US friendshoring expands to Southeast Asia and Mexico; China closely follows behind

Chiang, Jen-Chieh, Taipei; Jack Wu, DIGITIMES Asia 0

Credit: Eric Prouzet on Unsplash

The US's friendshoring policy has resulted in Western and Japanese companies moving their supply chains out of China to Southeast Asia (SEA) and Mexico. However, Chinese companies have also significantly enhanced their investments in the aforementioned regions.

According to a report from Nikkei, IMF data up to 2021 showed that among the major countries of ASEAN, the funds received through direct investments from China are about US$52 billion, which is higher than the US$51.2 billion from the US. That figure is also set to double within 3 years.

Furthermore, in the first half of 2023, China's direct investment applications to Thailand reached THB 61.5 billion (approx. US$1.74 billion). This accounted for 20% of all investment applications and ranked first.

Mexico, which has signed the United States-Mexico-Canada Agreement (USMCA), received 18 investment cases from Chinese companies in 2022. This number is almost the same as US companies, which accounted for the most cases.

Within the EV battery supply chain, the nickel produced by Indonesia is a crucial raw material, accounting for half of the world's production capacity. Japan's Sumitomo Metal Mining backed away from setting up a nickel refinery in Indonesia in 2022 and was replaced by a Chinese company. Chinese capital now accounts for around 70 of Indonesia's nickel refineries.

Regions like SEA and Mexico were previously considered alternative locations for the US and Japan to diversify their risks. However, China is also investing significantly in these regions. For SEA countries, due to the increase in direct investments from Chinese companies, their ties with China actually grew stronger. If the US and Japan want to expand their influence in SEA, they need to offer better technology and conditions that align with local demands.

As a major exporter of automobiles, Japan has historically held a high market share in the automotive markets of SEA countries like Indonesia and Thailand. While Japanese manufacturers have maintained their leads in ICE and hybrid vehicles, they have clearly fallen behind Chinese manufacturers in the field of BEVs.

For example, Chinese automakers SAIC Motor and Great Wall Motor announced at the GAIKINDO Indonesia International Auto Show (GIIAS) in August 2023 that they will be presenting plans for the local production and sales of BEVs in Indonesia. South Korea's Hyundai Motor has similar plans as well.

The concept of friendshoring to SEA and Mexico was originally meant to reduce risk by diversifying supply chains away from China. However, if Chinese companies elect to expand their supply chains in these countries, will friendshoring still achieve the same goal of diversifying risk?

On the other hand, the overseas expansion of Chinese companies in response to friendshoring also presents the potential risk of hollowing out China's local industries, which represents an alternative effect of the policy.