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Moving Manufacturing from China to Southeast Asia: An Introduction

Factory workers in Indonesia

 

Foreign companies have used low-cost country sourcing strategies for decades with a strong focus on China. In the past years, we’ve seen a new trend where increasingly more companies look for alternative sourcing markets in Asia.

In this article, we explore why this move is happening, specific brands that already moved parts of their production to Southeast Asia, what should you pay attention to if you are a manufacturer, and which countries are on the rise as alternatives to China.

Why are companies moving manufacturing from China?

Increasingly more companies have understood the importance of diversifying their supply chains from China, a trend that was accelerated during the pandemic.

The increasing labor costs is a major concern, which are around three times higher in China compared to Vietnam, and five times higher than Indonesia on average. Between 2009 and 2014, the Chinese minimum wage almost doubled, resulting in slimmer margins for foreign companies.

Another reason is the supply chain disruptions caused by the pandemic that sent shockwaves to global manufacturers, urging businesses to rethink their procurement strategies. Some companies have decided to move their production to other countries completely, while many adopt so-called “China plus one” strategies. This means that production is kept in China, while parts of the production is allocated to other countries.

The increasing import duties due to the ongoing trade war has also aggravated the struggles of businesses that are manufacturing in China. As China faces these and many other problems, Southeast Asia simultaneously rise fast and gain attention as an alternative market to China.

Companies Moving Out of China

Let’s review some notable companies that have moved parts of or all their production from China, and their future plans for the new manufacturing destinations.

Apple

Under the trade war pressure, Apple has been encouraging its suppliers to move production out of China. Parts of the iPhone’s production lines have been moved to India, some MacBooks are now assembled in the U.S, and Vietnam has been rising as an essential hub to produce Air Pods.

It plans to have 30% of its classic Air Pods produced in Vietnam instead of China. Foxconn for instance, the major supplier of Apple, invested 270 million USD in a plant to manufacture laptops and tablets in Vietnam in 2020. In fact, Apple tried to move more production to Vietnam in 2021, but the plan was postponed due to the pandemic, but the plan was resumed in 2022.

Samsung Electronics

Samsung stopped its smartphone manufacturing in China in 2019, and its TV and PC factory in 2020. Its global production is now based in Vietnam. The revenue of Samsung Vietnam is equivalent to roughly 20% – 25% of Vietnam’s total GDP in 2021 and the company is also a main contributor of FDI flows from South Korea.

Nike

Nike’s suppliers have been relocating production to Southeast Asia and Africa for a few years. The brand used to have much production in China with an estimation of 35% in 2006 but the brand has reduced its dependence on Chinese suppliers. In 2021, 51% of Nike’s shoes were made in Vietnam while only 21% were made in China.

Adidas

Nike is not the only apparel and footwear giant to shift its production location. About 25% of manufacturers for Adidas in China were shut down as foreign businesses stopped their partnerships with Chinese factories. The reason behind this was the penalty tariffs due to the trade war. Opportunities, therefore, open for counterparts in Vietnam, Thailand, Bangladesh, and Indonesia thanks to low-cost benefits.

HP

HP, Dell, and other tech firms planned to reallocate up to 30% of their notebook production out of China. HP has reportedly planned to shift 20%-30% of its Chinese production to Taiwan and Thailand to mitigate the risks of rising costs and disruptions, the US tariffs on tech products also reduced profits.

Considerations before moving manufacturing from China

It’s undeniable that China is still crucial for the global value chain, and the country has significant advantages that makes it competitive for manufacturing. Let’s review some important items to consider before relocating manufacturing from China to Southeast Asia.

Manufacturing capabilities

It’s easier to say what products cannot be manufactured in China than the other way around. Anything from clothing, machinery, electronics, telecommunication equipment, vehicles, and chemicals are produced here. Not only can you find products that require labor-intensive manufacturing at low costs, but also advanced manufacturing.

Manufacturing is also concentrated to different regions such as Guangdong province being particularly strong in electronics manufacturing, just to give an example.

Experience with foreign companies

Chinese suppliers are flexible and generally more experienced in working with foreign customers. They are nimble, fast, and understand Western standards well. The availability of skilled labor in China still also outweighs other Southeast Asian countries. It’s easy to come across suppliers who happily provide both OEM and ODM products, according to customers’ specifications.

The business ecosystem and mature supply chain

The supply chain in China has developed for decades. Foreign companies rely much on Chinese suppliers that are located. Therefore, moving out of China means moving the entire manufacturing and network from the country, which takes a great deal of effort, time, and money. Moreover, manufacturers around the world still depend a lot on Chinese raw materials and semi-final products. For example, clothing producers from Vietnam and Bangladesh must import most of their fabrics and threads from China; European manufacturers of cars must import wiring from China. This ecosystem makes China dominant in global manufacturing.

Relocation costs

With the strong concentration of manufacturing in China, relocations to other countries requires much capital and resources. Simply speaking, if you have your factory set up in China and want to shift to Vietnam, much capital is needed to set up a new factory, recruit workers, train the workers, send specialists to Vietnam for quality controls and inspections. You also have to add the work needed to deal with local authorities to get approvals and relevant certificates prior to operations.

China’s consumer market

Some enterprises hesitate to move from China due to its large consumer base. With a population of 1.4 billion, China remains the biggest consumer market for many products. If a company already has manufacturing in China, it is also easier getting access to the domestic market and to distribute products locally.

Otherwise, you would need to export the products to China, which comes with tariffs, customs clearances, additional shipping costs, and more.

What countries are companies moving to in Asia?

While China will remain an important manufacturing destination, there are a handful of countries in South and Southeast Asia that gain much attention. Let’s review the most notable ones.

Vietnam

Vietnam has traditionally attracted companies in furniture and textile production. Nowadays, multinationals set up production for more advanced products, including electronics, telecommunication equipment, and machinery. The benefits of choosing Vietnam as a manufacturing destination include its low labor costs, many trade agreements, enhanced manufacturing capabilities, and large labor pool. Even if Vietnam won’t replace China as a global manufacturing hub, it gains significantly as companies seek to diversify and set up manufacturing operations here.

Indonesia

With a population of 275 million, Indonesia is the most populous country in Southeast Asia and with a workforce of around 135 million. With rapid urbanization and a median age of 29.7, the country is set to become a leading manufacturing hub in Asia.

Its domestic market is expected to see great growth as disposable incomes increase and more people get access to smartphones, the internet, and modern financing options. At the same time, the country struggles with infrastructure issues, red tape, and regulations that tend to be unclear and change frequently.

India

The manufacturing industry is India’s most important. ‘Make in India’ is a program to put India on the map as a manufacturing hub and attract more businesses and investors. India’s main products includes automobiles, chemicals, clothing, consumer electronics, electrical equipment, furniture, heavy machinery, refined petroleum products, and ship building.

Notably, India has lower labor cost compared to China, yet you will have to deal with a weaker infrastructure, inefficient transport system, and lower domestic consumption.

Summary

In general, companies are moving from China due to the increased labor costs, supply chain disruptions, and trade war. At the same time China faces these issues, other countries like Vietnam, Indonesia, and India become more interesting and capable.

If you are considering a relocation from China, you should consider relocation costs and inefficiencies in new markets, not only looking at labor costs. China also possesses a business eco-system that cannot be replicated in the short-term.

Southeast Asian suppliers highly rely on imports from China, which drives logistics costs and final prices, so these rising countries can be one of the sourcing bases but cannot completely replace China.


