• Geopolitical anxieties around US-China relations and risks in the Taiwan Strait will drive supply-chain diversification over the 2020s. The fading attractiveness of China’s business environment will complement these discussions.

• South‑east Asia will be the main beneficiary of these trends, given EIU’s own assessment of the region’s generally favourable business environments. India enjoys strong latent potential, but will struggle to capture a higher degree of FDI flows in 2023‑27.

• Asia will be the world’s fastest-growing region throughout most of the 2020s. Consequently, we expect multinationals to avoid withdrawing from the region, even as geopolitical anxieties intensify, given the potential opportunities on offer.

EIU expects discussions around supply-chain shifts away from China to remain a constant discussion point in corporate boardrooms throughout the 2020s. We retain our long‑held view that a corporate exodus from China remains unlikely, given the attractiveness of the Chinese consumer market, as well as the competitive advantages offered by its sophisticated industrial clusters such as Suzhou industrial park (semiconductors, bio- and nanotechnology) and Jiangsu industrial cluster (pharmaceuticals, renewable energy), labour resources, and production and logistics networks. Tensions between China and the US, as well as persistent anxieties over Taiwan, will nevertheless underpin the urgency for firms to diversify their operations and supply-chain footprint in Asia. The lacklustre momentum attached to China’s post-pandemic reopening, alongside expectations of a sustained slowdown in economic growth later in this decade, will also drive these discussions. China’s fading attractiveness highlights new commercial opportunities in India and South‑east Asia. Consequently, we expect foreign direct investment (FDI) flows in Asia to be largely concentrated outside China in 2023‑27, to the benefit of the country’s regional neighbours.

How long will supply-chain shifts take?

Supply-chain shifts will nevertheless be a gradual process, and will differ significantly by industry. For some sectors, such as finished electronics or automotive parts, Asia is already home to a number of alternative former China production sites, particularly in South‑east Asia. This should allow for a relatively quick rerouting of manufacturing and logistics activity. Some of these dynamics were already on display in 2020 and 2022, when lockdowns in China forced the activation of alternative supply networks built out of markets like Vietnam. Malaysia and Thailand also saw larger inflows in 2021‑22 compared to 2018‑19.  

For many other sectors, supply-chain diversification will require a much longer process. In the past few decades, China’s integration with the global economy has allowed it to onshore critical production processes spanning a wide range of sectors. For many industries—ranging from automotives and electronics to chemicals and pharmaceuticals—China is (or is among) the sole source of certain upstream or intermediate goods, as exemplified by its dominance in rare earths and active pharmaceutical ingredients. Replicating these supply chains outside of China will, in some cases, require massive sums of capital investment, probably spread across multiple years. For companies, the cost of supply-chain diversification needs to be weighed against their profit considerations. If supply-chain replication ultimately ends up duplicating these processes in more expensive or less efficient ways, it will not make commercial sense for them to effect the changes. 

Which markets are Asia’s biggest winners?

Certain markets in South‑east Asia have already emerged as “winners” in attracting FDI, particularly in the context of worsening US‑China ties. Our long‑held view has been that countries like Vietnam, Malaysia and Thailand would reap the biggest benefits of these trends. Nevertheless, companies need to assess a wide range of considerations to assess which markets make the most sense for their operations.

Our business environment rankings (BER) suggest that different markets have different strengths and weaknesses. Vietnam, which in recent years has emerged among the top FDI recipients in ASEAN for example, had an estimated population of about 99.5m in 2022, lower than the population of China’s Guangdong province (127m). Structural constraints from the smaller population size and talent pool (when compared to China’s) limit the capacity for Vietnam to absorb new production. Furthermore, there will be upward pressures on wages, lifting costs for both companies already operating out of Vietnam, as well as prospective entrants into the market. In addition, the massive FDI boom into Vietnam’s export-oriented manufacturing sectors in recent years has worsened congestion in the country’s ports and roads and caused power shortages. These factors lead to a poor BER score for Vietnam’s infrastructure, which ranks below rivals such as Malaysia and Thailand. 

Nevertheless, the lower labour costs and potential market opportunities on offer in South‑east Asia’s stand in contrast to the more expensive economies of North‑east Asia. South Asia is also less advantageously positioned to capture FDI flows. Although we see an improving FDI outlook for India’s manufacturing sector, FDI inflows into India will lag behind those of South‑east Asia, owing to India’s poor infrastructure, a relatively unskilled labour force and a challenging political environment, which remain significant impediments to business. 

What are the supply-chain trends to watch?

Diversification and supply-chain shifts are not a new concept. In the 2010s these discussions were primarily driven by rising labour and other input costs in China, particularly amid fast-growing wage growth in China’s coastal provinces. Starting from 2018, these discussions received greater urgency as a result of the US-China trade war, reflecting strategies around tariff avoidance. In the 2020s we expect geopolitics to be the biggest driver of these discussions, as concerns around asset and staff safety compliment (or even eclipse) commercial or profit-driven decision-making. 

That said, supply-chain restructuring—including in the context of buzzwords like “near-shoring” or “friend-shoring”—will be difficult to implement in practice. Efforts by the US and the EU to re-shore investment into domestic semiconductor manufacturing will lead to a return in capital flows to those markets, given strong state-support policies. For many companies, however, the lower costs in Asia—alongside the commercial rationale of staying close to Asian markets, including China—will discourage many firms from withdrawing their operations from the region. For example, Google (US) will produce its Pixel 6 smartphones in Vietnam for the first time in 2023 to avoid overdependence on China (currently its main base for Pixel 6 smartphone production) and to take advantage of cheaper labour in the country compared to the US. Our forecast that Asia will be the world’s fastest-growing region throughout the 2020s will complicate corporate decision-making, as business leaders seek to mitigate risk while positioning to ride the wave of potential opportunities.

Moves by the US, EU and other governments to “de‑risk” supply chains suggest that government pressure on companies to diversify their supply chains—particularly from China—will intensify over this decade. Risks emanating from compliance burdens tied to export controls, sanctions, import bans, tariffs and other trade restrictive measures could lead to higher costs and greater production inefficiencies. For example, some textile and clothing manufacturers are setting up dual “China supply chains” (for products being sold into the Chinese market) and “ex‑China supply chains” (for products sold outside of China) to comply with US import bans on Xinjiang cotton. 

This will be particularly evident for Western companies, but there will probably be spillover to companies from countries that are aligned with the US (such as Australia, Japan, South Korea and Taiwan), given their necessity to conform to policies established by their home governments. The technology sector is particularly vulnerable to these political constraints. Investment incentives under the US CHIPs and Science Act, for example, are subject to a requirement that semiconductor manufacturers stop producing advanced chips in China. This halted the expansion plans of the Taiwan Semiconductor Manufacturing Company in Nanjing.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the economic, political and policy outlook for nearly 200 countries, helping organisations identify prospective opportunities and potential risks.