By J. C. Lim, June 28 2019; Business World

https://www.bworldonline.com/j-p-morgan-notes-philippines-luring-relocating-businesses/

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THE PHILIPPINES, along with neighbors Indonesia, Malaysia, Thailand and Vietnam, can expect to benefit from decisions to relocate by companies adversely affected by the ongoing trade war between China and the United States, investment bank J.P. Morgan said in a June 26 report e-mailed to journalists on Wednesday evening.

“Our analysis indicates [that] Southeast Asia benefits over other regions from supply chain shifts,” read the report that was authored by research analysts Ranjan Sharma, Rajiv Batra, Gokul Hariharan and Pranuj Shah.

“In our view, the attractiveness of Southeast Asia as supply chain geography is underpinned by large working-age populations, relatively low-cost wage structures and high skill levels,” it added.

“Vietnam/Malaysia are the biggest beneficiaries in SE Asia” while “Indonesia/Philippines emerge as beneficiaries, ahead of Thailand.”

J.P. Morgan also said that while Southeast Asia has been “seeing increased activity”, “bulk of relocation is yet to come” next semester.

“We find many companies are indicating shifting supply chains in 2H19/2020. Some companies are disclosing increased production from SE Asia from 1H19,” the report read, even as “optimism around resolution of trade tensions has potentially delayed plans of relocation.”

US President Donald Trump and China Pres. Xi Jinping are scheduled to meet at the sidelines of the G20 meeting this weekend in what markets worldwide hope would at least ease current tensions somewhat. The South China Morning Post reported on Thursday that the United States and China have provisionally agreed on a tentative truce before the summit, with Mr. Trump agreeing to delay additional US tariffs in exchange for the meeting with Mr. Xi.

“… [I]n our view, ongoing trade tensions are likely to result in increased activity in Southeast Asia from 2H19 by companies already relocating supply chains along with companies that will begin reviewing their supply chains,” J.P. Morgan said in its report.

It identified likely beneficiaries of relocating businesses as industrial estates, autos/auto components, as well as Vietnam’s power generation firms and port operators.

Technology companies across Southeast Asia should also benefit from such relocation over the medium term, even as current trade tensions between the world’s two biggest economies “present near-term risk.”

Production of auto and auto components has been the first to relocate to Southeast Asia, J.P. Morgan noted, citing semiconductor equipment in last year’s fourth quarter as well as electronic devices, electrical power equipment and electrical components in this year’s first five months in the case of the Philippines.

Citing news reports since December last year, the investment bank also noted plans by Taiwan-based Wistron Infocomm Corp.’s plan to raise personal computer production in the Philippines; by Taiwan-based Kinpo Electronics, Inc. to expand plants in the Philippines and Thailand; and by Japan Cash Machine Company Ltd to transfer part of its China production to the Philippines.

At the same time, “[w]hile shifts in supply chains can benefit ASEAN tech companies over the mid to long term, the trade tensions present near-term risk from demand destruction…,” J.P. Morgan said. It cited Integrated Micro-Electronics, Inc. (IMI) and Cirtek Holdings Philippines, Corp. among Philippine firms that could be affected. IMI, for one, has “a substantial portion” of its manufacturing operations located in China, according to the Ayala-led company’s 2018 annual report, particularly in Shenzhen, Jiaxing, Chengdu and Suzhou.

The same report cited other listed Philippine companies that are directly or indirectly “exposed” to the Sino-US trade war as Ayala Corp.; Ayala Land, Inc.; GT Capital Holdings, Inc.; Megaworld Corp.; and Filinvest Land, Inc., but it did not provide any explanation. — with J. C. Lim