Can ASEAN’s exports of goods hold up?

Electronics exports account for one third of Asia’s total shipments and the ratio is as high as 50-60% in ASEAN.

>> ASEAN’s exports: A surprisingly resilient story

The past two years of the pandemic led to impressive growth in Asia’s trade. Global demand has surged – from consumer electronics to kitchen utensils and home sports equipment – fueling Asia’s external engine. ASEAN is a clear beneficiary. Even accounting for base effects, exports remained resilient, growing by over 10% y-o-y in 1H22.

As the debate about a global recession looms, the key question is: will ASEAN’s exports hold up? While high frequency indicators point to a cooling global manufacturing cycle, there are good reasons to stay optimistic. A key part of the story is consistent FDI, the bulk of which flows into export-oriented sectors. ASEAN now accounts for roughly 10% of the world’s FDI share, almost on par with mainland China. The region has gained substantial market shares in certain products, likely providing a cushion against a slowdown in global trade. That said, the impact is likely to be uneven across the region, with Singapore, Malaysia and Vietnam relatively better positioned in the near term, and Indonesia offering a compelling structural transformation story. We start the discussion by looking at two crucial sectors: electronics and commodities.

Electronics: it’s complicated

HSBC said there would be no need to stress the significance of electronics exports. They account for one third of Asia’s total shipments and the ratio is as high as 50-60% in ASEAN. After two years of strong demand for electronics products, initial signs are pointing to a “pay-back” in the tech cycle. Both new consumer and industrial electronics orders have slowed after peaking in mid-2021. Shipments from Korea, which is usually a bellwether for Asia, have also turned south.

However, it is key to delve deeper into the nuances found in electronics. Take Singapore as an example: there is a divergence in consumer and industrial electronics. While shipments of the former fell, semiconductor non-oil domestic exports (NODX) have remained resilient, for now. Singapore has become a key supplier for 3D flash NAND, a type of advanced memory chip, thanks to Micron’s investment. That said, the fall in NAND prices is a clear risk. The question is: will Singapore’s electronics NODX drop off as sharply as they did in 2018-19? Perhaps not. The previous slump was largely the result of a sharp correction in memory chip prices due, in part, to oversupply. While it is unlikely to continue at such a fast pace, the currently easing semiconductor crunch points more to a slowdown than a collapse.

In Malaysia, ASEAN’s number two chip production centre, volumes are still rising. This has led to a historically high trade surplus of over MYR25bn, equivalent to 1.7% of GDP. For one, Malaysia is one of the world’s largest exporters of finished automotive chips, concentrated in testing/assembly of finished chips. While demand for consumer electronics is dipping, some of the backlog for automotive chips persists, suggesting that Malaysia will likely sustain its semiconductor export boom slightly longer.

Meanwhile, the boom also reflects new capacity additions, thanks to unwavering FDI inflows. Malaysia has consistently received a large share of the region’s FDI, recently reaching as high as 10% of GDP, 70% of which goes to electronics manufacturing. Set against a longer timeline, the results are even more impressive. In the past decade, the economy has gained substantial market share in the global semiconductor space: 25% of the world’s parts of integrated circuits (ICs), as well as a 10% share in both processor/controller and amplifier chips. Tech giants, including Intel and Infineon, have announced significant investments to expand their advanced manufacturing facilities.

Talking of regional FDI outperformers, Vietnam also stands out. Thanks to Samsung’s USD18bn investment in the past 20 years, Vietnam has been transformed into a key production hub. Its consumer electronics exports have soared to 30%-plus of total exports, up from less than 5% in 2000.

>> Vietnam hopes to foster computer, electronic, component exports to the UK

Still, strong FDI is likely to provide a buffer to support Vietnam’s move up the value chain. Since 2006, Intel has injected USD1bn into a chip assembly/testing facility in Vietnam, doubling its global share of processor/controller chips in just three years (although those assembled in Vietnam are relatively lower value chips used in a wide range of electronics products. Earlier this year, Samsung poured an additional USD920m of investment into Vietnam with the aim of expanding product complexity, including circuit boards and touch sensor modules. Six months later, Samsung is reported to be in the process of testing ball grid array products, a sophisticated type of chip substrate, with plans to enter mass production in July 2023.

