The shift in supply chains is likely to be a major driver of medium-term growth in Asian economies. In UBS’s view, the restructuring of regional supply chains, centered on China, continues to accelerate.

The restructuring of global supply chains is likely to accelerate due to geopolitical concerns, disruptions from the pandemic, and rising de-globalization pressures. The report draws on a series of previous analyses by UBS’s Asia strategy team, which show that no single economy has the potential to match China’s onshore supply chain network in scope, scale and competitiveness. But even if much of China’s manufacturing is likely to remain, the natural evolution of China’s comparative advantage has opened a gap for low-cost manufacturers to move into industries that are easier to relocate.

In this report, based on the expertise of UBS Asia Economics, Global Equity Research, and macro strategy analysts, I provide a comprehensive overview of Asia’s supply chain transformation and how developing economies are benefiting from it, as well as several aspects of each country’s strengths and weaknesses.

China is emerging as a high-value supply chain hub in Asia

Asia’s economies showed remarkable resilience last year as the centre of gravity of global manufacturing continued to shift east, with South-East Asia gaining market share in labour-intensive products and China emerging as a higher-value component supply centre.

Despite the rising cost of living and doing business in the current market environment, which has weighed on global economic growth, most Asian economies have maintained respectable growth rates.

The whole region is expected to get a boost this year, led by China. With the end of the pandemic, the risks to global trade are growing, putting Asia’s status as the world’s factory to a major test.

Global trade had already begun to decline before the pandemic, but exports of Asian goods still hit a record high in 2021. This more meaningful trend is the realignment in Asia, that is, the intra-regional shift of supply chains, rather than the wholesale withdrawal of production networks. Asia’s overall trade continues to expand rapidly, reaching a record share of global GDP last year.

For all the noise about “manufacturing shifts,” the growth in foreign direct investment also highlights Asia’s attractiveness. Global FDI inflows peaked in 2015, but flows to Asia have continued to climb and hit a new high last year, with China still in first place.

China’s overseas investment is not only concentrated in the natural resources sector or infrastructure projects, but the flow of funds into ASEAN’s manufacturing sector has also grown particularly rapidly, highlighting the growing supply chain connectivity between China and Southeast Asian economies.

Chinese exports are still growing faster than global trade, but that share has not come at the expense of lower-cost producers, suggesting that China is moving up the value chain.

Vietnam, India and Malaysia also increased the country’s global export market share. By contrast, Japan and South Korea have seen the biggest declines in their share of exports in the region, partly because they continue to shift manufacturing activity overseas and partly because of increasing competitive pressure from China. China is moving up the value chain.

Over time, the complexity of the global industry has changed: Asian economies have leapfrog up the value chain, while developed markets such as Germany, the United Kingdom, and the United States are losing ground. The underlying trend now is that as China moves up the value chain, this will become more of an exporter rather than an importer of intermediate goods used by manufacturers in other regions, helping to enhance regional supply chain connectivity and thus competitiveness.