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    Electronics Manufacturing & Sourcing in China: An Introduction

    Assembling electronics in a Chinese factory

     

    China has dominated electronics manufacturing for decades. Despite the recent trade with the US and Covid restrictions, China remains a crucial manufacturing destination for electronics. It exports almost half of the cellphones and laptops globally and produces many of the subcomponents used for manufacturing elsewhere. In this article, we review China’s electronics manufacturing industry, what the benefits are of sourcing electronics here, and what other alternatives you have.

    China’s Electronics Manufacturing Industry

    China is the biggest manufacturing hub of electronics globally with much of the production centralized to the Southern region.

    It all started around three decades ago when the government took the advantage of its large labor pool and low labor costs. As automation is applied in most cutting-edge production facilities, the manufacturers also benefit from China’s rapid development in infrastructure and innovation. It remains a key trade partner to all developed economies and is the biggest exporter of electronics to the US, accounting for more than one-third of US’s imports.

    Another reason that helps China to maintain its position in the electronics manufacturing sector is the availability of sub-components. Manufacturers save much on sourcing components locally as these can be supplied domestically. As a result, foreign companies find it difficult to relocating production overseas as they will lose access to these suppliers and face additional logistics costs.

    What electronic products are made in China?

    China produces a large variety of electronics products, it’s easier to explain what electronics that cannot be found here. This ranges from consumer products to industrial components. Factories are primarily located in cities such as Shenzhen and Dongguan in the South, but also in Chongqing and Shanghai. Below you can find examples of electronic products that are widely produced in China.

    Cellphones

    Many global mobile phone brands such as Huawei, Xiaomi, and TCL are originally from China. These brands established strong manufacturing capabilities locally, before expanding sales and manufacturing activities overseas. Naturally, this has benefitted local suppliers of related components, including chips and transistors.

    In addition, China is well-known for having a large rare earth elements reserve (44 million tons out of the global reserve of 120 million tons). These are crucial to produce electronic components, particularly cellphones. The availability of the materials ensures that domestic Chinese manufacturers enjoy a relative advantage over foreign manufacturers.

    Computers, laptops, and accessories

    It’s estimated that China manufactures 90% of the laptops globally and where domestic businesses are capable of supplying most of the components. At the same time, there has been an effort from the government to close the technology gap from foreign manufacturers, especially for semiconductors.

    Despite the reliance on imported semiconductors, China is still an attractive option for world-class laptop brands to set up production. Chongqing and Kunshan are known as the two largest clusters of laptop production, in addition to other well-known electronic manufacturing hubs, such as Shenzhen and Dongguan. Not only laptops, but also components and accessories can be sourced in these areas.

    Much of the electronics production is concentrated which eases the sourcing process and creates synergies.

    Benefits of Sourcing Electronics in China

    We have touched on China’s electronics industry and what kinds of products are manufactured here. Let’s review the underlying reasons behind this.

    Low labor costs and large labor pool

    Despite its increasing wages, China is still considered a low-cost country for sourcing. With wages that are around three times higher than Vietnam on average, companies still see China as a crucial for manufacturing, thanks to its developed supply chains and infrastructure. Relocating production is easier said than done and sometimes not feasible due to other challenges.

    Wages are obviously higher in and around the larger cities like Beijing and Shanghai along the East coast. Some manufacturers therefore target cities and provinces in the central areas, as well as in the South.

    Skilled workforce

    Given the well-established foundation of the manufacturing industry, foreign manufacturers believe that Chinese workers are more skilled compared to competing countries, like Vietnam or Indonesia. With a population of more than 1.4 billion people, 14% are considered skilled workers (approximately 200 million people) 3.6% highly skilled (approximately 50 million people.

    Large reserves of rare earth elements (REE)

    As mentioned, China has the largest reserve of RRE in the world. Although China accounts for roughly 37materials, These elements are important to produce electronic products, rather and wideused in components such as computer hard drives, flat-screen monitors, electronic displays, and more.

    Developed supply chain

    China has built a business eco-system that cannot be found elsewhere in Asia. Its developed supply chain benefits manufacturers in both procurement and distribution processes.

    As mentioned, domestic Chinese companies can provide most of the components used in electronics, which helps manufacturers to lower logistics costs. Apart from savings in logistics costs, the shorter lead times lower the required working capital, which relieves the financial burden for businesses.

    Besides, the transportation infrastructure is comparably high to Southeast Asia. To give an example, four of the five largest seaports in the world can be found in China. In 2019, China handled more goods volumes than all other East Asian and Pacific countries combined. Shanghai port is the only one that can manage volumes of more than 40 million TEUs a year since 2018.

    The many large seaports are located alongside the coastal line, making it easy for domestic and foreign manufacturers to reach global ocean shipping lanes.

    What are the disadvantages of sourcing electronics in China?

    Despite the many advantages of sourcing electronics in China, there are some drawbacks you should be aware of. Manufacturers of electronic goods should understand the following disadvantages.

    Communication issues

    Foreign companies often encounter communication issues when working with Chinese suppliers. This is a reason why many companies set up local organizations with staff that can reduce the risks for miscommunication.

    With that said, China has improved from having “low efficiency” to a “moderate efficiency” in the English language recently, which is a positive sign in the favor of the global companies. However, the business culture is still largely different from Western ones.

    It’s important to employ local persons who understand the Chinese business culture and that can communicate swiftly.

    Perception of Chinese quality

    Chinese brands still face a stigma regarding product quality, even if this has changed much in recent years. Huawei is one example where the product quality is almost on par with that of Apple yet being offered at significantly lower prices.

    We see more Chinese brands entering the global market and that receive positive feedback from foreign consumers. Examples include Xiaomi, OPPO, Huawei, and Lenovo that sell everything from cellphones, laptops, and robot vacuums.

    Shipping costs and lead times

    We’ve seen major supply chain disruptions in recent years, primarily due to the container shortages and Covid outbreak in China. The shipping rates for containers from China increased by ten times compared to pre-Covid levels. This has resulted in near sourcing and diversification trends where increasingly more companies seek to relocate production to Eastern Europe or Mexico, or Southeast Asia.

    In addition to the skyrocketing prices, have also affected companies’ future procurement strategies. Before the pandemic, it took roughly forty days to ship goods from China to the US. In the first half of 2022, this figure reached seventy to eighty days.

    Alternative Markets to Source Electronics in Asia

    Due to increased wages and supply chain disruptions, increasingly more companies seek to diversify manufacturing to Southeast Asia. Below you can find alternative markets in Southeast Asia that should be of interest when sourcing electronics in Asia, and what the benefits are.

    Malaysia

    Electronics manufacturing contribute much to the exports of Malaysia. Particularly global brands from countries like Germany, Japan, and South Korea have manufacturing activities here. Examples of products produced include computers, semiconductors, and cameras where its semiconductor production gets much attention.

    Surprisingly, labor costs are lower in Malaysia on average and blue-collar workers earn around 500 – 800 USD per month. In China, on the other hand, the average salary is more than 1,000 USD per month. Hence, Malaysia’s competitive labor costs, at least when compared to China’s, is something that should be considered.

    India

    Another interesting market for electronics manufacturing is India. Factory workers earn roughly 300 USD per month, which is 3-5 times lower compared to China. India also has a labor pool of 500 million people, which is competitive. Yet, a disadvantage is the significantly low participation of women in its labor force, which is one of the lowest in the world.

    More companies have moved manufacturing to India in the last years, the government also shows an aggressive approach to promote the country as an alternative market to China. The Production Linked Incentive (PLI) schemes launched in early 2020 allows manufacturers to receive cashbacks if products sold are locally produced. The electronic sector is one of the key focuses, with an incentive of up to 5% of the sales of goods that is manufactured in India.

