Reaction in the supply chain: Commercial war refugees must settle in Vietnam and Thailand

BANGKOK: Fred Perrotta spent four years building a network of Chinese suppliers for his line of fashionable backpacks, but as soon as the United States announced tariffs on nearly half of their Chinese imports, he started looking for suppliers in other countries.

This process is at this late stage, it would be too late to reverse, even though US President Donald Trump and his Chinese counterpart Xi Jinping were calling for a truce in the growing trade war that they organized at the summit. of the G20 this week, said the 33-year-old US president.

Tortuga, Perrotta's company, adheres to what industry experts consider to be the most significant change in cross-border supply chains since China's accession to the World Trade Organization. 2001.

This development creates stiff competition for securing new facilities in neighboring countries and rebuilding supply chains outside of China, home to one-fifth of global production sites.

"Everyone is nervous and struggling," Perrotta said by phone from Oakland, California, where he had recently received the first samples from a potential new supplier in Vietnam.

"In the long run, we will probably change everything."

The rush is motivated by the risk that US tariffs on China will be higher and higher, and the fear that neighboring emerging economies can only accommodate new businesses on a "first come, first served" basis.

Vietnam and Thailand are becoming favorite destinations, but they still face capacity constraints ranging from paperwork to skilled labor to limited infrastructure.

FRENCH ACTIVITY

Reuters talks with more than a dozen business executives, commercial lawyers and lobbyists in various sectors have revealed a frenzy in Asia in recent months: executives demand samples of products, visit industrial parks, hire lawyers and meet with officials.

In June, Hong Kong-listed furniture maker Man Wah Holdings bought a $ 68 million factory in Vietnam. He had announced earlier this month that he was planning to almost triple his capacity to 373,000 square meters by the end of 2019.

"The acquisition aims to mitigate the risks associated with tariffs," Wah said in a statement.

Vietnam-based industrial property developer BW Industrial says investigations have increased since October, and all its factories are now leased.

"Manufacturers come from all over the world, but they all have production plants in China and must start producing as soon as possible," said Chris Truong, sales manager at BW Industrial.

In Thailand, SVI Pcl, which provides electronic and manufacturing solutions, has announced the signing of four new contracts worth around US $ 100 million with existing customers operating in China.

"The trade war is good for us," said CEO Pongsak Lothongkam. "We have been contacted by so many companies that we need to prioritize."

KCE Electronics, the largest manufacturer of printed circuit boards in Southeast Asia, has been contacted by US companies seeking a new supplier to replace a supplier in China, said General Manager Pitharn Ongkosit at Reuters.

"This is a good opportunity, many customers have contacted us to ask for information about our products and prices, but there is no sale yet because it will take time," he said.

Stars Microelectronics Pcl, another supplier of electronics manufacturing services in Thailand, is also starting to secure new contracts.

"Two (or three) companies will soon start transferring their production base (out of China)," said Peerapol CEO Wilaiwongstien.

Cambodia is also attracting interest, with New Jersey-based, New Jersey-based bicycle manufacturer Kent International Inc., which is moving New Jersey's Chinese production to South-East Asia.

"We have a large company in the United States," Arnold Kamler, the majority owner of the company, told Reuters. "There is no choice but to seek as soon as possible to abandon production from China."

DISTURBANCE

Replenishment and offshoring efforts mark the acceleration of an already established trend as China's economy shifts towards high-tech services, consumption and production.

"We are about to experience the biggest break in supply for a generation," said Stephen Lamar, executive vice president of the American Apparel & Footwear Association, whose more than 1,000 members contribute each year for more than $ 400 billion in US retail sales.

"What companies say about No.1, is" For years we have talked about diversification from China and now we have to do it. "

It can take years for production to shift: companies need to raise funds, find the right suppliers, manage new logistics, and face new legal and accounting problems in a country they may not know. to be not good.

"Any offshoring out of China will be very slow and very uncertain," said Aidan Yao, Senior Asia Economist at AXA Investment Managers.

Low-tech goods and low-value manufacturing would be the fastest to migrate, while higher value-added exports in the machinery, transport and information technology categories would likely take decades to relocate due to R & D costs and competitive labor costs in China, said UBS in a note this month.

Yet a Citi customer survey last month showed that more than half of them are already adjusting their supply chain to limit the disruption to their business.

China's sophistication in areas such as automation means that no country can replace China, said Sandler trade lawyer Sally Peng, Travis & Rosenberg.

"Everyone is therefore looking for this country strategy for China plus one, plus two, plus three, up to Africa," she said.

Businesses have little hope of a truce in the trade dispute when Trump and Xi are scheduled to meet on the sidelines of the G20 summit in Buenos Aires this week.

Indeed, Mr Trump announced Monday that he hoped that tariffs on Chinese imports rising to 200 billion US dollars would be increased from 10% currently to 25%.

While Chinese export data shows little effect on the trade war, some economists say it is because companies are eager to get shipments through before they get more tariffs.

COLLATERAL VICTIMS

Certainly, the emerging emerging economies of Asia do not necessarily rise up in the face of the prospect of an increasingly serious trade war between the two largest economies in the world.

Growth slowed in the third quarter in Southeast Asia, as well as in Taiwan, Japan and South Korea, partly blamed on the trade war.

Thailand's exports of electronic integrated circuits, for example, increased by 4% to the United States in October but by 38% to China. The climate indicator of manufacturing industries in Vietnam is the highest in Asia, but it has well exceeded its peak.

Lack of infrastructure is also a problem for countries seeking to resume operations.

Thailand ranks 41st in the World Bank's infrastructure quality rankings, Vietnam 47th, compared to 20th in China.

Bangkok is seeking to solve this problem with its East Economic Corridor, an ambitious US $ 45 billion development project, which includes improvements for ports, airports and railways. in deep water.

Beyond infrastructural bottlenecks, bureaucracy – particularly in Vietnam – remains difficult to manage and skilled labor is not readily available.

Vietnam's unemployment rate is 2.2%. Thailand is even lower.

"The proportion of unskilled labor in Vietnam remains high and there is no effective plan to improve this issue, and I do not see any significant change in five or even ten years," said the vice president of Vietnam Electronic Industries. Nguyen Phuoc Hai Association.

"The question of whether cheap labor will remain one of the advantages of Vietnam facing the Fourth Industrial Revolution is debatable."

(1 USD = 32,9800 Baht)

(Reports of Anne Marie Roantree, Master Farah, Noah Sin and Marius Zaharia in HONG KONG, Orathai Sriring in BANGKOK, Khan Vu and James Pearson in HANOI, Rajesh Kumar Singh in CHICAGO and Marius Zaharia and Lincoln Feast