Reconfiguration of the China-centric regional supply chain to continue apace

Reshaped by the after-effects of the US-China trade war, pandemic disruptions, and rising political pressures to deglobalise, global supply chain reconfiguration is likely to accelerate going forward. This report leverages our UBS Asia Strategy team's previous Q Series analysis that suggested that even if the bulk of manufacturing in China looks likely to stay, the natural evolution of China's comparative advantage opens up a gap for low- cost manufacturers to step into sectors that are more vulnerable to relocation. In this report, leveraging the expertise of UBS Asia Economics, Global Equity Research, and macro strategy analysts, we provide an integrated bird's eye view of the developing Asian economies that could gain from supply chain shifts, laying out their strengths and weaknesses across multiple dimensions.

Which countries in Asia can benefit from 'China + 1' supply chain shifts?

We use scorecard analysis to evaluate the potential of individual Asian economies to accommodate supply chain relocation based on a group of fundamental factors. Four conclusions emerge from our analysis.

  1. No single economy has the potential to match the scale, size and competitiveness of China's onshore supply chain network.
  2. Vietnam deftly rode the initial relocation wave as pre-existing domestic production networks and supply chain connections with China helped to give it a head start. However, the country is hampered by its relatively small-scale infrastructure and the gaps within it.
  3. India is better placed in terms of size to match China's edge in low-cost, large-scale manufacturing. India's policy reforms and improving macro stability are clear advantages even though it is disadvantaged by high logistics costs, low labour productivity and regulatory impediments.
  4. In the rest of Southeast Asia, higher production costs and a lack of scale remain key hindrances but a few of these economies may carve out a niche in areas where they have a comparative advantage. We highlight Malaysia's competitive position in the semiconductor industry, as well as Indonesia and Thailand's emerging credentials in the electric vehicle (EV) supply chain.

Growth implication for India and Vietnam from supply chain relocation

We build a framework to analyse the impact on India's potential growth (6% YoY) under various scenarios in which it gains market share in global goods exports. Were China+1 supply chain shifts to continue and India to benefit from the government's reform agenda and increased FDI, this could help India move towards 6.25-6.75% YoY growth by 2030 in our upside scenario and towards 6.75-7.25% YoY under a blue-sky scenario. The boost to direct job creation could be 1-4m per annum (with a similar indirect impact as well). Vietnam has been growing as a stable manufacturing hub. We expect continued supply chain relocation to play an important role in helping the country achieve its development goal of 7.0% annual GDP growth for 2021-30.