1. In Q2 2021, the China-U.S. trade war and the COVID-19 pandemic laid bare the need for companies to diversify supply chains outside of China.
2. This has given rise to the “China plus one” strategy, in which multinational firms are moving to other countries, in addition to China. Some Asian countries have put forward plans to attract overseas investment as companies look for another center of production or distribution.
3. These include Thailand, Malaysia, and Vietnam, which have introduced preferential policies for overseas firms investing in the country.
THAILAND
1. Thailand has made strides in improving its ease of doing business, streamlining the process for obtaining construction permits and improving minority investor protection. FDI applications rose 80 percent in Thailand 80 percent year-on-year in the first quarter of 2021.
2. While the medical sector attracted the most FDI projects, foreign direct investment has also been increasing in the manufacturing industries, such as the metals and machinery sectors.
3. Thailand’s Eastern Economic Corridor, including the provinces of Chonburi, Rayong, and Chachoengsao, received the most FDI applications, 39 percent more than those filed in the first quarter of 2020.
MALAYSIA
1. Malaysia has also received an increasing amount of foreign direct investment, in part because the country has a strong legal system and high telecommunications and internet capabilities.
2. Foreign direct investments flowing into the country grew 383.4 percent year-on-year, going into the manufacturing, services, and primary sectors.
3. Much of the investment has been directed to Penang, which is known for providing high-tech manufacturing. Going forward, Malaysia’s Digital Blueprint Program is projected to further improve FDI flows into the development of software and hardware digital infrastructure.
VIETNAM
1. Vietnam is near China and has been a key part of the “China plus one” strategy, not only for Western firms but for Chinese firms as well.
2. While Vietnam’s infrastructure is far behind that of China, Vietnam’s 2030 master plan for transport infrastructure aims to construct 5,000 kilometers of expressways, a deep-water port, high-speed rail routes, and the completion of Long Thanh International Airport near Ho Chi Minh City.
3. This is much needed, as Vietnam’s ports have strained to keep pace with increasing demand for manufacturing and export. Some Chinese firms have chosen to relocate to Vietnam in order to avoid tariffs imposed by the United States throughout the trade war.
4. These include HL Corp, a bike parts maker; Shenzhen H&T Intelligent Controls, a company that specializes in intelligent controllers; and TCL Technology, an electronics producer.
CHINA
1. However, China is still pulling in a significant amount of foreign direct investment and creating attractive manufacturing regions in order to foment ongoing growth in this area.
2. FDI into China in the first quarter of 2021 amounted to $46.38 billion, which was a 39.9 percent increase year-on-year, and a 24.8 percent increase compared to 2019. Much of the FDI went into inland China, and into service and high-tech industries.
3. China’s focus on building enticing manufacturing regions is a major reason for ongoing flow of foreign investment.
4. One of the largest ongoing projects is the Guangdong-Hong Kong-Macao Greater Bay Area, an internationally oriented city cluster driving innovation and market reforms. The area is intended to be a globally competitive mega-region by 2035.
5. FDI flows into China may increase further. Some analysts have predicted that manufacturing operations may move back to China or suspend moves away from China due to COVID-19 outbreaks in Vietnam and India.
6. Zhiwei Zhang, chief economist at Pinpoint Asset Management, stated that “if [the] supply chain [in India and Vietnam] is disrupted for a long time, we could see [the current month-over-month] 20 percent, 30 percent export growth [in China] to continue into next year.”
CHINA PLUS ONE
1. For now, the “China plus one” strategy is working for some companies. One key determinant of how sustainable the trend will be is how quickly infrastructure can be built to accommodate more firms moving into other nations.
2. However, companies that do choose to diversify into Southeast Asian nations will continue to be able to take advantage of the varied and easily accessible suppliers from other Asian nations.
3. In addition, the recently signed Regional Comprehensive Economic Partnership (RCEP) will allow firms with supply chains distributed among several Asian nations to take advantage of common rules of origin for the entire bloc. This will allow RCEP countries to use only a single certificate of origin.
4. As a result, the “China plus one” strategy, with firms venturing into other Asian nations, has become a popular trend that is likely to continue over the long run, even if some firms focus production more on China in the short run.
5. In particular, Thailand, Malaysia, and Vietnam will continue to appeal to multinational firms, especially as these countries continue to build up infrastructure and production capacity.
MALAYSIA'S APPEAL TO CHINA PLUS ONE
1. Malaysia’s economy is well diversified and resilient. It continues to grow at a sustained pace despite the impact of external shocks. Its economy has been on an upward trajectory, with an average growth rate of 5.4 percent since 2010.
2. In 2018, Malaysia recorded a GDP of US$358.58 billion, outranked only by Indonesia, Thailand, and Singapore among the Association of Southeast Asian Nations (ASEAN) countries. Its GDP per capita was US$11,072 and it maintained a low and stable inflation rate of 0.97. The manufacturing and services sectors accounted for 23 percent and 55.5 percent of Malaysia’s GDP, respectively.