    As a result, dozens of companies pledged to set up mobile phone manufacturing facilities in India, with investments totaling around 1.5 billion USD. Global electronic giants are also showing their long-term commitment to India. Samsung completed the establishment of their display manufacturing factory in India in 2021. Nokia started to produce 5G equipment in India in late 2020. Foxconn, a Taiwanese contract manufacturer, plans to invest 1 billion USD to upgrade and expand its factory in Tamil Nadu. This is one of the two plants of Foxconn that assembles products for Apple and Xiaomi.

    Conclusion

    Even if China is still a major producer of electronics, it sees increasingly more competition from other Asian countries. It’s crucial for electronic companies to review their current reliance on China, global trends, establishing a long-term vision to produce electronics.

    India and Southeast Asian countries are growing as alternatives to China. India, Malaysia, and Indonesia are all promoting attractive investment schemes to attract foreign manufacturers that shift production from China. Apart from the general strengths of each country, the manufacturers are also suggested to consider the tariff for products imported to overseas markets.

    Vietnam, for example, has a free-trade agreement with the EU, and a bilateral trade agreement with the US. At the same time, trade agreements are being discussed between the EU and Indonesia and the Philippines.


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      Clothing Manufacturing in China: An Introduction

      Worker in a Chinese clothing factory

       

      China is the world’s biggest supply market and the first country that comes to people’s minds when discussing manufacturing. Clothing is one of the main strengths of China, with the main export market for Chinese clothing products being the U.S, EU, and Southeast Asia.

      In this article, we give you an overview and trends in the clothing manufacturing industry in China and review the clothing products and the regions in which they are produced the most. We will also tap into the advantages and disadvantages of sourcing apparel in China.

      We finalize the article by suggesting some alternative destinations in Asia for clothing products.

      China’s Clothing Manufacturing Industry

      As the world’s largest clothing manufacturer for more than a decade, China accounted for more than half of the global apparel production.  The country has a revenue of 303 billion USD in 2021 from the apparel market.

      Guangdong province is the hub of clothing production, with more than 28 000 exporting enterprises located here. In solely the first quarter of 2022, the province’s clothing manufacturing already contributed 6.3 billion USD value of export.

      However, since 2015, the clothing sector of China started to show a more sustainable trend, slowing down its expansion on the scale and focusing more on technology to raise productivity. The main motive behind this shift is the rising labor cost, which forces businesses to transform from labor-intensive practices to better-automated ones.

      Another significant trend in China’s clothing industry is the growth of domestic demand. Thanks to rising income, Chinese consumers are now more willing to spend more on clothes and to buy from local brands. Therefore, the Chinese clothing manufacturers are also seeking more opportunities in the domestic market rather than depending on exporting.

      Cities and Regions with Clothing Manufacturing in China

      It’s not an exaggeration to say that almost all clothing products are made in China. There are around 50 textile clusters in China. Guangdong, Shandong, Zhejiang, Fujian, and Jiangsu are the 5 provinces that account for 70% of the country’s total textile production. In this article, we will list out the main manufacturing regions for clothing and the most produced products in those regions so that you can save time when searching for suitable suppliers in China.

      Guangzhou

      Guangzhou is a city in Guangdong province. The city has had its reputation for apparel for a long time with a large fabric market – The Guangzhou International Textile City. In Guangzhou, you can find suppliers for men’s, women’s, and children’s apparel, trousers, sportswear, and even replica clothing. In adjacent to Guangdong, Nanyou also possesses a wholesale clothing market for high-end ladies’ clothing.

      Xintangzhen

      Xintangzhen is a town in Guangdong province where you can find a great number of suppliers for jeans wear. More than 5,000 denim clothing enterprises and factories are located here. It is estimated that the daily output of the town is 2.5 million pieces of jeans wear. This number is equivalent to 60% of the whole country’s denim production capacity. Products from Xintangzhen are exported to the U.S, E.U, Russia, and many other countries.

      Dalangzhen

      As mentioned, Guangdong province is a big hub for apparel, and Dalangzhen is another town in Guangdong with a reputation for clothing. The specialization of the town is knitwear. The largest wool wholesale market in China is in Dalangzhen, with more than 17 000 wool market entities operating in the town. One in every 6 sweaters in the world comes from Dalang, so if you are looking for a good factory that can provide sweaters, cardigans, socks, or woolen mufflers, Dalang is the right place to start.

      Huzhou

      Huzhou city is in Zhejiang province. Zhili town in Huzhou is home to the largest children’s wear industrial zone in China. The town currently has more than 14,000 children’s wear companies. In 2020, the annual output of children’s clothing in the town exceeded 1.45 billion sets, generating about 10 billion USD in sales revenue. Generally, the children’s clothing of Zhili focuses on low and middle-income households, but it is also not hard to find high-end children’s clothing manufacturers here.

      Suzhou

      Suzhou is a city in Jiangsu province, and the Huqiu district in Suzhou is famous for making wedding dresses. Roughly 90% of wedding dresses exported from China are from this district. There is A Wedding Dress Market here, with good quality products and diverse designs for any brides to choose from. Experience shows that it is cheaper to come and buy directly in the district than to shop online. Besides Suzhou, Xiangcheng and Jinchang city also provide wedding clothes.

      There are other cities in China that you can also refer to when looking for clothing producers, such as Hangzhou (in Zhejiang province), Humen (in Guangdong province), and Shishi (in Fujian province). They are mostly located in the East coast regions of China.

      Benefits of Sourcing Clothing Products in China

      Sourcing clothes from China gives businesses multiple advantages. We will explain some of the main reasons to find your suppliers in this big market: good experience and capacity, customization ability of suppliers, and an established business eco-system.

      Experience and Capacity

      Chinese clothing producers, with often 10-15 years in the industry, are very experienced in both manufacturing and exporting. You will not find difficulties in looking for a well-built factory with an understanding of the U.S and EU markets’ standards and certifications, as these two markets have long been the main markets of Chinese clothing products. The factories are mostly built for scale with good equipment, and the capacity for large orders.

      Customization

      If you do not specialize in designing, it’s important to find a supplier that can customize their products based on your rough ideas, or you might waste a lot of time and money explaining back and forth with the traders and the traders may misunderstand and deliver a different idea to the factories they find. Wholesale clothing manufacturers in China usually own a professional research and development team. Therefore, you can discuss your product concepts with them directly and it is much easier to work on adjustments later. The ODM and OEM services are available in most Chinese factories.

      Mature Supply Chain and Business Eco-System

      As a result of its long clothing manufacturing history, China has an ecosystem of businesses. If a manufacturer needs to import or source its raw materials and machinery from far away suppliers, the shipping cost will add up significantly to the final product’s price. Moreover, the lead time will be longer with the risk of disruption in the supply base. Factories within one industry are often placed close to each other. Therefore, it’s undeniable that the availability of components, the supporting systems, and the maturity of the supply chain are the advantages that no other country can compete with China.

      What are the disadvantages?

      In recent years, wages are higher in China and increase at a faster pace than in its Asian peers. In Vietnam, salaries are around a third on average compared to China and increase slower.

      A second issue is a long transportation lead time to Europe and the US, and the currently high freight costs. Due to recent supply chain disruptions and the COVID pandemic, some companies find it unbearable to produce in Asia, turning to nearshoring, at least partly.

      The ongoing trade war with the US has hurt both countries. Imposed tariffs have encouraged foreign companies to look for alternative markets, and to outsource at least parts of their production.

      Alternative Markets for Clothing Manufacturing in Asia

      With those concerns over sourcing in China, many enterprises now consider moving their production facilities or changing to suppliers in other countries in Asia. With clothing products, the most suitable alternatives are Vietnam, India, and Bangladesh.

