Supply-chain shifts to Asean now led by new capacity: Citi

MORE supply-chain shifts to Asean are being announced, and these are increasingly led by capacity additions rather than the use of existing capacity, said Citi economists Kit Wei Zheng and Ang Kai Wei in an Oct 15 report.

They noted 29 announcements in the third quarter of 2019 and 24 in the second quarter, compared with an average of 18 each quarter from Q3 2018 till Q1 2019, and just two in Q2 2018.

Since Q2 2019, capacity additions comprised 51 per cent of all announcements, up from 36 per cent of announcements in the preceding four quarters.

Production shifts to existing Asean facilities now make up a smaller share of such announcements -- 26 per cent, down from 42 per cent previously -- "likely as existing spare capacity is increasingly fully utilized by trade diversion".

More such announcements are also being made in non-electronics sectors, as the list of items hit by United States tariffs on China increases.

Electronics companies now account for 32 per cent of all announcements in Q2 and Q3 of 2019, compared with 61 per cent before that.

Year-to-date investment approvals have picked up in Malaysia, Vietnam, and Singapore, but remain stable in the Philippines and Thailand, according to Citi.

Vietnam remains the top destination, accounting for 61 announcements. Its dominance is aided by its proximity to China and market access via free trade agreements, said the Citi economists.

"But in light of greater US scrutiny, we think that policymakers are likely focused on the quality (rather than quantity) of investments," they added.

Other major destinations are Malaysia with 19 announcements, Thailand with 16 and Cambodia with 11.

Electronics-related moves have picked up in Malaysia since the second quarter, reflecting its status as an electrical and electronics hub, and the fast-tracking of investment approvals -- from requiring three months previously to one month now.

Though Thailand has not seen a pick-up yet, "policymakers noted that around 48 MNCs are considering relocation and new incentives were introduced in early Sept, with the aim of attracting 100 companies", noted the economists.

And while the Philippines and Indonesia have lagged thus far, both have plans to facilitate investment. The Philippines intends to cut taxes and amend the investment laws, while Indonesia intends to cut taxes and revise labour laws.

As for Singapore, while the island is "not commonly seen as a candidate for production relocation", it would still benefit from its position as a regional hub for supporting services, said the economists.