North Asia: Trade cycle bottoms; supply chain shift continues
- Trade cycle in North Asia has bottomed; China’s supply-side recovery is losing momentum
- Semiconductor destocking is ongoing; AI adoption bodes well for the medium term
- Taiwan’s investment in ASEAN continues to surge, reflecting the shift in Apple’s supply chain
- China’s investment interest in ASEAN is rebounding, particularly in TMT and EV sectors
- Foreign businesses are hesitant to decouple from the Chinese market fully
The trade cycle has bottomed
The latest data for May suggest that the trade cycle has bottomed in North Asia. Exports in South Korea continued to contract -15.2% YoY in May vs -14.3% in April. On a per working day basis, the decline in South Korea’s exports eased to -9.3% YoY, the slowest pace since October 2022. Likewise, Taiwan’s exports fell -14.1% in May vs -13.3% in April. Sequentially, the contraction narrowed to -0.3% 3M/3M saar, the smallest since July 2022. Trade pattern in China differs. China’s exports contracted 8% in May, reversing the 8% increase in April. April’s low base partly distorted this – the Shanghai lockdown occurred in April 2022. After smoothing out the monthly volatility, China’s exports grew 4.7% YoY on a 3MMA basis in May vs 6.9% in April.
The renewed decline in China’s exports also suggests that the supply-side boost to the Chinese economy, due to the restoration of manufacturing work after the lifting of Covid controls, has started to wane. On the other hand, China’s manufacturing demand has not begun to pick up substantially even after reopening. The country’s total imports fell -5.1% in May, a slightly slower pace compared to -7.8% in April. South Korea and Taiwan also reported a marginally smaller contraction in exports to the Chinese market in May vs April. The lackluster performance in China’s manufacturing demand is in tandem with the weakness in its property market and the lack of large-scale stimulus on infrastructures.
The tech sector is not out of the woods yet
North Asia’s trade data showed clearer signs of stabilization in the important tech sector but not yet a recovery. China’s exports of computers fell at a notably slower pace of -10.9% in May (-17% in April), but the decline in mobile phone exports deepened to -25% (-12.7% in April). Semiconductor exports from South Korea slumped again by -36.2% in May, slightly better than -41% in April. The contraction in Taiwan’s exports of electronic components has narrowed to single-digit rates and stayed there for two consecutive months (-9.9% in May vs -8.6% in April).
Semiconductor destocking is still ongoing. The inventory-to-shipment ratio in Taiwan’s electronic component sector eased to 1.7 in March from 2.0 in February, but still close to the historical peaks seen in 2001 and 2008/09. Past experiences suggest that the current process of destocking will continue for another few quarters till the end of 2023.
Oversupply continues to weigh on chip prices. High-frequency data showed that global memory chip prices stayed on the downtrend as of the first week of June. According to TrendForce, the average selling prices (ASP) of DRAM and NAND Flash will decline further by 13-18% and 8-13%, respectively, in 2Q.
The medium-term semiconductor outlook remains constructive. According to WSTS’s latest forecast, the global semiconductor market will grow 11.8% to USD576bn in 2024, reversing the -10.3% decline this year. The PC and smartphone markets are stagnating due to the lack of new technological innovation. On the other hand, the automotive, industrial, and high-performance computing (HPC) markets continue to see robust growth momentum.
AI segment will be a bright spot. TrendForce recently revised up its forecast for AI server shipments to 22% CAGR during the 2022-26 period. It also forecasts that AI chip shipments will increase by an impressive 46% this year. Taiwan is likely to be a main beneficiary, as it is far ahead in the race on the high-end chip market. TSMC has entered the mass production of 3nm chips since the end of 2022 and will incorporate Nvidia’s AI acceleration technology for the trial production of 2nm chips in June.
Supply chain shift into ASEAN continues
Recent investment flow data suggest that North Asian entities continue to diversify supply chains towards ASEAN. Japan’s net FDI inflows to the ASEAN-6 countries increased 24.3% YoY to USD5.3bn in 1Q. Taiwan’s approved FDI to the ASEAN-6 countries soared strongly by 461% YoY to USD1.6bn in Jan-Apr. Taiwan’s investment surge in ASEAN reflects the Apple supply chain shift. Taiwan’s Quanta, the largest ODM manufacturer of notebook computers globally, announced to invest USD120mn to build its first factory in Vietnam in April. This move also means that all of Taiwan’s top 6 contract electronics makers – Foxconn, Pegatron, Compal, Inventec, Wistron, and Quanta – have set up their subsidiaries in Vietnam nowadays.
The outbreak of the Covid pandemic and the increase in geopolitical risks have boosted demand for nearshoring or regionalisation of the supply chains. ASEAN should be a favourite destination for North Asian entities, thanks to their large domestic markets, affordable production costs, geopolitical neutrality, and deepening integration into the global value chain through the RCEP, CPTPP, and IPEF.
China’s investment interest in ASEAN also appears to be rebounding. China does not report outbound FDI on a high-frequency basis. Tracking the inward FDI data in selected ASEAN markets, we found that Indonesia’s FDI from China declined -36.3% YoY to USD408mn in 1Q; but Vietnam’s registered FDI from China rose strongly by 41.9% YoY to USD1.6bn in Jan-May. Chinese companies invested in 156 new projects in Vietnam over the past five months, twice the same period last year.
While infrastructure projects largely drove the earlier wave of Chinese FDI in ASEAN under the Belt and Road Initiative, manufacturing investment in the private sector dominated the current wave. The top Chinese display maker BOE is reportedly to invest USD400mn to build two factories in Northern Vietnam, in part to produce the iPhone screens. Sunny Optical plans to invest up to USD2.5bn in Northern Vietnam to develop an optical production complex. China’s largest EV maker BYD also plans to invest USD250mn to construct an EV parts factory in Vietnam.
The shift from North Asia to ASEAN does not mean that China will lose its dominant role in global supply chains. China’s utilized FDI stayed roughly flat at USD73.5bn in Jan-Apr (-1.3% YoY). The decline in its May exports should be seen as a short-term payback from the strong surge earlier this year rather than a loss in long-term trade competitiveness. Furthermore, rising investment by Chinese companies in ASEAN drives China’s exports of intermediate goods, deepening the trade ties between China and ASEAN. ASEAN’s share in China’s total exports increased to 16.2% in Jan-May, up from 15.8% in 2022. China’s trade surplus with ASEAN also widened to USD15.3bn per month in Jan-May, compared to USD13.6bn per month in 2022. Notwithstanding the increase in geopolitical risks and domestic policy uncertainties, China still has a clear advantage in terms of the scale of industrial clusters, size of the consumer market, quality of labor force, and readiness of infrastructure conditions. Foreign businesses have turned cautious about expanding operations in China but remained reluctant to exit or fully decouple from the Chinese market.
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