myriad weaknesses of cross-border value chains. Once the backbone of globalization, now they are associated with vulnerability to disruption. Thanks to the pandemic, value chains are being reconfigured with a focus on resilience. At the same time, China’s changing role in the global economy is forcing companies to reconsider it as a manufacturing hub. The world’s factory has reinvented itself as the world’s investor. Increasing digitalization of production and ongoing trade tensions with the United States have also contributed to an exodus of companies from China.

The departures include firms from a wide range of countries and industries. US toymaker Hasbro closed its Chinese factory in favor of facilities in Vietnam; Japanese electronics giant Sony has transferred operations to Thailand; and South Korea’s Cotton Club is relocating production to the Philippines, Cambodia, and Indonesia. Even Chinese firms are leaving the country for less expensive destinations. Wage rates in China are more than double those in Vietnam and close to 70% of those in South Korea. Labor shortages also have made it difficult to keep manufacturing costs down.

Moreover, fierce competition in the Chinese market from local manufacturers has made the country less attractive as a production center. A decade ago, Samsung’s Galaxy phone held more than 20% of the Chinese market; today, its market share is less than 0.5%. Given such trends, Samsung decided to relocate all of its manufacturing capacity for final consumer goods outside of China. The company currently maintains only three factories in China, and they make intermediate parts – semiconductor chips, batteries for electric cars, and multi-layer ceramic condensers that stabilize electricity flow in circuit boards.