Manufacturing In Asia Post COVID-19
Manufacturing In Asia Post COVID-19
The outbreak of Covid-19 may have started to impact Asian economies earlier than the rest of the world; however, with large populations and poor medical facilities, the worst is far from over.
Some countries that have successfully flattened the proverbial curve are now not only looking to gradually normalise their economies but also contemplating the landscape after the Covid-19 pandemic is more widely contained.
Fitch Solutions has discussed the six themes that will feature in Asia over the coming years following the Covid-19 outbreak—one being how manufacturing-heavy nations could have an advantage.
Manufacturing-Heavy Nations Could Have An Advantage
Even before the Covid-19 outbreak started, we had noted that reform in Asia was slowing as governments prioritised short-term growth wins over long-term sustainability. With Covid-19 pushing most countries in the region into some form of recession, it is likely that reforms will come to a halt over the short term.
However, we highlight that those countries that manage to restore a reform path quickly, will be able to take advantage of opportunities in the post Covid-19 world. For instance, many companies have already begun adopting a ‘China plus one’ manufacturing hub strategy since the US-China trade war began in 2018, with Vietnam having been a clear beneficiary of this trend. This trend is likely to only intensify following the ongoing crisis. Severe supply chain disruptions in the region as a result of Covid-19 containment-driven lockdowns in China in Q120 further highlights the importance of supply diversification, and we believe that businesses will have a greater impetus to set up some manufacturing operations outside of China going forward.
It is likely that economies with existing manufacturing capabilities and a conducive business environment, will attract more attention than others. With a lack of reform momentum, we could see a wide economic schism growing between preferred markets and those that are left behind.
That said, we have noted in a separate article that any manufacturing shifts away from China will be slow as that country still boasts an annual manufacturing output that is so large that even a group of countries would struggle to absorb even a fraction of it. For example, in 2018 the value of China’s manufacturing sector amounted to USD4.4trn, three times the size of the manufacturing output of 13 of some of the largest emerging markets (EMs) with major manufacturing sectors. However, expect countries in Asia to make accelerated efforts to boost domestic manufacturing capabilities not least to offset the debilitating impact that the Covid-19 outbreak will have had on employment.
We highlight that governments will be faced with a policy dilemma as they try to restructure their economies while also preserving livelihoods in the short term. It is likely that those that find themselves currently heavily dependent on a single large sector will face increased need for economic diversification.
For instance economies such as Thailand and Cambodia, which are heavily reliant on tourism for growth, the collapse in air travel due to Covid-19 will likely prompt the government to shift its economic focus into other sectors such as infrastructure and manufacturing. Such economic shifts are likely to be supported by reforms to the business environment to incentivise domestic resources into the targeted sectors and also to compete for foreign manufacturers looking to diversify some operations out of China. From a self-sustainability angle, countries such as Singapore, which are reliant on food imports, will likely see a push towards an expansion of food production, while the region as a whole will divert more resources towards domestic production of medical supplies to ensure reliability at the expense of higher costs.
To read the full Fitch Solution report, click here.
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