EquitiesFirst Could Help Fund Supply Chain Diversification in Asia

The risks of supply chain disruptions have been all too clear in recent years, and companies around the world are accelerating efforts to diversify. A gamut of challenges, from geopolitical conflict to the COVID-19 pandemic, have jolted companies across industries to rethink decades of lean, cost-optimized supply chains extending across Asia.

For companies from automakers to electronics giants, the watchword today is resilience — an ability to consistently withstand disruptions — even if it comes at some cost of efficiency. As businesses consider strategies like reshoring production to home markets or nearshoring to neighboring countries, a variety of options throughout Asia have emerged as compelling and scalable choices, in some cases as alternatives to longstanding Chinese manufacturing dominance.

So far, the biggest beneficiaries of this trend have been Southeast Asian countries like Vietnam, and Malaysia. Analysts have projected that Vietnam's exports could double to over $750 billion annually by 2030, while Malaysia's exports could reach $652 billion — driven predominantly by manufacturers relocating operations out of China.

But while there has clearly been a shift, supply chains across Asia are still deeply intertwined and reliant on a Chinese manufacturing base that’s famously productive, efficient, diversified, and skilled.

Companies like Adidas and Nike, which have moved apparel production out of China, still source the majority of components from Chinese suppliers. China’s domination of the manufacture of electronic vehicle components remains firmly entrenched, accounting for roughly 75% of battery cell production and a 50% share of final EV assembly.

It’s a complex new supply chain environment in the region, but one that presents opportunities for those who are proactive in responding to that change.

“If companies in Vietnam and other Southeast Asian nations such as Thailand, Indonesia, and the Philippines are to benefit fully from the growing appetite for supply chain diversification, they need to invest in their capabilities, including upskilling their workers,” notes a report from EquitiesFirst.

“Chinese firms, meanwhile, will also need to continue their efforts to move up the value chain as manufacturing becomes increasingly dispersed across the region. This will involve large investments in technology and further training for their already skilled workers.”

Supply Chain Diversification Across Asia

In a recent analysis, the International Monetary Fund simulated a supply chain disruption akin to China’s 2020 COVID-related lockdown. It found that if such an event limited around 25% of the labor force in a large supplier country like China, the average global economic output decreased by 0.8%. But this economic decline was cut in half, to around 0.4%, with a more diversified supply chain ecosystem in place.

“The evidence from a modeling approach suggests that resilience to cross-border supply shocks can be increased with greater input source diversification (using more foreign inputs) and greater input substitutability (across suppliers)," the IMF concluded, questioning the effectiveness of reshoring initiatives such as those launched in India and China in recent years. "More diversification, not less, improves resilience."

With this in mind, some companies are turning to countries like Vietnam, which can offer access to low-cost labor on par with China’s but with lower geopolitical risks. Vietnam's minimum wage remains less than half of the level in China's industrial heartland of Guangdong province. And parallels have been drawn between the two regions given their proactive policies to attract foreign investment into industrial parks and special economic zones.

The relocations include Chinese companies, like smartphone maker BBK Electronics. The manufacturer of the Oppo, Vivo, and OnePlus brands now produces 60% of its phones outside of China. It also includes Japanese apparel giants like Uniqlo’s parent company, Fast Retailing, which has announced plans to rapidly grow its manufacturing footprint across the region beyond its longstanding base in China.

Despite this shift, China remains a major manufacturing force in areas like electronics and apparel, with long-established supply chains and worker expertise.

"The mature ecosystem, established over decades in China, not only ensures competitive price points, but also delivers stable quality at mass production that's hard to copy," Laura Magill, head of sustainability at footwear brand Bata Group, said in a recent Bloomberg article. "I can't think of another place that can do the quality, the quantity, and the price as well as China."

Even as companies flock to Vietnam as a supply chain option, the country still imports the majority of textiles and components from China, with only 30% and 40% made locally, making it the world’s largest importer of Chinese textiles.

Nearshoring and reshoring may avoid geopolitical risk, but shifting supply chains entirely out of China means rebuilding industrial ecosystems from scratch. Setting up those new supply chains and upskilling local workforces requires massive investments.

That's why many businesses are opting for a diversification strategy of China plus other manufacturing hubs.

“The U.S. is seeking markets in Western Europe, Japan, Korea, and elsewhere. Likewise, China is doing the same thing in the Middle East, Russia, and Iran,” said a portfolio manager in a recent EquitiesFirst report.

Equities-Based Financing and Supply Chain Resilience

This diversification will require capital. Paying for dual supply chains, financing new facilities in new regions, relocation, and worker retraining costs amount to a huge investment imperative. These costs can be particularly difficult to finance amid higher interest rates and somewhat uncertain consumer demand outlooks.

Herein lies the opportunity for a new model of equities-based financing. For example, EquitiesFirst’s financing options are designed to allow long-term shareholders to access liquidity backed by their existing holdings. Unlocking this capital while retaining upside exposure can enable businesses to fund initiatives to diversify production and make supply chains more resilient to future shocks.

Companies can adjust to the current dynamic period to reorganize and fortify their supply chains to withstand future crises, using a slice of current equity exposure rather than issuing new debt or selling equity stakes at inopportune times.

Specialised equities-backed financing can allow company owners, entrepreneurs and investors to retain long-term exposure to their stock and ride out market volatility while accessing liquidity. Rather than selling out of positions to rebalance or meet liquidity needs, investors and company owners tap into the underlying potential of their assets to fund new projects to diversify or expand their business.

This will be a pivotal decade for building new supply chain infrastructures, forging a new sustainable globalization pathway that’s less centralized around any single country. By allowing businesses and professional investors to leverage existing equity holdings as low-cost sources of capital, equities-based financing could be instrumental in funding this next great shift in global manufacturing footprints.a