Southeast Asia may not be the next ‘factory of the world’ even as production moves away from China

  • Multinational companies are adjusting their business strategies as the U.S.-China trade dispute continues to affect global markets and business sentiments, according to a Bain and Co. survey.
  • The survey of 200 high-level executives at American multinational firms found 60 percent saying they were ready to take action now. That’s compared to 50 percent that took a wait-and-see attitude a year ago.
  • Factory facilities will become more fragmented globally as the production of goods meant for non-Chinese consumers moves closer to their target markets,  according to Gerry Mattios, vice president at Bain.

The U.S.-China trade dispute is pushing American multinational companies to relocate their factories and adjust business strategies for their supply chains in the next 12 months, according to a survey by Bain and Company.

“The shift is happening,” said Gerry Mattios, vice president at consulting firm, Bain.

“Back at (the) end of 2018, when we ran a similar report, we found out a lot of companies — over 50 percent — were actually sitting on the fence … there were no major actions taken,” Mattios told CNBC’s “Squawk Box” on Monday.

But now, 60 percent of the respondents said they are ready to take action, as they see headwinds on their balance sheets, he added. “They see customers having to pay part of it, and they are trying to see how to reassess their supply chains.”

A supply chain is a network between a company and its suppliers to produce and distribute the firm’s products.

Even though China has had a significant cost advantage that propelled the country to its leading position as the world’s manufacturing hub, that advantage is eroding as costs rise, Mattios said.

The survey polled more than 200 high-level executives and senior supply chain officers at U.S. multinationals with operations in China, and sought to gauge their perspectives on the ongoing trade dispute.

However, some manufacturing will still remain in China as the country moves toward being a consumption-driven economy, he said. Items that would’ve been exported will see some assembly lines move to Southeast Asia, Mattios said.

Still, he added, “we don’t think Southeast Asia will become the factory of the world in the way China did two decades ago.”

‘Fragmented manufacturing’

“What we’re seeing now is due to automation, technological improvements. We move away from this consolidated global manufacturing hubs that we used to have into a more fragmented manufacturing footprint,” said the consultant.

For instance, companies will make products in various facilities closer to their consumers in the U.S. or Europe, he added.

Multinationals are taking action as the bilateral trade dispute between the world’s two largest economies continues to affect global markets and business sentiments.

Some companies are now looking for new suppliers, new sources of innovation and new areas of manufacturing, he added.

“Ultimately, someone has to pay for this prolonged trade dispute, which is adding cost to the supply chains,” Mattios said, adding that the consumer or manufacturer would have to absorb some costs to maintain market share — even at reduced profit margins.

Despite all the strategizing, however, one thing is for sure, Mattios said: “This uncertainty with the trade dispute is not helping anybody.”

“Although companies are ready to start taking action, there is a thirst for stability to come through so companies can start making their plans,” he said.

Source: CNBC