      Vietnam

      Vietnam hosts the facilities of Nike, Adidas, and The North Face; a large percentage of Mango, G.A.P, H&M, and Zara clothes are also made in Vietnam. The country has the advantage of low labor costs, proximity to China for raw materials, favorable geographic position for shipping, and multiple free trade agreements for tariff exemption.

      India

      India, with a population of 1.3 billion, has a massive pool of workforce to support manufacturing industries. The country is also big in raw material production as the second-largest player in the world cotton trade.

      Bangladesh

      Bangladesh has the lowest wages of these 3 countries. Workers are experts in processing bulk orders and fast delivery, explaining why fast fashion brands like Zara prefer Bangladesh. The industry benefits from the domestic supply of cotton.

      Summary

      China has maintained its position as the world’s manufacturing hub of clothes for decades. This has allowed the country to build up superior supply chains and a business eco-system that is hard to relocate elsewhere.

      Different regions of China specialize in different clothing products, so knowing the right regions will save you a lot of time and effort when searching for suppliers.

      The manufacturers are moving towards more automated manufacturing and focusing more on domestic markets, yet there is still ample room for exports.

      If you consider diversifying your supply base and being less dependent on China producers, we recommend considering Vietnam, India, and Bangladesh for clothing products.


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        The Cement Industry in Asia: Major Producers & Trends

        Cement factory in Thailand

         

        The cement industry plays a vital role in infrastructure development and urbanization drives the demand for cement greatly. Concrete is currently the second-most used substance on the planet after water, which explains its importance.

        In this article, we review the cement industry in Asia and what countries account for much of the exports and the consumption. We will also explain current issues that governments work actively trying to resolve, and how these affect the markets.

        The Cement Industry in Asia

        Production and consumption of cement are largely concentrated in Asia, accounting for 73% of the output globally and a consumption of 81%. Yet, the cement production industry is also facing a capacity surplus due to lower demand from the construction industries.

        The largest producers of cement include China, Vietnam, India, and Indonesia where China produces and consumes the most by a big margin. In Southeast Asia, there is a large gap between Vietnam and the second-largest cement-producing country, Indonesia, which has 15 integrated plants and 66 million metric tons of production per year.

        Thailand, the Philippines, and Malaysia all also possess large cement markets, despite not being as big as the above-mentioned countries.

        The EU imports the most cement from China, Thailand, and the Philippines, while Vietnam is in the top 5 exporters of cement and clinker to the US. Having said that, both the EU and the US aren’t dependent on cement from Asia as most of their cement producers operate on a global scale and can provide enough for the domestic markets.

        Worth highlighting is also the close ties between the US, Mexico, and Brazil, where the latter have large-scale cement manufacturing.

        In recent years, China has tried to cut down on cement production due to environmental issues. It’s said that if the cement industry was a country, it would be the third-biggest polluter in the world, after the US and China. The governments of Vietnam and Indonesia have also implemented measures to counter the surplus of cement capacity with new regulations that limit new cement investment projects. The new regulations and limits will also help to reduce the cement output, preventing oversupply and increased competition among suppliers.

        What countries are the biggest cement producers in Asia?

        Four of the ten biggest producers of cement globally can be found in Asia, as well as the world’s biggest exporter of cement. Keep in mind that we must make a distinction between “producers” and “exporters” as countries like China consume much of their locally produced cement.

        Vietnam

        Vietnam is the biggest exporter of cement globally with an export value of 1.4 billion USD in 2020, equaling 12.5% of the global cement exports. Clinker is a nodular material used as a binder in cement products, and Vietnam also exports this product in large quantities.

        Vietnam exports around 10% to 15% of its cement, having China, the Philippines, and Bangladesh as its biggest trading partners. China doesn’t have a shortage of cement, yet the cost for Chinese producers to transport products to the coastal region is higher than importing from Vietnam. This explains why China remains the biggest importer of Vietnam’s cement and clinker for many years, accounting for 57% of the total export volume.

        At the moment, Vietnam faces an oversupply of cement. While the current domestic demand is around 65 million tons, the industry’s capacity has reached nearly 107 million tons. The situation is particularly serious in the North of Vietnam, which will increase its dependence on the export market.

        China

        China is the biggest cement producer, consumer, and importer in the world. It produces almost 60% of the world’s cement and accounts for most of the colossal carbon footprint of the industry. In 2020, the production volume reached almost 2.4 billion metric tons. To match China’s urbanization need, the domestic production of cement grew rapidly between 2002 and 2014.

        However, the demand for cement is expected to decline due to the shift from mass urbanization to more sustainable infrastructure, along with the slowdown in the Chinese real estate market. Therefore, the country is reportedly trying to limit cement imports.

        In addition to restricting imports, China has a plan to cut down on cement production as the manufacturing process requires much coal, which emits CO2 and dust. This causes a negative and long-lasting impact on the environment. This is part of its five-year plan to reach the CO2 emission reduction goal.

        India

        Being the second-largest cement producer with 7% of the global installed capacity, India has a positive outlook on its cement industry. Until February 2021, India’s overall cement production reached 262 million metric tons in 2021, which is around 10% of China’s.

        The demand for housing in rural areas and the Indian government’s strong focus on infrastructure development will drive the cement production to double-digit growth. Examples of infrastructure development projects include the goal of creating 100 smart cities, expanding the capacity of railways, and adding 125,000 km of roads in the coming five years. We will also see an increase in storage and handling facilities to reduce transportation costs. The demand for cement will remain high for at least until 2030.

        South India is the main hub for cement production that has several big producers, accounting for 33% of India’s total output. On the international trade aspect, India exports mostly to Bangladesh, Sri Lanka, and Nepal, while it imports much clinker from Vietnam.

        Indonesia

        Indonesia is an emerging exporter of cement, having a production volume of around 66 million metric tons of cement in 2021. It’s rapidly increasing exports of cement and clinker where Bangladesh and the Philippines are major importers of clinker, and Mauritius and the Maldives are the biggest importers of its cement.

        The cement industry is dominated by four major producers, including the state-owned Semen Indonesia, which has a 44% market share. The other major producers include Indocement Tunggal Prakarsa, Holcim Indonesia, and Semen Baturaja.

        Like Vietnam, Indonesia also struggles with an oversupply as domestic consumption only accounts for 60% of its production capability. Despite the massive infrastructure projects across the country, the low utilization rate results in inefficiencies that have hurt many cement producers.

        Summary

        Asia has four of the ten biggest cement producers globally, including China, Vietnam, India, and Indonesia. While Vietnam exports much of its cement, China consumes much of its locally produced cement and where most of the supply is allocated to the construction industry. Worth highlighting is also the overcapacity that countries struggle with, including Vietnam, which will result in the need for more exports.

        At the same time, Europe is facing a crisis due to a shortage of building materials, which is partly related to the increased energy costs. Turkey and China have traditionally been interesting supply markets for such products, but we might well see Southeast Asian countries becoming new options for foreign companies.


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          Semiconductor Shortage Update

           

           

          The semiconductor industry witnessed strong growth in the last few years due to skyrocketing demand in every industry that applies digitalization and automation; from automotive and consumer electronics, to ICT infrastructure and healthcare. However, the current supply fails to keep up with a sharp rise in demand while the pandemic is causing supply chain disruptions. The challenging semiconductor shortage is expected to continue in 2022 and even last until 2023. Both upstream and downstream companies are trying to address this issue in different ways with the target to balance supply and demand.

          As societies shifted toward a more digital lifestyle during the COVID-19 pandemic, demand for electronic products started to rise. Now, as the second year of the COVID-19 pandemic has passed, lockdowns are lifting in several countries. Economies have reopened gradually and the demand for digital products continues to rise, which leads to a larger demand for electronic chips. Consequently, global semiconductor revenue reached an all-time high at 555.9 billion USD in 2021, an increase of 26.2% (YoY). This is equivalent to 1.15 trillion semiconductor units shipped throughout the year. The sales are predicted to further increase by 8.8% and exceed 600 billion USD in 2022.

