The trade war between the Washington and Beijing is pushing many global companies to rethink the manufacturing and fabrication work they now do in China — and a bloc of Southeast Asian countries stands to benefit tremendously, according to a senior partner at consulting firm Bain & Co.
In the short term, there will be an adverse effect on the region as an exporting base for the world, and for the U.S. in particular, Satish Shankar, managing partner for Southeast Asia, told CNBC’s “Squawk Box” on Friday.
“Certain intermediate exports that go into China, and then onto the U.S., are going to be impacted in industries such as textiles and electronics,” he said. “However, in the long term, we feel pretty confident that ASEAN is a very attractive alternative supply chain base for companies looking to diversify away from China.”
The Association of Southeast Asian Nations (ASEAN) is made up of 10 countries in the region including Singapore, Thailand and Vietnam.
Bain predicted that as companies consider moving their supply chains into Southeast Asia, small and medium enterprises in the region will adopt more technologies into their daily operations that could potentially create a $1 trillion opportunity.
“It is the fifth-largest economic bloc, comparable in size to the U.K. and India.”
-Satish Shankar, Bain & Co.
The U.S. has levied additional tariffs on an extensive list of Chinese products since July. Beijing responded with duties on U.S. imports, even as President President Xi Jinping himself denounced protectionism.
Investors are now closely monitoring a much-anticipated meeting between the two countries when Xi meets President Donald Trump at the upcoming G-20 summit on Nov. 30 and Dec. 1 — as they look for clues on whether there may be a breakthrough in the impasse.
Even if trade tensions eventually simmer, companies would still try and shift some of their supply chains to Southeast Asia, Shankar said.
“For two reasons,” he said. “One is that the process is already underway and the experience companies are having in places like Vietnam and Thailand have been positive. Second is, it’s just good business practice to ensure that you are diversified and you don’t have concentration risk with things like your supply chain.”
He explained that in the future, companies would shift to “distributed supply chains,” where they would have multiple sources of supply for a particular product.
‘Fifth-largest economic bloc’
Southeast Asia’s growth prospects and demographics have caught the interest of many investors who have steadily poured money into the region. A recent update to a highly-cited study on the region’s internet economy predicted it will exceed $240 billion by 2025 due to affordable mobile connection to the world wide web.
“It is the fifth-largest economic bloc, comparable in size to the U.K. and India. It has been growing at 4.5 to 5 percent, there’s a lot of (foreign direct investments) coming into the region,” Shankar said, adding that the presence of dynamic companies make ASEAN a “very legitimate supply chain base.”
He explained that each country in the region had a different specialty. For example, Thailand has a strong automotive sector that can become an alternative supply base for companies in that space. Meanwhile, Vietnam is strong in areas such as textiles and electronic components.
Companies would also stand to benefit from a “strong domestic demand in the region,” Shankar added.