Trade war to trigger manufacturing revolution - M&A Forum

"The first wave was state-owned enterprises going to build roads, bridges, and airports. I have been asking for years who is going to use this infrastructure and I never got a real answer. But the answer has been provided by the trade war. You have a slew of SMEs [small and medium-sized enterprises] looking for opportunities," Fung told the Hong Kong M&A Forum.

Following the imposition of wide-ranging tariffs on Chinese exports to the US, Fung expects "almost a revolutionary change in supply chains," but one driven by a relatively simple premise: moving final production and assembling out of China so goods come with a different country of origin certificate.

"If you look at what is exported from China to the US, the value added in China is 13-14%. China does the final finishing and it's where substantial transportation takes place, which confers country of origin status," he said. "If you do the finishing in another country like Vietnam, you have the same percentage of value added in China."

There are already signs that Southeast Asia is recapturing a share of the manufacturing market that it lost to China in previous decades. Notably, key Apple suppliers Foxconn and Pegatron are building new facilities in the region – as well as in India – while Taiwanese contract electronics manufacturers such as Compal and Wistron plan to relocate part of their production from China to India or Southeast Asia. Trade tensions are cited as a motivation for reducing reliance on China.

However, taking advantage of this opportunity, which means developing sizeable logistical networks and overcoming bottlenecks created by fragmentation, is not straightforward. "No single country in Southeast Asia can have the integrated supply chain and the capacity for the volume that China produces," Jovasky Pang, CEO of Southeast Asia-focused Archipelago Capital Partners, told AVCJ earlier this year. "You are looking at a fundamental shift in the way these countries have to plan around industrial cities and cater to the industries they are trying to attract, and that takes time."

Fung admitted that some markets are already struggling to handle new business. Vietnam has developed substantial manufacturing and logistics infrastructure – in part due to Japan's decade-long pursuit of the "China plus one" strategy – but the country is now close to full capacity, as evidenced by costs rising 10-15%. Fung noted that Cambodia is also at full capacity while Indonesia and Bangladesh are nearing this point. India is next on the list for many companies, but the long-term bet is Africa.

"We have been in Egypt for 25 years – we used to work with the fathers and now we work with sons after they've gone to the US and got MBAs – and you see it ramping up," Fung said. "The US cannot afford to destabilize Egypt." Of all the countries in the region, only Egypt and Jordan can export to the US without tariff or quota restrictions through qualifying industrial zones established in collaboration with Israel.

This realignment of supply chains is to some extent aligned with Chinese government policy, given Beijing's longstanding desire to climb the production value chain. Fung admitted that he had lobbied against this in the past, given Hong Kong's historical dependency on Guangdong as a manufacturing base, but now "Trump has completed the process."

Assuming higher-end manufacturing remains in China, Fung believes the Greater Bay Area has the potential to become a leader in industry 4.0, leveraging Shenzhen's innovation and Dongguan's manufacturing expertise. Hong Kong would then serve as the international financial conduit. "That combination is going to be the digital manufacturing base of the world," he said.

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