Southeast Asia is the top choice for firms diversifying supply chains amid U.S.-China tensions

Southeast Asia has emerged as a top choice for firms looking to diversify production away from China, including Chinese companies, amid escalating tensions between Washington and Beijing.

"Southeast Asia is well-placed to benefit significantly from the China+1 phenomenon as both foreign and Chinese companies diversify their supply chains and operations," said Kuo-Yi Lim, co-founder and managing partner of Southeast Asian venture capital firm Monk's Hill Ventures.

"Geopolitical [tensions have] accelerated these activities, which started during the Covid lockdowns," Lim added.

The "China Plus One" strategy seeks to reduce the risks associated with total reliance on China's market or supply chain through diversifying manufacturing operations, expanding into other countries even as companies' maintain a presence in China.

This has spurred greater investments into the ASEAN bloc. Foreign direct investments into the ASEAN economies of Indonesia, Malaysia, Philippines, Thailand, Singapore and Vietnam rose to $236 billion in 2023 compared with an annual average of $190 billion between 2020 and 2022, OCBC economists said in a May report.

The inflows mostly came from the U.S., Japan, European Union as well as Mainland China & Hong Kong.

"The ASEAN-6 region has benefited from a diversification of global and regional supply chain as well as the adoption of 'China+1' strategies. FDI inflows from Mainland China and Hong Kong SAR into the region have risen, with manufacturing and certain services receiving the bulk of inflows," the OCBC economists said.

Vietnam has become a key manufacturing location for Apple as the U.S. tech giant seeks to diversify the assembly of its products away from China.

Beijing's tough Covid-19 measures and worker unrest at Foxconn's flagship iPhone factory had majorly disrupted production.

MacBooks, iPads and Apple Watches are reportedly being manufactured in Vietnam.

"Vietnam's proximity to China has long made it a preferred destination for supply chains to offshore processes that could drastically reduce costs of production," said Yinglan Tan, founding managing partner at Insignia Ventures Partners.

Vietnam is already a major research and development hub for Samsung, as well as a manufacturing and export base for Samsung's smartphones, according to local reports.

Malaysia has seen semiconductor firms including Intel, GlobalFoundries and Infineon setting up or expanding operations in the country over the last few years amid U.S.-China tensions.

"Malaysia has seen a revival in its longstanding semiconductor sector, attracting renewed investments from companies such as Intel," said Lim of Monk's Hill Ventures.

Industry observers said that Malaysia's edge has always been its skilled labor in chip packaging, assembly and testing, and relatively lower operating costs.

"It's not just the semiconductor stories in Malaysia that's taking off. You do see a lot more investments into data centers that have come into play, especially the last couple of months, and perhaps there's other sectors, like solar, EV related components as well. So Malaysia is getting that breadth of investments into the country," said Ang of BofA Securities.

The archipelago has vast resources of copper, nickel, cobalt and bauxite — crucial for the manufacturing of electric vehicle batteries.

"Indonesia – that's another interesting country as well – where they are hoping to emerge as an integrated EV hub," Ang said. "It's probably still at a very early stage, but they are looking to scale up capacity across the whole supply chain."

The Indonesian government has been luring EV companies with incentives to set up local manufacturing bases.

"China+1 is not only for foreign companies in China. Geopolitics and international trade developments also push Chinese manufacturers to diversify their production geographically," said Anders C. Johansson, director of Stockholm China Economic Research Institute under Stockholm School of Economics, in a LinkedIn post last week.

The industry ministry said earlier this month that it had entered an agreement with four Chinese companies – Neta, Wuling, Chery, and Sokon – to establish Indonesia as an EV production hub.

Chinese electric vehicle maker BYD plans to start commercial production of EVs in Indonesia in 2026, according to local reports.

Singapore has been "a preeminent destination" for firms looking to set up regional headquarters as well as expand across the region, according to a report by ASEAN Briefing.

"Today, this diversification has extended not just to global businesses like Apple and supply chains but also entrepreneurs and startups looking to build global businesses in the Asia-Pacific region," said Tan of Insignia Ventures Partners.

"Singapore in particular has become a destination for these entrepreneurs to headquarter global businesses, while still being able to, for example, raise money from the U.S. and employ engineers in China," Tan added.

Chinese companies including TikTok and Shein have set up regional headquarters in Singapore, which is seen as a stable base amid geopolitical headwinds.

"Singapore, with its trusted hub status in finance and regulatory infrastructure, will continue to attract companies seeking an Asian base in these uncertain times," said Lim of Monk's Hill Ventures.