Looked at together, these issues highlighted how Western consumer goods companies have been highly reliant on a single manufacturing partner: China. As a result, and in a bid to diversify their risk of exposure to such geopolitical challenges, companies are accelerating a shift in their supply chains that was already underway.

Member countries of the Association of Southeast Asian Nations, being close to China and with competitive cost bases, are reaping the benefits.

Who is leading the shift?

The evidence for this is plentiful. By early 2020, major brand names such as Harley Davidson, Steve Madden, Panasonic and Nintendo had all announced their intentions to invest in production in Thailand, Cambodia and Vietnam. And even before their public pronouncements, this trend was showing up in the numbers.

According to data from Maybank Investment Banking Group , Maybank's investment banking arm, outstanding foreign banks' claims on Asean have risen fairly steadily since the fourth quarter of 2016, and by the end of March 2021 nearly matched the stock of claims on China. Such funding tends to be consistent with rising investment from MNCs.

Vietnam has been a particular beneficiary, with newly registered manufacturing foreign direct investment rising by one third in 2019. Its imports of capital goods have been catching up with those of Thailand, which has consistently enjoyed the highest level of such imports in the region.

And the shift has been across sectors. Christopher Soon, head of the International Financial Institutions Group and Regional Client Coverage at Maybank Singapore, notes that while manufacturing has led the trend, companies in fields as varied as agriculture, infrastructure, high-tech, the digital economy and the green economy have all been increasing their investment into Asean countries.

SMEs from Japan and South Korea, in a range of industries that includes electronics and textiles, have begun to set up factories for OEM production in Asean, and this, too, shows up in the statistics: Japanese bank claims on loans into Asean rose by 16 percent year on year in Q3 2019, the strongest growth in five years.

Cooperation, not competition

Despite immediate appearances, Chinese companies are not being left out by this development. In the early phases of the Sino-US trade war, Chinese firms increased their investment into some Asean nations as much as threefold in order to continue shipping to the US tariff-free. In 2021, China has by far the most influence in Asean, according to an Institute of Southeast Asian Studies survey.

Soon of Maybank says that with China and Asean countries at different stages of industrialisation, each has its own comparative advantages. "They can achieve industrial complementarity and win-win cooperation in promoting the transformation of traditional industries and the development of emerging industries," he says.

There are also other benefits to locating production in Asean countries. From a trade perspective, "markets often overlook Asean, with its younger and fast-growing population", says Adrain Ler, Maybank Singapore's head of Transaction Banking. Such demographic details point to potential distribution and consumption opportunities in the region in the future.

The impact of Covid-19

The pandemic has, of course, had an impact on the implementation of relocations - some approved foreign direct investment applications have not yet made the shift into actual FDI flows. The recent lockdown of Vietnam has also shown that even relatively new production sources can be vulnerable in a time of changing coronavirus regulations.

But by the same token, the global uncertainty simply emphasises that multiple sourcing bases are critical to minimising product disruption. "Covid-19 has made it apparent to companies of the risks that may arise from concentrating their production in one single country - regional diversification is more important than ever before," says Soon.

Indeed, Japan's early stimulus response to the coronavirus included funds of more than $2bn (¥220bn) earmarked to encourage Japanese firms to bring production home from China, with an additional ¥23.5bn allocated to companies intending to move elsewhere. In 2020, Japan's ministries approved 30 companies' applications for funds to move facilities to Asean.

What the future holds

While there are now clear incentives to diversify into Asean, Maybank's Ler says the trend is likely to continue into the future, and again he highlights the region's demographic advantages. "Asean, with its combined population of more than 600m, has one of the youngest median ages among economic blocs to supplement labour force growth," he says.

With electronics manufacturers assembling in Malaysia and Vietnam, automobile and packaged-foods companies clustering in Thailand, and industries from petrochemicals and apparel to pharmaceuticals gathering in Indonesia, the Philippines and Singapore, there is room to achieve ever-greater efficiencies as the region integrates more closely.

This content has been produced by Maybank in collaboration with the Commercial Department of The Financial Times.