What a trade war means for Asia Pacific businesses

Asia Pacific businesses are caught in the crossfire of the US-China trade war. No matter how the conflict ends, trade patterns in the region are likely to change permanently and it will be those businesses with the most strategic foresight that stand to benefit.

We are witnessing a new type of global trade war between the US and China, with tariffs levied on products largely for broader policy objectives, most notably to control new technology and influence purchasing. While the conflict had cooled temporarily since June’s G20 meeting in Osaka, when both sides agreed to relaunch trade talks, the eventual outcome remains no clearer.

On the surface, the trade war is taking its toll on the region, compounding broader economic uncertainty and dampening confidence across Asia Pacific (APAC).

Indeed, Grant Thornton’s latest International Business Report (IBR) shows that net optimism among APAC businesses has fallen 8pp since the second half of 2018 and is more than 50% lower than the first half of last year. Data, however, showed Vietnam with a net 72% of respondents optimistic about the outlook of the economy in the next 12 months, ranking no. 2 compared with other countries and beating Asia Pacific’s net average 26% and a global net average of 32%.

Businesses need to think about how they can secure growth in the face of a possible permanent disruption to trade. This requires them to grapple with the challenges of supply chain disruption, transformative technology, and the increase in regulations and compliance that can bar access to new markets.

The trade dispute has a mixed impact across the region. The economic fortunes of countries differ across the region with the trade war affecting separate economies in different ways.

Parts of emerging APAC are benefitting

However, some emerging economies stand to benefit as businesses tactically pivot their manufacturing. Founder and Senior Board Adviser of Grant Thornton Vietnam, Kenneth Atkinson, says: “Vietnam has already seen an acceleration of FDI, due to the shift in manufacturing of items such as garments, footwear and power tools, because of the current trade tensions between the US and China. In the first five months of 2019, Vietnam attracted a record US$ 16.5 billion in new foreign direct investment (FDI) with 30% of that coming from Hong Kong and investments from mainland China increasing.[i] The leading beneficiary of this FDI is, in fact, manufacturing and processing.”

Identify and reduce risks in the supply chain

The challenge for businesses scaling to meet demand from shifting trade is not only the time it takes to move manufacturing capacity from one country to another but also the issue of the supply chain. Supplier networks in the region are getting increasingly complicated, and sophisticated approaches will be needed to manage these effectively. Businesses are assessing the trade war’s impact on their suppliers as well as their markets. While they may be able to reduce risks by reviewing their customs processes and mapping their supply chain, more fundamental changes may be necessary.

Having multiple supply chains is more critical than ever. Until recently, businesses sourcing goods and materials from China typically operated a ‘China plus one’ supply chain strategy, which involved a secondary supplier in a different country in case of disruption. That may no longer be sufficient to keep goods moving.

Businesses also need to ensure they have the capacity and competencies within their organisation to manage those changing and alternative supply chains. At the same time they need to embrace technologies such as automation of processes to reduce upfront costs, increase efficiency and make good use of data.

Be strategic about the new wave of technology

Technology has become a central problem in the US-China relationship, muddying the distinction between economic competitiveness and national security. This was seen in the US decision to blacklist Huawei earlier this year. The conflict has weighed heavily on the tech and electronics industries of both countries, with no clear sign of how to resolve this.

The APAC region is one of the most advanced when it comes to launching and incubating new technologies, and is leading the development of 5G - a potential game-changer for many businesses in the region. While China’s technology capabilities have advanced at break-neck speed, the US has struggled to keep up.

Despite the trade war, investment in technology expectations in the region shows a mixed picture with most Southeast Asian nations anticipating a significant lift. Indian businesses expect a net increase in tech investment of 75% and Indonesian business a net rise of 74% over the next 12 months. In Vietnam tech investment is expected to increase by net 63%, according to the IBR.

Adopting international regulations broadens access to new markets

As growing APAC businesses become more integrated into global supply chains, buyers in developed economies are increasingly demanding adherence to regulatory compliance and higher standards. In the UK, US and Europe, company officers are more concerned about supply chain practices, because they could face prosecution – in the case of anti-bribery laws, for example – or reputational damage where supplier’s practices fall short of ethical standards.

However, implementing international regulatory requirements is a significant challenge and progress is often slow among businesses in countries that score very poorly on the Corruption Perception Index (CPI). In fact, IBR shows that among business leaders in Vietnam, 43% cited regulatory restrictions and complexity as an external barrier to expanding internationally. This is compared to 44% in APAC’s emerging economies and 28% in developed APAC economies.

Businesses should grapple with their long-term strategic challenges

APAC businesses are facing an unprecedented period of change as they seek to navigate a new economic reality. While uncertainty endures, businesses should look to secure future supply chains; harness transformative technology; and tackle some of the international compliance issues to align with broader markets. All of these could reduce risks and provide significant rewards.

Nguyen Chi Trung, CEO & Managing Partner, Grant Thornton Vietnam says: “Businesses need to think about their strategy going forward. There is going to be a permanent disruption to trade and supply chains, and we won’t see a return to the time before.”

In terms of expectations for the next 12 months, Vietnam also ranks:

#1 with a net 70% projecting an increase in human capital

#2 with a net 60% - behind India (65%) in expecting an increase in exports

#2 with a net 80% - behind Nigeria (89%) in expecting an increase in profitability

#2 with a net 57% - behind Nigeria (62%) in expecting an increase in new building investment

#2 with a net 64% - behind Nigeria (72%) in expecting an increase in investment in plant & machinery investment

#3 with a net 76% - behind Nigeria (90%) and Indonesia (79%) in expecting an increase in revenue

#3 with a net 81% - behind Sweden (87%) and India (86%) in expecting an increase in employee salaries

#3 with a net 67% - behind Nigeria (77%) and South Africa (70%) in expecting an increase in research & development (R&D)

[i] Vietnam Briefing, June 2019

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Linh Ngo

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