          Despite suppliers’ efforts in pushing production to meet the demand surge, the semiconductor shortage remains a challenge to all industries that runs on these essential components worldwide. The global average delivery lead time soared 77% in December 2021 compared to the previous year, approaching staggering 25.8 weeks, according to Bloomberg. The long lead times have caused production delays, factory shutdowns, and revenue losses, especially for companies that have no buffer stocks. Acknowledging this issue, electronic chip-buying companies tend to place bigger order to mitigate the long lead times, which eventually amplifies the real demand, and worsen the current shortage while causing oversupply in the later period. Moreover, semiconductors manufacturers now concentrate on the production of the newest and most cutting-edge chips which are used in consumer electronics. Therefore, industries using “legacy nodes” or less modern chips like in the automotive industry continue to be the most heavily affected.

           

          Graph showing semiconductor delivery delays

          With the heaped-up orders in sight, semiconductor foundries, which are known as semiconductor fabrication plants, have significantly increased the utilization of their existing capacity since Q2 2020 and reached over 90% of the capacity in 2021. Revenue of the top 10 foundries grew dramatically by 30.8% in 2021 (YoY). The foundry market is projected to continue its growth by 12.9% in 2022. As of 2021, more than 80% of the semiconductor foundries were built in Asia Pacific countries including Taiwan, Korea, and China. Taiwan dominates the market, producing over 50% of the global chip production volume.

          Hence, in order to catch up with the increase in demand, semiconductor manufacturers have invested in building new factories to expand their capacity. The world’s largest, Taiwan-based semiconductor foundry TSMC continuously announced ambitious expansion plans budgeting 100 billion USD through 2023, standing on the frontline of solving the chip shortage. For example, the construction of its 12 billion USD factory in Arizona was announced in 2021 and is expected to come into operation to make advanced 5-nanometer chips by 2024. Furthermore, it also plans to increase the capacity of the new factory in Japan, which focuses on producing chips with older technologies, but the production is expected to start in late 2024. TSMC has other expansion plans in Taiwan and Singapore as well. In addition, mainland China’s largest chip manufacturer SMIC also has aggressive plans to target self-sufficiency by building a 9 billion USD factory in Shanghai’s free trade zone.

           

          Charts showing semiconductor foundries market share and revenues

          Chip manufacturers are not alone in battling with the shortage. Chip-buying companies are also joining forces for expanding capacity as well as diversifying the supplier base and localizing production to mitigate their risks. Japanese carmaker Denso plans to invest 350 million USD, taking a 10% stake in TSMC’s Japan factory expansion to revive the halted production lines. Taiwan’s Foxconn, Apple’s biggest iPhone assembler who has been seeking to have its own semiconductor capacity for years, and is in discussion with Saudi Arabia and the United Arab Emirates authorities to jointly construct a 9 billion USD foundry for microchips and other electronic components. Similarly, the American automobile company Ford is currently dependent on Taiwan’s TSMC for supplying older technology chips, but has lost its prioritized position and faced a serious chip crisis. To tackle its short- and long-term supply shortage, Ford partnered with GlobalFoundries to initially produce chips for Ford, but later also boost chip production in the U.S. Those strategies are aligned with governments’ semiconductor production localization initiatives in multiple countries.

          To mitigate the risks of future shortages, local governments focus on expanding production capacity and having their own semiconductor manufacturing setups in their countries or regions. The U.S, the European Union, and the Asia Pacific region are encouraging local companies to build or expand their facilities locally, or to attract FDI investments in the semiconductor sector. In the Asia Pacific region – the hub of chip production – governments play an essential part in promoting the semiconductor sector. The Chinese government’s investment in the semiconductor industry increased dramatically from less than 1 billion USD in 2018, to more than 30 billion USD in the following two years respectively, proving the Chinese government’s fierce determination to achieve self-sufficiency in semiconductor production for mainland China. The South Korean government collaborates with local companies to invest 450 billion USD to establish the world’s largest semiconductor industry supply chain. Japan has also built a fund of 1.63 billion USD for the semiconductor industry and has planned to extend support policies to attract foreign investment in advanced technology.

          Graph showing government investment in the semiconductor industry

          Despite the positive outlook and ambitious initiatives, increasing the supply capacity and localization of production is a slow process. It takes many years, billions of dollars, and lots of skilled labour to build a new semiconductor factory. In addition, semiconductor technology has been developing quickly and the demand for cutting-edge chips needed in new technologies such as smartphones and 5G devices continues to surge. Meanwhile, only a few companies can produce such advanced chips, and building those factories takes even longer time and effort. Nevertheless, companies’ and governments’ current efforts can help relieve the intense demand for electronic chips, shorten lead times and eventually reach a balanced state of supply and demand in the next two years.

          To summarize, the semiconductor shortage, particularly for cutting-edge chips, is expected to linger through 2022 and most likely to 2023, with longer lead times, delayed shipment, and higher costs. It is primarily fuelled by fast growth in demand and disrupted supply chains. The shortage will affect companies to different extents, depending on the industry and application they operate on. Therefore, every company should thoroughly analyze and assess risks at all levels of its supply chain to minimize the impacts on production.


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            Greening Steel in Asia: A Race for Innovation

            Given the growing support from governments and major consumers of the steel industry – construction, automotive, and household appliances – the green steel market is developing at a rapid pace. Our insight looks at the current development of green steel in top Asian markets – as they race to reach net-zero emissions.

             

            Steel manufacturing process

             

            Despite steel being one of the most recycled materials on the planet, the extraction of iron ore and other elements used for steelmaking make the industry one of the most carbon-intensive industries on Earth. Iron and steelmaking represent between 7% and 9% of global greenhouse gas emissions. Sustainable steelmaking requires technology performance improvements and material efficiency. In the long term, innovative technologies would be required for adoption. These include carbon capture, utilization, and storage (CCUS) and production using hydrogen (either as an auxiliary reducing agent in a blast furnace (H2-BF) or as the sole reducing agent (H2-DRI) in a process known as a direct reduction of iron).

            Asia’s Bid To Green Its Steel Industry

            Asia controls a large percentage of the world’s production of steel. China, India, Japan, and South Korea made the top 10 list of steel producers globally. The four countries’ combined production of crude steel accounted for nearly 68% of the world’s total production in 2021. The whole continent, as estimated by the World Steel Association, was responsible for 74% of the crude steel produced globally.

            Chart showing Asia's total steel production by country

            The steelmaking industry in China accounts for about 15% of the country’s total carbon emissions, the same number is 14% for Japan and 12% for India. To accelerate the industry’s transition to cleaner infrastructure, well-designed policies and regulations by the governments are much needed. The Chinese government has set a deadline that the country should reach peak emissions by 2030, 30 years before the targeted date to reach carbon neutrality. The country has been intentionally curbing its steel production to tackle carbon emissions. In 2021, China’s steel production levels finally fell for the first time in 6 years, dropping by 3% year-on-year. The steel output curb is expected to continue, at least until the production of green steel is in place.

            At the COP26 climate conference in November 2021, India, Japan, and South Korea backed the Glasgow Breakthrough protocol to decarbonize steel by accelerating the development and deployment of clean technologies and sustainable solutions. The countries also established roadmaps for the national decarbonization of the industry.

            Top Steelmakers Pledge to Meet Their Governments’ Targets

            The majority of the top steelmaking players have announced their commitment to reach net-zero emissions. Multiple projects were released in recent years, characterized by large investments and global partnerships.