However, Samsung is not the only one, Apple is accelerating its relocation to Vietnam, after the plan was partially disrupted by the pandemic. After mass producing AirPods in 2020, Apple is in talks with Vietnam to produce more sophisticated products like the Apple Watch and the MacBook. Indeed, Foxconn, a major Apple supplier, has moved, by signing a USD300m Memorandum of Understand (MOU) with Vietnamese developer Kinh Bac City, to expand its production facility in Bac Giang province.

What about commodities?

There are only two winners in ASEAN: Malaysia, the region’s only net oil and gas exporter, and Indonesia, the world’s largest palm oil and second largest coal exporter. While some commodity prices have fallen recently (e.g., oil and palm oil), prices still remain elevated. In the case of Malaysia, recent high frequent trade data suggest the energy trade held up well in July. For Indonesia, this is even more evident.

Indonesia’s trade metrics improved significantly due to high commodity prices, with the trade surplus hitting as high as 4.2% of GDP YTD. This has improved the current account position of Indonesia, which historically has run a deficit, by 2.4% of GDP since 2019. Among commodities, one third of the improvement came from elevated palm oil prices and the remaining two thirds from high coal prices. Still, one risk to be mindful of is the possibility of a sharp correction in global commodity prices, which may erode Indonesia’s improving external metrics.

That said, another bright spot is the transformation of Indonesia’s manufacturing landscape. It has witnessed an investment boom in its downstream commodity sector, in particular the nickel supply chain. Indonesia has become the world’s largest stainless steel exporter, partly due to the ban on exports of unprocessed nickel ore. The economy now exports over USD2.5bn of iron and steel products per month, compared to a trend of just USD200m a decade ago.

“The key question is whether Indonesia can use its vast nickel resources to produce inputs for EV batteries, for which global demand is soaring. Fortunately, the authorities delivered a watershed reform in 2020, the Omnibus Law, aiming to improve the investment climate. Thanks to the unprecedented scale of new FDI, investment realisation (excluding the banking and oil & gas sectors) in Indonesia jumped sharply, adding new capacity”, said HSBC.

For example, a consortium led by Korea’s LG Energy Solution (LGES), partnering with domestic state-owned firm Antam, will invest USD9bn to build facilities to handle the entire battery production process. LGES, in partnership with Hyundai Motor Group, is also building a USD1.1bn battery cell factory, with mass production expected to start in 2024.

>> Vietnamese rice exporters expect higher prices

When fully operational, it is expected to produce battery cells for 150k-plus battery electric vehicles per annum. Meanwhile, mainland China-based CATL announced a USD6bn battery investment plan. While the EV story is evolving, structural demand for EV batteries is a compelling growth story. If Indonesia can continue to attract and effectively utilise quality FDI that brings in more complex know-how along the EV supply chain, it will be better positioned to offset some of the cyclical trade headwinds.

Stabilisation from mainland China?

In addition to assessing different baskets of goods, another way to look at trade is through trading partners. When demand in the West is set to fall, a key question to ask is: how about mainland China? After all, ASEAN’s exposure to mainland China has risen significantly in the last two decades. ASEAN’s exports tracked closely with the global industrial production (IP) prior to the Global Financial Crisis (GFC). However, mainland China’s IP has had a larger impact on the region’s exports since the GFC.

Of course, the exposure varies across the region. HSBC maps how the export share to mainland China in each economy’s total exports have evolved since the GFC. In less than 15 years, mainland China surpassed the US to become ASEAN’s primary export destination (except Vietnam), accounting for roughly 16% of total exports, on average, up from 9%. In particular, Indonesia, Vietnam and Malaysia are among those that have raised their exposure to mainland China over the years. Generally speaking, this did not come at the expense of exports to the US and the EU combined, but Malaysia and the Philippines are two outliers in this regard.