Regina Chi is vice-president and portfolio manager, AGF Investments Inc.
It’s no secret, globalization has peaked. You might even say it’s on life support.
And given that it is responsible for generating untold trillions in shareholder value over the past few decades while lifting hundreds of millions out of poverty, it’s little wonder so many bemoan the near future as capital retrenches around the world.
Yet it’s not all bad news for investors. In fact, there appears to be a silver lining as Asia’s emerging economies rush out their welcome mats, positioning themselves to reap the spoils of China’s woes – from continuing trade wars and rising tariffs, to the swell of populism.
Countries such as Vietnam, Thailand, Indonesia and India are now poised to become the next wave of winners as decades-old relationships are remapped, and new ones forged. However, investors looking for a long-term play would be wise to consider each country as its own asset class, each with its own economic policies and drivers of growth.
How did we get here?
While globalization has been underway since the birth of the telegraph and emergence of transcontinental railways, it has waxed and waned over the centuries. However, the most recent wave truly gained momentum following the implementation of the North American free-trade agreement in 1994, when U.S. car manufacturers outsourced much of their labour to Mexico and, similarly, after China’s admission to the World Trade Organization in 2001.
For decades, China built its economy as the world’s factory floor for cheap goods. However, over the past decade, China has been undergoing an astonishing transformation – from serving as an imitator, to a country focusing on moving up the value chain through technology advancements, thereby threatening the global order and the United States’ dominance.
This has created a domino effect in local, emerging markets – a shift that has already been well under way but is accelerating in the wake of continuing trade wars as affected global businesses seek to reorganize their manufacturing investments to avoid U.S. tariffs on Chinese exports.
Tomorrow’s emerging market players
Vietnam’s industrial parks have been quietly filling up as companies look to hedge against rising political uncertainty. One of the world’s fastest growing economies, Vietnam has recently opened its doors to the world and boosts several advantages over its neighbours in Asia. Firstly, it is located next to China, making for convenient shipping. Consider that it is also cheaper than Malaysia, more stable than the Philippines and Thailand, and more accessible than Indonesia.
What’s more, Vietnam’s factory workers earn about half of what workers earn in China’s big manufacturing zones. And with about 70 per cent of its citizens under 35, and with more than one million joining the labour force every year, according to the World Bank, Vietnam has a steady flow of low-cost labour for the near future.
Meanwhile, some see the global trade wars as a second chance for India to realize its growth potential, based on its scale in terms of power generation, structural availability, favourable demographics and the spate of new reforms announced in recent months. While the country’s current economic woes have been widely telegraphed, the Indian government is implementing a number of stimulus measures designed to jolt the moribund economy while attracting new foreign investment.
The government recently announced steps to liberalize foreign direct investment regulations in manufacturing and retail sourcing, lowering the tax rate of 17 per cent and now allowing 100-per-cent direct foreign investment in contract manufacturing in the auto sector. Importantly, this latter move will help India establish more integrated supply chains based in the country.
Indonesia and Thailand are also poised to benefit from moves out of China. Indonesia is well-equipped to undertake some of China’s manufacturing capacity with 42 per cent of the population under the age of 25, World Bank figures show. The government recently announced it will open up new sectors of the economy to foreign investment and introduce labour reforms by year’s end. Some companies, such as Delta Electronics Inc., a Taiwanese-based electronic manufacturing company, already had a subsidiary in Thailand before the U.S-China trade spat deepened. It now plans to continue to build capacity in Thailand, as well as grow a footprint in India.
And Delta Electronics isn’t the only company with a head start in uprooting from China. Eclat Textile Co., a Taiwanese-based textile manufacturer working with companies like Nike Inc. and Lululemon Athletica Inc., already has much of its garment capacity in Vietnam and has plans to build new fabric plants in Indonesia. Meanwhile, other companies such as South Korea’s Samsung Electronics Co. Ltd., which has pulled its mobile phone production out of China altogether, are also likely to gain market share from the fallout from the U.S. government’s trade ban on companies such as Huawei Technologies Co. Ltd.
The views expressed are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. References to specific securities should not be considered as investment advice or recommendations. AGF owns stock in Eclat Textile Co., Delta Electronics Inc., Nike Inc., Lululemon Athletica Inc. and Samsung Electronics Co. Ltd.
Editor’s note: An earlier version of this article incorrectly said Samsung Electronics Co. Ltd. had pulled all of its production out of China. In fact, South Korea-based Samsung no longer makes any mobile phones in China, but still produces some memory chips there.