            Table showing Asia's top steelmakers

            The world’s top steel producer – China Baowu, has established a Low Carbon Metallurgy Innovation Center and a Global Low Carbon Metallurgical Innovation Alliance with partners to promote the green, low-carbon transformation of the steel industry. Consisting of 52 members, including enterprises, universities, and institutes from 15 countries, China Baowu’s Alliance includes some of the top industry players ArcelorMittal, Rio Tino, BHP Group, Thyssenkrupp as its members.

            In 2020, Australian mining giant Rio Tinto, together with China Baowu, entered an R&D partnership with Tsinghua University to develop and implement methods to reduce carbon emissions in the steel industry. An investment of 13 million USD will be used to fund a low-carbon raw materials research and development centre. Rio also announced its plans to partner with Japanese Nippon Steel to develop similar technologies. The project intends to become aligned with Japanese climate ambitions, which include reaching net-zero emissions by 2050.

            In 2020, the world’s largest mining enterprise BHP also announced its investment of 35 million USD, which aims to develop low-carbon technologies and pathways to reduce emission intensity in integrated steelmaking. BHP will join forces with China Baowu in a five-year-long partnership. The research themes include investigating the deployment of carbon capture, utilization, and storage at one of China Baowu’s production bases. BHP also signed a Memorandum of Understanding (MoU) with China’s second-largest steel producer – HBIS, to invest 15 million USD for the same purpose in 2021. The partnership will prioritize the development of three main areas: hydrogen-based direct reduction technology, recycling and reusing steelmaking slag, and iron ore lump utilization.

            In 2021, HBIS implemented the world’s first Direct Reduced Iron (DRI) production plant in China, using “ENERGIRON” technology, developed by Tenova and Danieli. The technology is powered by hydrogen and significantly reduced CO2 emissions in steel making. The final carbon footprint goal will be 125 kg of CO2 per ton of steel, a significant reduction compared to the current average of 1.85 tons of CO2 emitted for every ton of steel.

            In 2021, POSCO, along with South Korean giants Hyundai Motor, SK Group, Hanwha, and Hyosung, announced they will invest a total of 38 billion USD to boost the country’s hydrogen economy by 2030. The move came on the back of the “Hydrogen Economy Promotion and Hydrogen Safety Management Act”, the world’s first-ever hydrogen law, passed by South Korea in 2020. In December 2020, POSCO also unveiled plans to build a hydrogen production facility with a capacity of 5 million tons per year by 2050.

            In March 2022, Baowu contracted Tenova for designing and supplying a hydrogen-based ENERGIRON DRI plant with an annual capacity of 1,000,000 tons/year. Located in the Zhanjiang Economic and Technological Zone, Guangdong, the plant will be the largest hydrogen DRI facility in China.

            The current transition to sustainable infrastructure is thus far only at its preliminary phase in Asia, and the governments are still rolling out support policies to encourage decarbonization. However, large importers of steel products such, as Europe and the US, are setting up more stringent policies and increasing tariffs on products with carbon-intensive manufacturing processes. This urges companies to rush their transition to remain competitive on an international level. The need for changes in the near future has provided strong momentum for green investment and financing in Asia, both cross-border and domestically.


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              Investing in China – Opportunities Surpass Uncertainties

              Despite rising concern about investing and doing business in China, the country’s growth potential makes it a hard-to-miss investment opportunity. Several global investment firms announced new deals in Hong Kong and mainland China earlier this year, consolidating their faith in the region’s long-term development.

               

              Guangzhou city centre

               

              The M&A market in China is meeting another challenging year with Covid outbreaks in Hong Kong and mainland China, which prompts several global firms to rethink their operation. Escalated geopolitical and political tensions, e.g. between China and the US amid the Ukraine war also became a great concern for global investors.

              Successful international investments

              Still, some companies remain confident in the market’s future prosperity. At the end of March 2022, Swedish EQT and its Asian subsidiary announced two major investments in China and Hong Kong within a week’s time.

              On March 16, the Swedish private equity group announced its agreement to acquire 100% of Baring Private Equity Asia (BPEA). BPEA is a long-standing Hong Kong-based private markets investment firm with 17.7 billion EUR of assets under management. The strategic move helps to significantly expand EQT’s presence in the booming Asian private markets and put the group in the top 3 active ownership players globally. Mere days later, EQT Private Equity Asia also disclosed its majority investment in Guardian, China’s largest domestic pest control operator, previously owned by Jade Invest. Guardian’s success is fueled by favourable demographic trends, including increasing urbanization, a growing middle class, and a shift towards healthier and environmentally-friendly lifestyles. As there has been growing concerns about investing in China, EQT’s successful investments show a promising outlook for international investors.

              China’s tech industry has also continued to receive attention. The Fidelity-backed global venture capital firm Eight Roads announced on March 22 that it has set up a 350 million USD technology fund dedicated to the Chinese market. Eight Roads has invested in China’s technology and healthcare industry for over 25 years, backing over 130 companies, including the tech-giant Alibaba.

              China – a promising and unique country to invest in

              International investors’ most common concerns for investing in emerging markets include uncertainty over economic development. Nevertheless, the factors that have made China attractive to invest in remain intact. The country continues to stay on its course to becoming the world’s largest economy over the next decade. The Chinese government is also continuously introducing initiatives to strengthen its infrastructure to support foreign investment in multiple industries, ranging from consumer services to hi-tech and green energy. The favourable environment and fast-growing market that makes the country so attractive is not easily replaceable, and businesses that shy away from business activity in the country risk falling behind their competitors.

              China’s GDP reached 18 trillion USD in 2021, growing by 8.1 percent YoY and surpassing that of the European Union, which stood at 15.73 trillion USD. As the world’s second-largest economy, the country still has vast growth potential. China’s GDP per capita was 12,551 USD in 2021, six times lower than the world’s top economy the USA, indicating that there is still room for significant growth in their economic activity and household wealth.

              China also offers a unique ecosystem for manufacturing expansion. The country boasts high-quality infrastructure and a vast labour pool, among many other advantages. It also claims an extensive capability in technology, reliable logistics, and ease of in-country sourcing. While rising labour costs have been cited as a growing concern among businesses wanting to enter China, its worker productivity and experienced human resources balance it off. The vast experience that China’s labour pool holds results in a highly flexible workforce that can easily adapt to various fields for different business needs.

              China’s technology landscape is heading towards data-fueled innovation, leaving behind a past of copycats and counterfeits. The country’s spending on research & development takes up around 2.5% of its GDP, a much higher percentage than corresponding markets at similar or equal development levels. The country’s high investment in technology makes them competitive with advanced economies such as the US. The breadth and depth of China’s tech industry are enhanced by close to one billion internet users, more than the US and EU combined. China’s WeChat and TikTok stood as the world’s fifth and sixth largest social media channels, and the nation is the leading fintech investor in the world since 2018, with investments reaching a value of US$25.5 billion in 2019, a YoY growth of 900%.

              China provides an ideal market for businesses and investors who are attempting to gain long-term value. EQT and Eight Roads are successful examples proving the potential that the market has to offer, and investors should not shy away from conducting business activity in China fearing uncertainties in the economy.

               


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                Sourcing & Manufacturing in China: An Introduction

                Cargo ships on the river in Shanghai

                 

                China is the world’s biggest supply market and the first country that comes to people’s minds when discussing manufacturing. Since the 1980s, it’s transitioned from primarily producing low-cost products to becoming an advanced manufacturing market.

                In this article, we review what products are produced in China and why it remains an attractive supply market. We will also tap into the topics of nearshoring and the China Plus One strategy, due to recent supply chain disruptions and companies’ goals to diversify.

