Trade War Risk Rises: China’s Expansion Spurs Concerns in Southeast Asia

Chinese companies are increasingly venturing overseas. According to accumulated statistics from January to November 2023, Chinese companies’ direct investment in Vietnam has increased significantly compared to Korean, Singaporean, and Japanese companies. Chinese companies targeting the emerging ASEAN market, and even the US and European markets, are accelerating their overseas expansion. 

What’s behind the overseas expansion of Chinese companies?

The backdrop is the severe economic downturn due to China’s collapse of the real estate bubble. Default risks are skyrocketing in local governments, real estate developers, and shadow banking (financial intermediation business by investment funds other than banks). Not only are there few chances for improvement in the employment and income environment, but the youth unemployment rate has been reported to reach 46.5% in particular. The consumer price index is stuck in negative territory, increasing deflationary pressure. Household consumption is not growing, making significant improvement in China’s economy unlikely for the time being. 

Competition with local companies is fiercer due to Chinese companies’ expansion. As investment in countries connected by the Belt and Road Initiative (an economic zone concept advocated by General Secretary Xi Jinping) has become a problem, the feasibility of Chinese companies’ business plans is unclear. There is also growing wariness towards China’s expansion into the South China Sea among ASEAN countries. 

Foxconn also strengthens its production system in Vietnam

Since 2019, Chinese companies have been moving their production bases overseas to avoid the impact of the US-China conflict in advanced fields. By 2023, China is expected to overtake Singapore, South Korea, and Japan in direct investment in Vietnam. Manufacturing is the most common industry. In the field of IT, Foxconn, which produces iPhones for Apple, is strengthening its production system in Vietnam. Apple has moved its unit assembly production from China to India. Xiaomi has also entered Vietnam. Xiaomi aims to increase its smartphone market share in Vietnam and sees the ASEAN region, which has high expectations for economic growth, as a crucial export base. It entrusts production to Dixon Technologies, an electronics manufacturing services company in India.

The overseas expansion of Chinese companies in the EV field has also surged. BYD, which has grown rapidly into the world’s largest EV maker (based on 2023 results), is planning production in Vietnam. BYD also plans to strengthen its business structure in Thailand, Malaysia, and Indonesia. SAIC-GM Wuling has also entered Vietnam.

In the field of EV batteries, CATL, the world’s largest company, has formed a strategic alliance with Vingroup, Vietnam’s largest conglomerate. Gotion Hi-Tech also plans to build a vehicle battery factory with Vingroup.

In Indonesia, CATL is directly investing in mine development and production bases. The Southeast Asian region is not only a high-demand market for internal combustion engine vehicles for automakers but also a crucial market for securing a foothold for electric vehicles. 

The reason for the expansion of Chinese companies into Vietnam and other countries is the severe economic downturn caused by the collapse of the real estate bubble. The collapse of the real estate bubble has led to a sharp drop in housing prices in major urban areas such as Beijing. There is still no sign of improvement in China’s real estate market outlook. 

When China’s real estate market was at its peak in the past, it was analyzed to account for nearly 30% of China’s GDP. The bubble collapse has led to a widespread decrease in demand for land, apartments, cement, construction machinery, and household appliances. The fact that imports in November fell short of expectations confirms the downturn. 

The pressure of deflation is increasing, and the deterioration of the employment and income environment, especially among the young, is intensifying. With the delayed treatment of bad debts, the Chinese government strongly demands that Chinese companies improve performance and expand employment. Under such pressure, it is no exaggeration to say that Chinese companies are giving up growth in their home market.

For these reasons, Chinese companies have felt a stronger need to enhance their expansion into more liberal and high-growth expectation markets such as Vietnam and other ASEAN countries.

Chinese EVs increasing market share in Europe 

In Europe, the market entry of BYD and MG brands under SAIC and the increase in the distribution of Tesla and BMW brands produced in China are noticeable. Although they have not yet secured price competitiveness in the European market, their market share is gradually increasing. The movement of Chinese companies to convert the slump in the Chinese market into overseas demand is apparent.

The rise in labor costs in China is also a background to the overseas market entry. Due to the decrease in the production age and population, labor costs in China are gradually rising. If we compare GDP per capita, China is $12,000, while Indonesia is $4,300, and Vietnam is $3,700. (IMF estimate for 2022)

The impact of major companies like Apple moving their business bases from China overseas is also significant. The US-China confrontation in the semiconductor and other advanced fields is becoming more acute. The sense of crisis over the Taiwan issue is also increasing. Korean and Taiwanese companies are transferring their production bases from China to India, and emerging ASEAN countries are also growing. 

The risk of a trade war between China and Southeast Asia is increasing

The trend of Chinese companies intensifying their overseas expansion is expected to persist. However, a growing concern revolves around the escalating competition between Chinese firms and local enterprises in the regions and countries they have entered. In response to this situation, policymakers may consider implementing punitive tariffs and other measures to address excessive price competition by Chinese companies. This escalating competition raises the risk of trade tensions between the ASEAN region and China and beyond the ongoing US-China trade dispute.

Concerns about the surge in direct investment by Chinese companies are growing in Vietnam. The risk of land and material price increases and economic fluctuations due to the sudden influx of Chinese capital gradually increases. The expansion of Chinese companies could lead to a scramble for technical personnel, power shortages, and severe air and water pollution due to the surge in factory construction.

The high-speed railway plan entrusted to Chinese companies in Indonesia is being delayed. The Indonesian government is increasing direct investment from overseas companies besides China to strengthen manufacturing technology to promote industrialization and advanced fields such as digital and medical.

Global trade friction is expanding

The European Commission has begun an investigation, judging that the Chinese government’s EV production support policy distorts competition in the EV field. The French government plans to revise the subsidy for EV purchases to exclude vehicles produced in China.

The imposition of punitive tariffs on Chinese-made EVs by the European Commission suggests that the trade war is expanding. On December 1, the US Treasury Department announced that it would exclude EVs using raw materials from China from preferential tax treatment. From 2024, vehicle battery components will be targeted, and from 2025, nickel and lithium will be targeted.

China’s deflationary pressure will increase, and an economic downturn is inevitable. Along with this, the number of Chinese companies strengthening their overseas expaAdditionallyis increasing. Concerns about friction with local companies, local communities, and governments in the countries where Chinese companies have entered are also growing. Trade friction with China is intensifying not only in the US and Europe but also in the ASEAN market.