Supply chain diversification: who benefits in Asia?

The growing importance of supply chain resilience is pushing companies to diversify their sourcing and manufacturing to reduce risk, both operational and geopolitical. Instead of concentrating most of their production bases in China, corporations are branching out to other markets – either closer to their end customers or to ones that have friendlier relations with their countries of origin. Two relatively recent shocks are driving this shift in global supply chains. First, the Covid pandemic led to abrupt border closures, acute supply shortages, and shipping gridlock that resulted in rising input prices and inflation. Second, trade tensions between the US and China, and Russia’s subsequent invasion of Ukraine, forced corporations to reassess their exposures to geopolitical instability.

Asia’s structural reforms

What does this mean for Asia? For a start, there is an ongoing race between Asian governments to implement structural reforms that reduce the constraints of doing business in their countries to attract more foreign direct investments. For example, Indonesia has the potential to become a major industrial hub due to its vast natural resources. India, which benefits from favourable demographic trends, is already a global hub for IT services. Vietnam is an urbanising country with a thriving export market, which has undertaken strategic infrastructure development since the 1990s to become a manufacturing hub like China.

This is creating a tremendous flow of investment opportunities across Asia ex-China and also emerging markets ex-China. Our regional portfolios are positioned to take advantage by investing in companies that are poised to benefit from long-term structural tailwinds emerging from this trend. There are three areas around this trend where we see the most attractive opportunities:

ASEAN’s growing importance

ASEAN (The ten-nation Association of Southeast Asian Nations) is an attractive destination as a low-cost alternative manufacturing base to China for western as well as East Asian multinationals. The region has an attractive demographic dividend – some 685 million people and a combined projected growth of around 4.6% GDP annually for the rest of the decade. Moreover, though China’s labour costs are relatively cheaper than the west, direct manufacturing costs in Indonesia, Thailand and Malaysia are between 10% and 15% lower than China. Further, Southeast Asia has a range of well-established manufacturing clusters, including electronics in Malaysia and Vietnam, automobiles and packaged food in Thailand, machinery and petrochemicals in Indonesia, and semiconductors, biopharmaceuticals, and aerospace components in Singapore.

We are already seeing the first wave of opportunities in ASEAN coming through with industrial land players benefitting – specifically, we like AKR Corp in the Indonesian small cap space. Its diversified business stretches across logistics, warehouse and tank rental, and transport services among others.

India’s manufacturing ambitions

The Indian government has stepped up initiatives to turn the country into a global manufacturing hub, with campaigns like ‘Make in India’ and production-linked incentive schemes designed to spur companies to shift their production bases to India. This is in addition to offering favourable tax rates, an easier land acquisition process, and building up domestic infrastructure. As a result, we are seeing an inflexion in the capital expenditure and infrastructure cycle in India, underpinned by government spending on roads, railways, airports, and everything in between. This has driven strong order flows into industrial companies such as Larsen & Toubro and KEI Industries – a local mid-cap cables and wires manufacturer. In turn, this is helping to drive up margins and fuel earnings growth as well as better return metrics. We also like UltraTech Cement, the largest grey cement manufacturer in the country with a healthy balance sheet and a proxy for both infrastructure development and real estate.

Increased resilience within the tech sector

In a bid to diversify the global supply chain, we are seeing leading Asian players in the tech sector invest in new manufacturing bases outside Asia to keep pace with the expected increased demand for computing power. A sizeable portion of their new hubs are being created in developed markets. For example, Taiwan Semiconductor Manufacturing Co is in the process of opening two fabrication facilities, or fab, in Phoenix, Arizona that would produce high-end memory chips for the US market . While moves like these make the supply chain more resilient to disruptions, there is also a growing opportunity to invest in the ancillary parts of the overall tech value chain. Within semiconductors, for example, we hold a couple of Dutch suppliers – ASML and ASM International – that provide the necessary equipment to make advanced semiconductor chips, with more than 50% of their revenue coming from Asia.

China’s bottom-up opportunities are still attractive

All of this is not to say that China no longer holds any promise. Quite the contrary as we are finding attractive bottom-up opportunities in both the onshore, or A-shares, universe that are tied to the country’s structural tailwinds and in the offshore space (H-shares). In many sectors, Chinese companies are becoming globally competitive, including in electric vehicles and battery storage where we hold Contemporary Amperex, a recognised industry leader with a dominant market share at home. Many corporations have also become cash flow generative and pay out attractive dividends, therefore offering both income and growth for some of our portfolios, including internet giant Tencent. We remain constructive on China and maintain an active pipeline of ideas in the country for our regional portfolios. Further, we are prepared to add to high quality stocks that, in our view, have been sold indiscriminately alongside the broader market, where we see good quality coupled with strong financials.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

Important information

Risk factors you should consider prior to investing:

The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
Past performance is not a guide to future results.
Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.