                We finalize the article by reviewing some of the major cities for manufacturing and what kinds of products are produced there.

                China Overview:

                • Population: 1.4 billion
                • Capital: Beijing
                • Bordering countries: 14 – including Russia, India, Vietnam, Pakistan, and Myanmar
                • Major cities: Beijing, Shanghai, Shenzhen, Guangzhou, Tianjin, Chongqing, Chengdu

                What products are manufactured in China?

                China is often referred to as “The World’s Factory” and we hardly find any products that can’t be produced there. While the country has manufactured low-cost products like toys since the 80s, it is shifting more to advanced manufacturing.

                This is something we will review in greater detail later in this article.

                To give you an overview, below are just some examples of products that can be manufactured in China today:

                • Cars and automotive parts
                • Commercial and agricultural vehicles
                • Furniture
                • Electronics
                • Garments and textiles
                • Chemicals
                • Agricultural products
                • Batteries
                • Machinery and equipment

                In recent years, companies have started to diversify their supply chains by moving at least parts of their manufacturing outside of China. Asian countries that benefit from the trend include Vietnam, Indonesia, and the Philippines, for example.

                Perhaps you have heard of the China Plus One strategy, a term used when companies try to diversify production to other countries, due to an overconcentration of investments in the Chinese market.

                Nearshoring has also become an increasingly common topic due to recent global supply chain disruptions and exorbitant freight rates. An example of nearshoring is when an American company outsources manufacturing to a neighboring company such as Mexico.

                In Europe, manufacturers often turn to low-cost countries like Serbia and Poland when deploying nearshoring strategies.

                Benefits of Manufacturing in China

                China still excels in many aspects and some foreign companies find it difficult to shift production to other markets. Below you can find some of the major reasons why China continues to be a major supply market globally.

                Low Labor Costs

                Even if labor costs have increased much in China in previous years, it’s still considered a Low-Cost Country (LCC) for manufacturing. Of course, we have to consider productivity when discussing labor costs, but this is still the definition.

                There’s also much room for development in the Central and Western parts of the country as most manufacturers are concentrated along the East Coast.

                Manufacturing capabilities

                China has transitioned from being a pure low-cost supply market to an advanced manufacturing market. “Made in China” is not what it used to be as consumer apprehensions have changed.

                The country is now a leading manufacturer in advanced industries like automotive, telecom equipment, and robotics, in addition to consumer products. Compared to Vietnam, which is specialized in industries like electronics and garments, China has a much wider industrial base.

                Business eco-system

                Not only does China have an enormous industrial base but its business eco-system plays a vital role domestically and overseas. Relocating production from China is easier said than done, considering the large number of sub-suppliers located in the country.

                This is particularly the case in the automotive and electronics industries, for example, which require many sub-parts and components. If you approach suppliers in Southeast Asia you’ll notice that many rely on imports of sub-components from China.

                Besides, some products are still cheap enough to produce in China, it doesn’t make sense for manufacturers in other countries to make the products.

                China’s growing consumer market

                China has one of the biggest consumer markets globally, which encourages foreign manufacturers to keep production locally. By doing this, they can avoid tariffs as well as reduce logistics costs and lead times.

                Increasingly more companies want to target China’s growing consumer market and companies who are already present will have an advantage.

                Disadvantages of Manufacturing in China

                As mentioned earlier, wages are higher in China and increase at a faster pace than its Southeast Asian peers. In Vietnam, salaries are around a third on average compared to China and increase slower.

                Again, I want to highlight that we should also consider productivity when discussing labor costs. China is also a far more developed market in terms of manufacturing and supply chains.

                A second issue is the long transportation lead times to Europe and the US, and the currently high freight costs. Due to recent supply chain disruptions and the COVID pandemic, some companies find it unbearable to produce in Asia, turning to nearshoring, at least partly.

                The ongoing trade war with the US has hurt both countries. Imposed tariffs have encouraged foreign companies to look for alternative markets, to outsource at least parts of their production.

                Industrial Regions and Cities

                The East Coast is significantly more developed and more densely populated compared to the rest of China. While the land size of Gansu province is almost as big as Sweden, its population is similar to that of Shanghai, with 26 million inhabitants.

                In this section, we review the most interesting cities and provinces for manufacturing activities. The logistics infrastructure and business eco-systems are also comparatively more developed in the areas.

                Shanghai

                Shanghai is the biggest city in China after Chongqing in terms of population and is considered its financial center.

                Along with Beijing, Tianjin, and Chongqing, it’s also a municipality. This means that the cities have the same rank as provinces and are under direct control by the central government.

                Having the biggest port in the world, Shanghai is vital for both the imports and exports of goods, acting as a distribution hub. The automotive industry is one of the city’s most important.

                Companies like Volvo Cars, Volkswagen, and GM all have factories here. Of course, this has resulted in a plethora of sub-suppliers that set up operations in Shanghai or its vicinity.

                In addition to automotive, the city is also a major producer of electronics, petrochemicals, integrated circuits, advanced equipment, and biomedicines.

                Shanghai Free Trade Zone

                China’s first Free Trade Zone was established in Shanghai. Other domestic Free Trade Zones such as in Tianjin, Guangdong, and Fujian have all used the same legal framework.

                With a massive size of 121 sq.km. the zone comprises four areas:

                • FTZ Bonded Area
                • Lujiazui Financial Area
                • Jinqiao Export Processing Zone
                • Zhangjiang High Tech Park

                Each zone fills a specific purpose, which can be seen by the names.

                Beijing

                With a population of almost 22 million, Beijing is considerably important for both business and national trade decisions. The city is home to many of China’s state-owned companies and has the most Fortune Global 500 companies globally.

                It’s located just 120 kilometers away from Tianjin, one of the biggest in China with around 14 million people. You can travel between the cities in as little as 30 minutes by high-speed train.

                Beijing is a major producer of metallurgy, electronics, automobiles, chemicals, machinery, textiles, garments, and household appliances. Being the cultural and political center of China, you can also find many banks here, as well as embassies.

                Examples of companies that have offices in Beijing include ABB, Siemens, Schneider Electric, Volkswagen, Nestle, Philips, and Daimler.

                Shenzhen

                Shenzhen is sometimes referred to as “The World’s Factory” due to its large production of electronics. With a population of 18 million, it’s strategically located close to Hong Kong, Guangzhou, and Dongguan.

                Shenzhen is primarily famous for its innovative and entrepreneurial culture, serving as the country’s tech hub and called “China’s Silicon Valley”. The high-tech, finance, and logistics industries are its major pillars.

                According to Inc., 90% of all electronics are produced in Shenzhen, Dongguan, and Guangzhou globally. If you plan to manufacture electronics in China, Shenzhen will most likely be one of your top choices.

                Shenzhen Free Trade Zone area

                Qianhai is one of the biggest and most well-known Free Trade Zones in China, covering 28 square kilometers. Main business areas include finance, logistics, and IT.

                Guangzhou

                With a population of more than 15 million, Guangzhou is one of the biggest cities in China and is located a mere 30-minute train ride away from Shenzhen. The city is a major manufacturer of automobiles, electronics, and petrochemicals and contributes to more than 55% of the city’s GDP.

                Guangzhou Free Trade Zone area

                Nansha is famous for its vast manufacturing activities. The zone covers 28 sq.km. and primarily serves companies in logistics, finance, international trade, and commerce, as well as high-end manufacturing.

                Dongguan

                Dongguan is wedged between Shenzhen and Guangzhou and one of the most important cities for electronics manufacturing in China.

                Samsung, DuPont, and the likes all have factories in Dongguan and it served as China’s most important export hub from the mid 80s. It’s the fourth biggest export region after Shanghai, Shenzhen, and Suzhou.

