。 EQUITY STRATEGY ● ASIA12 February 20192Overview 3Global production networks, revisited 3What’s new 3Investment implications 5The rest of this report 6A quick recap 7Retooling Asia’s supply chains:Harder than it looks 7US and China trade 9Trade trends 9New trade corridors 12Switchin’ 12Existing production networks inASEAN 16Actual movements 18Vietnam opportunity vs. first mover disadvantages 18Stirrings elsewhere 19Substantial transformation 22Origin and substantialtransformations 22Automation and capex 24Automation 24Capex trends 25Investment themes 27Observations 27Investment implications 28Appendix: The GPN framework 29Thinking of supply chains, clusters, and forces 29Forces or vectors 30Valuation and risks 32Disclosure appendix 38Disclaimer 41Contents 3EQUITY STRATEGY ● ASIA12 February 2019Global production networks, revisitedLast year, the introduction of US tariffs raised questions about how Asian companies wouldrespond. One option was to avoid tariffs altogether and move production out of China to non- tariffs countries, such as Vietnam. If so, this could “disentangle” China from global supplychains, some argued. Headlines such as “Apple suppliers step up expansion outside China;Foxconn and Pegatron look to Vietnam and India as trade war takes toll”(Source: FinancialTimes 28 January 2019) suggest that companies are exiting China. Meanwhile, shipping ratesfrom Shanghai to the US spiked higher (Chart 1 on page 9). We investigated this very complex subject in Retooling Asia’s supply chains, 12 October 2018.We concluded that there are indeed “push” factors to get around the tariffs and move productionto low cost, none tariff countries. But there are also “pull” factors that would force companies tostay where they are, such as a reliable supply of raw materials in their existing location andefficient customs procedures. When “pull” factors are greater than “push” factors, production willremain in a particular location. Thus, we argued that any move in supply chains or production networks would be very slow. Ithelps to know that in Bangladesh it takes an average of 269 days to get a construction permit.So why not simply stay where you are and upgrade your existing facilities and, in the meantime,raise prices to offset the negative impact of these tariffs In that case, someone, be it a producer or a consumer, would have to absorb the costs of thesetariffs. In addition, we argued that existing production hubs are likely to be “moving up the value- added ladder”. In China, automation can play a major role in this process.What’s newWe now have the advantage of seeing what actually happened over the past few months of2018, allowing us to check our existing investment thesis. In this report we highlight the following:Overview Last year, we investigated the impact of US tariffs on Chinese supplychains. Since then, supply chains have hardly moved, but the RMBhas fallen, and US consumers are absorbing some of the higher costs New topics are legal issues related to changes in “country of origin”labels and challenges in ASEAN We reiterate that the best way to play this theme is to: (1) buy stockswith pricing power where the US cannot switch to another sourceeasily, (2) build exposure to Vietnam, and (3) buy automation namesPush and pull factors EQUITY STRATEGY ● ASIA12 February 20194 Currencies. Part of the adjustment took place in the FX markets. The RMB depreciatedand this has offset some or all of the increases in tariffs.US consumers pay too. US imports of Chinese products have remained fairly stable orfallen only marginally, while Chinese imports of US products has fallen substantially. Itappears that US consumers are absorbing at least part of the cost of tariffs. The US might switch to producers elsewhere (semiconductors, automotive tires, audio- visual equipment). In some industries, such as toys, China’s production overwhelms that of therest of the world. US consumers will have no other significant alternative source for theseproducts anywhere in the world. But in other industries, China’s share in production is smaller;this includes products such as blank tapes (audio and video), natural rubber, semiconductors,nuts, cotton and fibres, motorcycles, and automotive tires. Here, US buyers might switch toalternative producers. For more details see Table 2 on page 16.First mover disadvantages: Moving production to Southeast Asia comes with newchallenges. We can take Vietnam as an example. Vietnam faces a shortage of skilledworkers and attrition rates are high. Costs of training have risen substantially in recentyears (to 5.7% of total costs in 2017 from 3.6% in 2012). Other challenges are difficultiesimporting new equipment and finding reliable suppliers in local markets. But these wereissues before the new US tariffs were imposed and still companies moved to Vietnam. Whatmakes Vietnam attractive is not its low wages, but local tax policies, free trade agreements,and relatively good infrastructure. For example, Vietnam customs clearance and approval oflicences are very efficient. Taiwanese companies seem to be relocating some production back to Taiwan fromChina. Increasingly, high-margin and security-sensitive products produced by Taiwanesecompanies in China are moving back to Taiwan. But the overall numbers are quite smalland relocation is not only in response to the US tariffs, but is also addressing issues suchas increasing wages in China and ESG factors. Taiwan’s bicycle company, Giant, hasmoved production back to Taiwan to get around European dumping fines on Chineseproduced e-bikes. “Country of Origin” issues are under-appreciated. Moving production from China toanother country to avoid tariffs is not sufficient to reclassify the country of origin. It isimperative that “the substantial transformation” from raw materials into product with a newdistinctive name, character, or use, takes place in the new country. This means that a keyelement of the overall production process needs to shift, and not just final assembly. Tomake things more complex, it is the importer’s responsibility to determine that substantialtransformation has taken place. Errors or even a good faith disagreement with customs canresult in expensive fines for importers. Moreover, these fines can be imposed retroactivelyover multiple years. 。。。。。。