3. Now, the insatiable global demand for electronics, commodities like oil and gas, as well as rising domestic consumption, are fueling Malaysia’s economic growth.
4. Categorized as an upper-middle-income economy, Malaysia is on its way to achieving high-income status by 2024. The government’s 11th Malaysia Plan aims to boost productivity, encourage innovation, and increase labor’s share of income to attain this goal.
MALAYSIA'S APPEAL TO CHINA PLUS ONE - TRADE
1. Located on a major shipping channel connecting the Indian Ocean to the west and the Pacific Ocean to the east, Malaysia recognizes the importance of international trade. Its growth is highly reliant on trade, with a trade to GDP ratio averaging over 130 percent since 2010.
2. In 2018, Malaysia shipped US$ 247.3 billion worth of goods around the world, reflecting a 5.6 percent gain since 2014.
3. The country exports a large number of electronics, petroleum products, chemicals, machinery, and natural gas around the world. It is also one of the major producers of oil and rubber.
4. Overall, Malaysia posted a US$29.8 billion surplus on goods traded in 2018, up 32.2 percent from US$22.6 billion a year earlier. It has a large surplus in international electronics trade, including as a net exporter of consumer electronic gadgets.
5. The most in-demand goods shipped from Malaysia include electronic integrated circuits and its related parts, refined petroleum oil, petroleum gas, computers, optical readers, solar power components, and palm oil.
6. According to Nomura, the Asia-based financial services group, Malaysia has been one of the top five beneficiaries of the US-China trade war, especially in its exports of electronic integrated circuits and semiconductor devices.
7. Singapore, China, the US, Hong Kong, and Japan are the top five export destinations of Malaysia’s products. Continent-wise, in 2018, 72.2 percent of Malaysian exports by value were delivered to Asian countries, while 10.6 percent to Europe and 10.3 percent to North America.
8. Malaysia highly values regional and bilateral trade agreements. It joined the General Agreement on Trade and Tariff (GATT) in 1957, which was replaced by the World Trade Organization (WTO). The country is thus a founding member of the WTO.
9. Malaysia is one of the ten ASEAN member countries and is a member of the Regional Comprehensive Economic Partnership (RCEP) negotiations – an international free trade agreement (FTA) between the ten ASEAN countries and six countries that have signed FTAs with ASEAN, namely Australia, China, India, Japan, New Zealand, and South Korea.
10. Malaysia is also a member of the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP) – which used to be the Trans-Pacific Partnership Agreement (TPPA), a trade agreement between the 12 Pacific Rim countries, and was renamed as CPTPP after the US withdrawal under President Donald Trump.
11. By far, Malaysia has seven bilateral FTAs with Australia, Chile, India, Japan, New Zealand, Pakistan, and Turkey. Through ASEAN, Malaysia has regional FTAs with China, Japan, Korea, India, Australia, New Zealand, and Hong Kong. It also participates in the ASEAN Trade in Goods Agreement (ATIGA).
MALAYSIA'S APPEAL TO CHINA PLUS ONE - INVESTMENT
1. In 2018, FDI in Malaysia recorded a lower net inflow of RM32.6 billion (US$7.42 billion) as against RM40.4 billion (US$9.13 billion) in 2017. The FDI flows were in a downward trend since 2017 due to lower investment in the mining and quarrying sector.
2. More than 50 percent of FDI inflow went into the services sector and 47 percent into the manufacturing sector. The US, China, the UK, Hong Kong, Singapore, and Japan contributed the most FDI in Malaysia in 2018. Continent-wise, Asia (44.9 percent) remained the highest region of FDI flows, followed by Europe (33.7 percent).
3. The Malaysian government allows 100 percent foreign ownership in healthcare, retail, education, as well as professional, environmental, and courier services sectors. Export-dependent Malaysia is keen to attract FDI and promote high-value manufacturing. Investment incentives like corporate income tax exemption and tax allowance are provided in industries, such as advanced electronics, medical devices, biotechnologies, and green technologies.
4. More than 50 percent of FDI inflow went into the services sector and 47 percent into the manufacturing sector. The US, China, the UK, Hong Kong, Singapore, and Japan contributed the most FDI in Malaysia in 2018. Continent-wise, Asia (44.9 percent) remained the highest region of FDI flows, followed by Europe (33.7 percent).
5. The Malaysian government allows 100 percent foreign ownership in healthcare, retail, education, as well as professional, environmental, and courier services sectors. Export-dependent Malaysia is keen to attract FDI and promote high-value manufacturing. Investment incentives like corporate income tax exemption and tax allowance are provided in industries, such as advanced electronics, medical devices, biotechnologies, and green technologies.
Source:
https://thediplomat.com/2021/06/which-asian-nations-can-benefit-from-the-china-plus-one-strategy/
https://www.aseanbriefing.com/news/china-plus-one-series-understanding-malaysias-appeal-foreign-investors/