                Summary

                China has maintained its position as the world’s manufacturing hub for decades. This has allowed the country to build up superior supply chains and a business eco-system that is hard to relocate elsewhere.

                Companies strongly rely on its efficient logistics network and massive amount of sub-suppliers.

                While we see a new trend with nearshoring and diversification through the China Plus One strategy, China will remain a highly important manufacturing hub. Being one of the biggest consumer markets globally, increasingly more companies want to profit from the market.

                By keeping production in China, companies have an advantage thanks to the avoidance of tariffs and long shipping lead times. Besides, these companies build up a knowledge of the market and local connections, which in turn gives them more advantages.

                Issues to overcome in the short term include long freight lead times, as well as freight costs that have gone through the roof. The ongoing trade war with the US is also a roadblock that will stay for the unforeseen future.


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                  Policy Easing Paves the Way for the Recovery of China’s Real Estate Industry

                  In the last quarter of 2021, China’s government introduced an extensive property tax trial for the following 5 years, which aims to bring long-term sustainable benefits to both the local governments and its people.

                   

                  Chinese real estate construction site

                  The pilot is just one of the recent regulatory changes under China’s socio-economic reform plan, creating huge pressures on property businesses.

                  A sign of policy easing in China’s property sector

                  In 2021, China’s government reined real estate developers with stricter financial rules for property development, resulting in a cooling property market. Investment in China’s property sector only logged a 4.4% annual growth in 2021, down from the 7% growth rate recorded in 2020. The number of new construction projects was relatively robust in the first half of 2021, but eventually decreased 11.4% (YoY) at the end of the year, after the strain of regulatory measures started affecting property developers. Because of the outsized importance of China’s real estate in the global economy, the change shook multiple domestic and international investors. Following a drop of 38% in 2021, China’s high-yield real estate dollar bonds continued to plunge by 19% in January 2022. According to Reuters, property investment is predicted to drop by 3% in the first six months of 2022, compared to a 15% increase during the same period 2021.

                  At the start of 2022, the sector was buoyed up with new hope thanks to the government’s recent initiatives. Several policy restraints were removed or reduced in China’s Central Bank’s quarterly report, signalling an ease on monetary policy. Yet, The Economists believe that the actual changes in the property curbs will be more evident after the first few months. The sector will likely see a partial recovery in the last half of 2022 when more supportive policies will arrive.

                  China’s real estate development

                  Real estate has been considered a pivotal driver of China’s economic growth. Real estate and related industries, such as construction and property service, account for about a quarter of China’s economy on average. As of 2019, real estate made up 23% of household consumption. It is driven by the country’s rapid economic development and urbanization. The urban population, which increased from 19.4% to 63.9% between 1980 and 2020, significantly fueled the demand for housing in the cities. Another growth driver is a cultural factor, in which homeownership is the embodiment of wealth in China. According to the 2021 Statista Global Consumer Survey, the homeownership over renting rate in China is 83%, notably higher than in the US and Japan, with 58% and 61%, respectively. Consequently, residential land sales account for 85% of the local government’s revenue, making it a significant source to finance their budgets. On top of that, real estate is one of the sectors that led the inbound investment in China, suggesting that multinational companies are buying into China’s Belt and Road Initiative projects.

                  As high as the potential of the real estate sector is, it’s becoming an increasing issue for the government as more households are buying real estate for speculation, rather than for living. Regulatory curbs have been introduced in the last two years to improve the sector’s overall financial health. In 2020, The People’s Bank of China issued the Three Red Lines policy, which targets debt reduction for property developers by tightening banks’ lending limits to those parties. Thus, businesses must now rely on property sales to fund their land acquisitions and construction. According to Nomura Holdings, Japan’s largest brokerage, presale home revenue accounts for more than half of real estate developers’ funding. Meanwhile, real estate firms are taking steps to lower their debt until the deadline of 2023, in order to avoid further regulatory scrutiny.

                  Chinese developers historically relied on the offshore bond market, which gave them access to foreign investors. However, that channel of financing began to crumble in the rear of the potential defaults that Evergrande faced, the infamous Chinese real estate developer with over 300 billion USD of liabilities. As the situation caused a negative sentiment among foreign investors, the government assured that Evergrande is an isolated phenomenon that does not represent the overall health of the property sector, noting that major real estate businesses are still operating steadily with good financial indicators.

                  A gradual recovery in 2022

                  Despite many controversies and uncertainties, there are bright spots in China’s property sector. Transactions in the property market are predicted to pick up after the first quarter of 2022, while investment in the property sector is expected to be recovered after six months. Looking into 2022, reforms in the industry will be continued with more policy adjustments, adding that the government could roll out a new housing policy to support the three-child policy. Regulators have taken steps to provide greater access to funds and stabilize property sales. Commercial banks have begun to process mortgage loans faster and relax their lending policies in the last month of 2021. On a broader scale, the government encourages mergers and acquisitions in the housing sector, in which larger and often state-owned developers will likely take over the less financially stable players. These real estate development groups are perceived to leverage their connections to access financing from local governments. In the first weeks of 2022, the sector witnessed a spurt in deals from Chinese state-owned firms, in an attempt to rescue cash-strapped private developers. Overseas investors that continue to purchase the high-yield bonds of China’s prominent real estate developers in the upcoming future are recommended to keep their eyes on these regulatory trends.


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                    China’s Birth Rate Declines To Record Low

                    A year after allowing married couples to have up to three children, China’s birth rate is facing a continuing decline, reaching a record low in 2021.

                     

                    Chinese father holding his child

                    Despite multiple efforts from the government to encourage couples to have more children, China’s birth rate dropped for the fifth year in 2021, signalling an ageing population. China’s birth rate was 7.52 births per 1,000 people in 2021, down from 8.52 in 2020 and the lowest since 1949, when the National Statistics Bureau first began collecting the data. The natural growth rate of China’s population, excluding immigration, was a mere 0.034% for 2021, the lowest since 1960. The number of births in 2021 totalled 10.62 million, compared to 12 million in 2020.

                    The rising cost of living and demanding work schedules are common reasons why married couples delay having children. Women are concerned that they will be further disadvantaged in their careers as companies seek to avoid the extra financial burden. Ning Jizhe, director of the National Bureau of Statistics, told state media that the decline in births stemmed from the pandemic and a decrease of “women of childbearing age, a continued decline in fertility, changes in attitudes toward childbearing and delays of marriage among young people”.

                    Huang Wenzheng, a demography expert with the Center for China and Globalization, said the birth numbers are likely to fluctuate in the 10 million range before declining further in the absence of more policy changes.

                    The Chinese government has increased their efforts to avoid such a scenario. Beijing scrapped its decades-long one-child policy in 2016, replacing it with a two-child limit. In 2020, the two-child limit was lifted to replace it with a three-child allowance. Beijing also rolled out several policies which aimed to reduce the financial burden of raising children, including banning for-profit after-school tuition in 2021. More than 20 provincial or regional governments also amended their family planning laws, including extending maternity leave for women.

                    The moves were to tackle the demographic situation that could hinder economic growth. The falling birthrate, coupled with an increased life expectancy over the last four decades, would lead to a decline in the number of people of working age, relative to the number of elderly who are too old to participate in the workforce. The possibility of having too few workers supporting a growing number of elderly people could cause labour shortages and overwhelm the state’s capacity to provide pensions. The eventual result would be intensified pressure on China’s economic growth.

                    The percentage of people ages 16 to 59, the official working-age population has fallen to 882.2 million, or 62.5% of the total population, from 63.3% in 2020.  That is a 70.1% decrease from a decade ago. Experts say the working-age share of the population might fall to 50% by 2050.


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