Analysis: Why Southeast Asia is Becoming a Manufacturing Hub for Chinese Investments
By Li Rongqian and Denise Jia
Southeast Asia is becoming a magnet for Chinese companies wanting to relocate their mid-to-upstream supply chain to avoid the United States’ stricter tariff policies. China’s investment in the region is accelerating, particularly among the electronics, automotive and renewable energy sectors.
From January to November 2024, China’s exports of intermediate goods to Vietnam surged by 32% year-on-year, accounting for 70.2% of total mechanical and electrical exports, customs data show.
Exports to Malaysia, Thailand, and Indonesia also grew significantly, reflecting the region’s growing role amid the shifting dynamics of global trade.
The increase in intermediate goods exports aligns with China’s broader trend of expanding overseas investments, according to Yi Huan, chief macro economist at Huatai Securities.
Intermediate goods are those exports, such as wheat, oil, sugar and steel, that are used in the production of final goods. China has been the global leader in this area for 12 consecutive years, with these goods comprising 50% of its total exports by 2023, up from 45% in 2020.
Southeast Asia’s share of China’s intermediate goods exports has risen sharply, from 13% in 2013 to nearly 18% in 2023, with Vietnam, Thailand, Malaysia and Indonesia becoming critical nodes in the global supply chain, driven by geographical advantages, competitive labor costs and trade liberalization.
China’s appetite for relocation has been spurred on by stricter rules of origin under U.S. trade policies, which are pushing Chinese upstream and midstream manufacturers to establish operations in Southeast Asia, said Luo Chuanyu, deputy director of the China-ASEAN Research Institute at Guangxi University.
Future exports will probably move from simple re-labeling practices to local production, a shift already evident as more small and mid-sized Chinese component manufacturers set up operations in the region to bypass trade restrictions, Luo said.
Southeast Asia’s proximity, low labor costs and favorable business environment make it an attractive destination for Chinese investment. Yet political uncertainties and varying regulatory environments pose challenges for companies wanting to enter these markets. A senior logistics expert told Caixin that many companies are buying land in a number of locations to offset future uncertainties.
Bypassing U.S. trade barriers
The U.S.-China trade war has played an important role in this shift. Section 301 tariffs, introduced during Donald Trump’s first term, have cut China’s share of U.S. mechanical and electrical imports from 28% in 2018 to 17.1% in 2024.
To mitigate the effects of U.S. tariffs, Chinese companies have invested in manufacturing bases in Vietnam, Mexico and elsewhere. The tactic has produced mixed results. China’s mechanical and electrical exports to America grew modestly by 2.1% in 2024, but its shipments of goods such as smartphones, laptops and tablets that don’t incur tariffs declined sharply.
This reflects the broader restructuring of global supply chains. Electronics giants such as Samsung and Apple have relocated production lines from China to Vietnam, prompting their suppliers to follow.
Thailand and Malaysia are also emerging as leading manufacturing hubs, particularly for automotive and electronics industries. Tax incentives, strong infrastructure and established supply chains make these countries attractive for foreign direct investment, UBS said in a November report.
Leading Chinese semiconductor packaging and testing company Tongfu Microelectronics Co. Ltd. is increasing its investment in Malaysia. More and more chip design companies are choosing to locate their packaging and testing operations in Malaysia, Shi Lei, director of Tongfu Microelectronics, told Caixin in an interview.
Indonesia, leveraging its rich mineral resources, is focusing on value-added manufacturing. To gain “Made in Indonesia” certification, companies have to meet strict localization requirements.
Lower tariffs are also significant incentive for Chinese companies to set up local manufacturing in Southeast Asia. For example, components exported from there to the United States face duties as low as 10%, compared with 25% for goods made in China.
A senior researcher at a financial institution told Caixin that rate of Chinese enterprises relocating manufacturing to Southeast Asia is expected to gradually increase, but the complexity of the process may act as a brake. In practice, America’s stricter trade policies can only focus on major categories such as automobiles, photovoltaics, lithium batteries and functional machinery. For fragmented and highly diverse goods, comprehensive origin tracing would be not only prohibitively costly but incredibly challenging in practice, the researcher said.
Fan Yimin, chief analyst for the machinery industry at Huachuang Securities Co. Ltd., said that industries such as electronics, automobiles, and photovoltaic lithium batteries were leading the shift to Southeast Asia, driven by cost optimization. Sectors such as pharmaceuticals, semiconductors, home appliances and food manufacturing are relocating more slowly due to underdeveloped infrastructure, while traditional industries such as mining and metallurgy remain in their early stages due to limited local resources and policy support.
Fan told Caixin that fragmented regulations in Southeast Asia raise compliance costs and risks, and Chinese firms struggle with cross-cultural management. Weak logistics, energy supply and industrial infrastructure in some countries further hinder efficient production, he said.
Luo from the China-ASEAN Research Institute said some photovoltaic companies have slowed investments or operations Vietnam, Thailand, Cambodia and Malaysia and are relocating to Indonesia, Laos or even South Asian countries. Companies that already have production capacity or investment plans in these four nations, might temporarily halt production or scale back investments, and perhaps resume operations later, he suggested. Or they may adjust their target markets, shifting away from Europe and the United States to other regions, or focus on absorbing demand within Southeast Asia itself.
New energy bet
Renewable energy and automotive sectors are also relocating to the region. Chinese electric vehicle (EV) giant BYD has built a factory in Thailand.
Thailand is positioning itself as a regional hub for EVs, offering subsidies to foreign manufacturers, although its regulation introduced last August that at least 40% of components in locally assembled EVs must come from Thai suppliers is challenging for many companies operating in the country.
In addition, tightened credit policies led to a 26.7% year-on-year drop in vehicle sales in the country in the first 11 months, making it difficult for Chinese companies to meet localization targets.
An industry insider told Caixin that some Chinese automakers aggressively priced their vehicles expecting subsidies that have yet to materialize. Combined with large investments and low factory utilization, many now face financial strain.
Malaysia and Indonesia have also introduced incentive policies for EVs. Indonesia requires at least 80% localization of components by 2030 to qualify for subsidies, while Malaysia focuses on attracting investments from companies in the EV ecosystem, such as recycling and processing firms. Additionally, Malaysia wants to attract component manufacturers and suppliers of automation and robotics technologies essential for EV production. Indonesia is leveraging its abundant nickel resources to strengthen its position in the EV supply chain.
Leading Chinese lithium battery firms, including Contemporary Amperex Technology Co. Ltd., EVE Energy Co. Ltd. and Gotion High-Tech Co. Ltd., have already invested in or planned factories in the region.
Contact reporter Denise Jia (huijuanjia@caixin.com)
caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.
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