Asia's outstanding companies: Firms look further afield
From Taiwan to India and all points in between, businesses are bracing for the fall-out from the US-China trade war – hence the search for new bases for manufacturing.
By Morgan Davis
Geely Automobile Holdings’ first-half results were disappointing this year: net profit fell 40% from a year ago, while the group, headquartered in Hangzhou, China, is feeling a change in mood. Consumer spending has fallen and new cars are not being driven off the lot as quickly as before.
“We can’t see any sign of [the trade war] ending,” says Daniel Dai, Geely’s head of investor relations, of China’s auto industry. “We should be conservative to face the uncertainties ahead of us.”
Geely had previously seen steady growth, but the hit that Chinese consumer confidence has taken from the trade war has been hard for many businesses.
“Last year was the first time in 28 years [Geely had] a negative growth rate,” adds Dai.
Of course it’s not just Chinese companies that have felt the crunch. All across Asia, companies are rethinking their business strategies, shifting manufacturing bases and bracing themselves for a global trade war, even as many express hope that US president Donald Trump and Chinese leader Xi Jinping will resolve the trade conflict soon.
Palm oil companies such as Indonesia’s Bumitama Agri, for instance, are also feeling a shift in demand.
|Christina Lim, Bumitama|
“The trade war has impacted demand for soy oil and its prices,” says Christina Lim, head of investor relations at Bumitama. “There are some small spill-over effects of increased volume from China for palm oil, but the knock-on impact of lower soy oil prices has also led to a drastic fall of palm oil prices in the first half of 2019.”
Bumitama hasn’t yet altered its business strategy, but the firm is not optimistic.
“The best remedy is to anticipate the worst and remain cautious on our operations, prioritizing the key businesses and delaying expansions,” says Lim.
Thammasak Sethaudom, chief financial officer of Siam Cement Group (SCG), says: “Customers are cautious to build inventory.”
Bangkok-based SCG’s businesses include packaging, cement and building materials, and chemicals. Demand for chemicals, which makes up 51% of SCG’s bottom line, has fallen in the wake of the trade war.
“We sell very little to China, but as situations in China change, it affects the sale of chemical products,” says Sethaudom. “We’re still affected by what happens in China.”
The best remedy is to anticipate the worst and remain cautious - Christina Lim, Bumitama
Over the last few months, SCG has experienced lower economic growth globally, particularly in some parts of southeast Asia, and reported a 38% drop in earnings in its chemical business during the first half of 2019, something Sethaudom attributes to the trade war.
“We need to be very certain that we will survive this,” says Sethaudom.
SCG has a large chemical project in Vietnam that is set to start operating in 2023. This could be the company’s future cash cow, says Sethaudom. At the same time, SCG switched to an asset-light strategy in its cement and building materials business late last year, partly in response to the trade war.
That move prioritizes the company’s cash flow, leaning on expectations for the Vietnam project.
The trade war has accelerated some industrial changes that were already under way.
Until the start of the trade war, people saw trade as an enabler, says Munir Nanji, head of global subsidiaries group Asia Pacific banking, capital markets and advisory at Citi. But the trade war forced companies to think again about how they manage trade, where their manufacturing is based and where their supply chain comes from.
“Trade is not going away, but it is evolving,” Nanji says. “The trade war has forced companies to rethink their strategies.”
The reality is that China will be an important consumer and supplier base for many companies for years to come.
“The Chinese auto market is the most profitable market in the world,” says Geely’s Dai.
The firm’s customers are in eastern Europe, southeast Asia and the Middle East, but the Chinese base has been – and will continue to be – a focus for Geely, he says.
The shift in trade won’t come in the form of a mass exodus out of China, but instead an approach that Nanji calls ‘China plus one.’
“China has been the factory of the world,” he says.
Large manufacturers know that they need a China base, but now they’re looking to add other options, Nanji adds.
Vietnam, Thailand, Malaysia and other countries in southeast Asia have benefitted from this new thinking.
“These Asean countries are saying: ‘If companies are going to move from China, why not attract foreign investments?’” says Nanji.
The trade war has forced companies to rethink their strategies” - Munir Nanji, Citi
As a whole, Asean offers an educated workforce and a large millennial generation. These countries have transport connections to move products. Likewise, Asean is experiencing its own digital revolution, with internet usage and smartphone penetration already high.
In a recent poll, Citi found that nine of its 10 biggest clients would be attracted to invest in Asean or add to existing investments.
Taiwanese communications equipment company Sercomm is one company that has shifted some of its manufacturing away from China. When the trade war started, chief executive officer James Wang began to look around.
“It’s very unpredictable,” says Wang of the trade war. “We couldn’t expose our global clients to that uncertainty.”
He says that the trade war expedited the company’s transformation.
“We planned aggressively to allocate partial capacity from China to southeast Asia,” says Wang.
Just over a year ago, Sercomm had about 90% of its manufacturing based in China, and the other 10% in Taiwan. By the middle of 2019 that had shifted to a balance of 60% China, 20% Taiwan and 20% to the Philippines.
“That quick move helped us to grab more market share,” says Wang. “All customers, especially in the US, are exposed to uncertainty.”
He adds that customers respond well to the agility and flexibility of companies looking to meet their needs.
Wang expects Sercomm to open additional manufacturing outside of mainland China.
“I’d rather build our future manufacturing capacity in close proximity to our targeted market,” he says. Even so, “we cannot really avoid relying on the China supply chain.”
Wang expects it will take some time for suppliers to shift businesses, and many will stay put in China. That means that at least for the time being, Sercomm’s supply chain has gone from a one-day cycle in China to a 10-day one in the Philippines.
