While countries look to reduce their reliance on a single supplier, much to the benefit of export-oriented Asian economies other than China, localisation of productive capacity, especially in strategic sectors like pharmaceuticals, will have negative effects for Asian producers, the report said.
“Ensuring supply security by enhancing the strength of supply chains will become the overarching objective of governments and companies, overtaking cost and efficiency considerations,” says Michael Taylor, a Moody’s MD and chief credit officer for Asia Pacific.
“The Asian countries that stand to benefit from diversification are those with sound economic fundamentals, reliable infrastructure, sufficient human capital stock, and low geopolitical and supply security risk,” Taylor added.
The move, set in motion by the US-China trade dispute, would be credit positive for these economies as higher export orders and foreign investment would support local economic growth and employment, the report said, naming Thailand, Vietnam, Taiwan and Malaysia as likely to benefit the most.
On the other hand, production in sectors such as pharmaceutical products, medical instruments and high-end technology goods are likely to be localised closer to home markets which would acutely impact Asian producers like China, Moody’s said.
Free trade agreements could mitigate the negative impact in this regard on some of the Asian economies. “Developing countries in Asia such as Indonesia, Cambodia and India stand to benefit from their preferential access to the EU and US markets for certain goods under the Generalized System of Preferences and the Everything but Arms initiative to support low- and middle-income economies,” the report said.
By contrast, companies will be more likely to diversify production for products that have high reliance on a single source of supply but which involve relatively low levels of security concern, like iron, steel and basic metals, it said.
However, the shift would be gradual as it would be time consuming and costly to relocate the productive capacity that has been set up in China over the past 20 years to other emerging economies, it said.