FINANCIAL TIMES

JULY 20, 2018

China’s factories eye south-east Asia to avoid US tariff threat

Risk of wider trade war prompts some manufacturers to accelerate diversification

Ben Bland and Nicolle Liu in Hong Kong

Manufacturers in China are considering moving production to Vietnam and other lower-cost countries in south-east Asia as they fear being swept up in the widening trade dispute between Washington and Beijing.

The Trump administration has already imposed or announced 25 per cent tariffs on $50bn of high-technology products and industrial machinery and is proposing to implement 10 per cent tariffs on a further $200bn of Chinese exports, including some consumer goods such as furniture.

Factory owners in the manufacturing heartland of Guangdong province say existing tariffs and uncertainty about future US trade measures are prompting them to accelerate plans to diversify production beyond China, where wages have increased rapidly over the past decade.

“We don’t think the trade war is a short-term crisis,” said Joe Chau, who runs a baby garment factory in Guangdong and is the president of the small- and medium-sized business division at the Hong Kong General Chamber of Commerce. “We have to analyse which Asian countries are good for our customers . . . to offset the China risk.”

Although clothing, and many other consumer goods including toys, have not yet been hit by tariffs, Mr Chau said that US retailers and their suppliers in China need to work on contingency plans ahead of the traditional autumn buying season because “nobody can predict what Donald Trump will do”.

Jimmy Kwok, chairman of the Federation of Hong Kong Industries, another lobby group, said that while the shift from China to south-east Asia was already under way for products such as electronics, trade tensions were pushing companies to re-examine their supply chains.

But manufacturing executives said that shifting production out of China would take several years of planning, running the risk that the US-China trade dispute would be resolved or that the Trump administration would extend tariffs to countries such as Vietnam precisely to stop this sort of “tariff-jumping”.

Chiu Chi-hong, who owns a toy factory in Guangdong that supplies Disney and Mattel, said that even though toys were not on the tariff lists yet, his exports had been held up by “extreme test requirements” by US customs since the start of the year.

Along with 30 other manufacturers, he is going to Myanmar in September to examine the possibility of moving production there to protect himself from further US trade restrictions on Chinese exports. But he fears that the policy might change again. “Trump and Xi [Jinping] might become friends again,” he said, referring to the presidents of the US and China. “We’re only a mid-sized company. We can’t handle factories in two places at the same time.”

Angelo Cheung, a Hong Kong-based executive for Aoyagi, a Japanese electronics group that manufactures in China, said some orders from the US had already been halted because of the heightened uncertainty.

“We are now in the middle of a crossroads,” said Mr Cheung, whose company is considering various options, including moving part of its supply chain to Vietnam. “But they are all only mid-to-long-term solutions.”

Jon Cowley, a trade expert at law firm Baker & McKenzie in Hong Kong and a former Nike executive, said that it was “expensive and complicated” to open factories in new jurisdictions.Factories exporting to the US have to meet a wide range of environmental, labour and quality standards and it takes time to ensure that production facilities in new countries are up to scratch.

A further challenge is the need to meet fast-changing consumer tastes, where existing Chinese factories often have the edge because of their decades of experience and long-term relationships with US retailers. Mr Cowley said that while they were in a tight squeeze, factory owners would not rush to move production. But if they were already considering diversification, for example to take advantage of the far lower wages in countries such as Vietnam, “this may be enough to push them over the finishing line”.