Now Reading
Chinese companies turn to SEA amid China’s economic, regulatory challenges

Chinese companies turn to SEA amid China’s economic, regulatory challenges

For years, the China Plus One strategy served as a buffer against supply chain disruptions. Western companies adopted such approach to diversify their operations away from China amidst rising operating costs and the country’s escalating trade tensions against the United States (US). 

But the tables are now turning. What began as a strategy for foreign firms is now a defining trend for Chinese companies themselves.

China is increasingly directing its investments eastward, focusing on Southeast Asia (SEA). China’s State Council Information Office (SCIO) on April 22 said in a press release that a significant part of China’s non-financial outbound direct investments (ODI) is going to SEA.

ODI are investments made by a country’s entities abroad. These investments are aimed at gaining influence in foreign markets.

In the first quarter of 2024 alone, China’s non-financial ODI reached 242.92 billion Chinese yuan, with investments in SEA experiencing a surge of 36.7% year-on-year, according to SCIO.

“For Chinese companies seeking to expand globally, ASEAN (Association of Southeast Asian Nations) is usually their first stop and an important market for their overseas development,” Eddie Ching, EVP and Deputy CEO of HSBC China said in a webinar in 2022.

Growing opportunities in SEA

The region has a lot to offer to companies seeking to expand or move out of China. Beyond its low labor costs, SEA nations have worked towards making their economies attractive to foreign businesses.

The electric vehicle (EV) industry reflects this trend. For example, Indonesia started offering a $5,000 subsidy for EV buyers in late 2022, while the Philippines provides tax exemptions to EV distributors and owners and prioritizes them during vehicle registration.

READ: On EV industry race: Who will dominate the SEA market?

Chinese automaker BYD is seizing these opportunities. On Thursday, July 4, BYD opened its first manufacturing plant in Thailand — the automaker’s first in SEA. This move is driven by the country’s tax breaks for EVs and established supply chain, which can bypass US trade restrictions.

Several other Chinese firms have also expanded to SEA, capitalizing on the region’s business-friendly environment and the rapidly growing consumer base.

In June 2022, tech giant Xiaomi launched the first batch of its Vietnam-made smartphones through its local manufacturing partner DBG Technology’s factory in Thai Nguyen province. DBG Technology said such move would open doors for Vietnam-made smartphones to be exported to neighboring markets. 

That same year, Xiaomi became Vietnam’s second-largest smartphone manufacturer for the first time, recording an on-year growth of 67% — the highest among the country’s top five smartphone manufacturers.

Market access is also a key motivation for this shift. Chinese companies are expanding to SEA to reach diverse markets and demonstrate confidence in Chinese brands in the global market.

For example, home appliance giant Midea has invested over 1 billion Chinese yuan in a facility in Thailand to target SEA, Middle Eastern and North American markets. In 2022, it produced 60 million units, leading China in domestic sales and refrigerator exports.

Chinese companies face challenges in SEA

But while the China Plus One strategy unlocks exciting prospects for Chinese companies in SEA, specific challenges arise.

“Supply chain shifts of this size take long periods to complete, often years, but the shift has started already, especially in areas such as the auto industry and electronics, with ASEAN’s share of intermediate goods on an increasing trend, but there is still a long way to go before this reaches an equilibrium,” independent research firm CrossASEAN Research founder Angus Mackintosh said.

Intellectual property (IP) protection in SEA is a hurdle for companies. Japanese trading and investment company Mitsui & Co. reported that SEA struggles with issues like counterfeit products and less strict enforcement of patent rights.

Low confidence among Chinese firms in SEA’s IP protection is apparent. From 2022 to 2023, the same report said that Huawei and Alibaba were the sole Chinese firms filing patents in the region, focusing only on Singapore, Malaysia and Indonesia.

The West is also vying for market share in SEA. A 2024 report from The European Union Chamber of Commerce in China sees 21% of Western companies moving their operations to this region due to China’s economic slowdown, high government debt and regulatory challenges.

Another major challenge in SEA is the skills gap. Despite the region’s cheap labor, most countries lack the educational systems to build a skilled workforce. According to an ASEAN study, data on vocational training provided by employers is missing except in Singapore and the Philippines. 

This makes it hard for companies to find workers for their supply chain facilities in SEA. Without skilled workers, companies may incur higher operating costs and may need to relocate workers from China to fill key positions.

The approach to staffing varies. Some companies choose to move key personnel from China to ensure knowledge transfer and maintain leadership, particularly to address the skills gap in SEA.

In 2023, Chinese EV company SAIC Motors appointed two executives from China to lead their operations in Thailand. Their goal is to replicate SAIC’s strategy from China in the Thai market.

Many also actively hire locally to understand consumer preferences and build relationships with local suppliers.

For example, Haier, a Chinese appliance company, hires local managers for its overseas operations. They oversee team hiring and develop regional sales and distribution channels.
Huawei and Alibaba also have research and development centers in SEA. They are staffed primarily by locals and have also been engaging in research with local universities.

What’s on the move for Chinese companies?

The decision to move or diversify ultimately hinges on industry focus. According to the ASEAN+3 Macroeconomic Research Office (AMRO), companies catering to the domestic market are finding inland China more suitable.

For example, China’s chemical industry is moving from the coast to the western provinces driven by less stringent regulations and incentives offered by local governments to encourage the move.

The Regional Statistics Bureau of China reported that annual exports from China’s provinces grew from 1.34 trillion to 2.34 trillion Chinese yuan between 2014 and 2022, with a growth of 7.25%.

However, AMRO points out that export-focused companies are still drawn to SEA. This is because of China’s good trade deals with ASEAN, SEA’s proximity to major shipping routes and a growing middle class in the region.

According to the Development Bank of Singapore (DBS), exports from Chinese companies in SEA improved from -1.2% year-over-year in the fourth quarter of 2023 to 1.5% in the first quarter of 2024. 

DBS recorded a 10 to 20% growth in the manufacturing and electricity industries in 2023. It also saw an increase in Chinese capital in SEA through equity investments, especially in venture capital.

A new chapter in manufacturing

By establishing lower-cost production facilities in SEA, Chinese companies are diversifying their supply chains and placing themselves closer to growing markets. This addition creates a win-win situation for the companies and the markets they serve.

The China Plus One strategy has long been embraced by manufacturing companies. But now, as Chinese companies join in on the move and expand their operations overseas, they not only gain access to lucrative markets but also ensure their operations’ sustainability amidst their home country’s trade and geopolitical hurdles.

View Comments (0)

Leave a Reply

Your email address will not be published.