In the long run, more manufacturing could be moved to be closer to the demand base, says Rafael Consing, chief financial officer for Philippines-based International Container Terminal Services (ICTSI). That presents openings for Mexico and the rest of Latin America, he adds. “Definitely our eyes are open, looking for opportunities in these areas.”
Munir Nanji, head of global subsidiaries group Asia Pacific banking, capital markets and advisory at Citi
Some Asian companies plan to take advantage of the trade war to build their businesses at home and globally, perhaps while weaker competition is crushed.
For industries such as shipping there could be M&A opportunities, says ICTSI’s Consing. Companies may want to shift to more asset-light models, or may want to adjust their balance sheets by selling off some of their businesses.
This could present opportunities for the surviving companies, says Consing. “Whoever has the right capital structure will win in the challenging environment.”
Geely’s Dai agrees: “Bad news is also sometimes good news”.
Despite the blows the auto industry has taken, Dai says, there is still time to focus on technology development and new models. People will eventually want cars again, he adds, and Geely needs to be ready to meet that demand.
“The Chinese auto market is overcrowded,” says Dai.
Like Consing, Dai reckons that the trade war could shake out some of the competition.
“Only in the difficult times can we know who is the most competitive,” he says.
While the opportunities to be found in a global trade war may seem few and far between, one country tops the list as benefiting most from the manufacturing shift away from China: Vietnam.
“They’ve just seen a significant amount of investments coming into that country,” says ICTSI’s Consing.
Vietnam has positioned itself to take in more manufacturing and has been attracting cash and companies. If anything, China’s recent problems have only ramped up the migration to Vietnam.
If the trade war is getting any fiercer…the capacity [in Vietnam] is just too small to handle all the flood that will come from China - James Wang, Sercomm
“Even without the trade war, Vietnam has been receiving a lot of FDI (foreign direct investment) recently,” says Hoang Viet Phuong, head of institutional research at Saigon Securities.
Korea used to top the list of countries investing in Vietnam, but China led in FDI for the first half of 2019, contributing 21.6% of total investments, or $1.79 billion, Phuong says. Korea contributed 17.8%, or $1.47 billion, and Japan made up 13.6%, or $1.12 billion. Some 71% of FDI this year has gone into manufacturing.
The biggest exports from Vietnam are electronics, clothing, furniture and footwear, many of which are also manufactured by large FDI contributors.
“This is very good for Vietnam,” says Hoang. “We’re emerging as the manufacturing hub for the region.
“We have received newcomers, and the existing players want to expand their production as well,” she adds.
There are though some areas that Vietnamese firms cannot service on a large scale, for example high-quality tires. The majority of tire exports from Vietnam come from Chinese company Sailun Tire and Korean company Kumho Tire.
Vietnam must be cautious, says Hoang. Manufacturers are aware that they need to source more supplies from outside China, and many are shifting product lines to both buy from and sell to the US, she adds.
“There are a lot of concerns about the impact of the trade war, because global demand has slowed down and Vietnam has a high export contribution to its GDP,” says Hoang. “People are well aware that the trade war might lengthen and may impact our local production.”
On top of that, Vietnam is not the only destination that companies are looking at. Wang says that Sercomm deliberately avoided moving its manufacturing to Vietnam, and looked at the Philippines and Indonesia instead. The Philippines offered the advantage of an English-speaking workforce, and Sercomm already employed a number of Philippine workers in Taiwan.
In addition, “if the trade war is getting any fiercer…the capacity [in Vietnam] is just too small to handle all the flood that will come from China,” says Wang. “We are latecomers and I don’t want to get there too late to compete.”
The trade war headlines have been focused on the battle between the US and China so far, but many companies and bankers are worried that the trade war will soon turn global.
“It’s a new order, new chaos triggered by the US-China trade war,” says Sercomm’s Wang.
Geely’s Dai says: “It’s not only the trade war, we have a tech war, a monetary war.”
He points to the US and its views on Huawei and the movement of the renminbi: “These crises are beyond our knowledge and control.”
Consing agrees: “We really don’t know what the effect will be once Brexit occurs.”
He thinks there is a “real risk” of the trade war spreading to Europe as the US looks for its next target for renegotiating trade arrangements. Smaller conflicts between Japan and Korea, or between Pakistan and India, for instance, are also adding to escalating tensions.
“It’s not a good situation we’re seeing around at the moment, from a trade perspective,” Consing says.
It’s not only the trade war, we have a tech war, a monetary war - Daniel Dai, Geely
Some of the change can already be seen in the global shipping industry, where demand growth is expected to be around 2% this year. ICTSI grew 7% during that same time period.
Part of the differentiator for performance of container port companies will come from the cargo they move, says Consing, likening a global shipping drop to the 2009 industry downturn.
“Everything that needs to be consumed still passed through ports,” he adds, explaining that the losses come from the drop in discretionary spending.
“Because what happens to come through our ports are consumption goods, then it will be all about [domestic market] confidence,” Consing says. Once global confidence is dented, everyone will be affected, he adds.
Geely’s Dai agrees: “You can’t go without drinks, food, clothing, but you can go without procuring a car.”
Though, he adds: “It’s meaningless to have these trade conflicts. You can’t close your door. You should open your door more and more.”
Perhaps only Trump knows when the US-China trade war will end, since so much of it depends on his whims. At the end of June after the G20 summit, for instance, he said he wouldn’t roll out any new tariffs for China. A month later he reneged on that promise, announcing additional tariffs on $300 billion worth of Chinese goods.