Asia Unveiled
In the intricate world of global politics and economics, diversification is indeed a winning strategy. The ongoing tension between China and Western countries, along with the rise of ESG (environmental, social and governance) regulations and incentives for on-shoring, is steering investments toward Asia, specifically regions outside of China, often referred to as Alternative Asia or Alt-Asia.
The geopolitical landscape we navigate today is complex and filled with challenges. The West and China, two of the world’s most influential powers, are engaged in a major geopolitical contest. This struggle, coupled with the growing influence of ESG regulations, is prompting businesses to reassess their supply chains.
Apart from managing inflation, ensuring the robustness of supply chains has become a top priority for professionals in the field. Companies are expanding their horizons beyond China, exploring on-shoring, near-shoring, and opportunities in south and southeast Asian countries. These regions, referred to as the “China + 1” source, are becoming increasingly appealing for businesses aiming to diversify their supply chains.
The initial tariffs imposed on China during the Trump administration led to a significant increase in foreign direct investments in Vietnam, as companies sought to diversify their final assembly locations. This trend of reducing dependence on China has continued, with other Alt-Asia countries also benefiting. There is a noticeable shift in the location of final assembly lines to Asia.
Moreover, the concept of a north-south supply chain, in addition to the traditional east-west one, is gaining popularity.
With the growing philosophy of north-south supply chains and markets, and the desire to reduce “made in China” content, investments are being directed beyond final assembly. New investments are linked to midstream activity, e.g. transforming raw materials like nickel ore into nickel and battery components in source countries like Indonesia. This is a departure from the traditional model where nickel ore was exported to China for processing. The focus is now on adding value rather than merely selling raw materials. And this results in a wider population benefiting from resource extraction.
Currently, many Alt-Asia countries are still developing economies. However, the increase in investment is expected to boost economic growth in Alt-Asia over the next decade at a rate faster than the global average. In several large, emerging Asian economies like India, Vietnam and Indonesia, GDP per capita is projected to reach the middle-class tipping point before the end of the decade. Once this tipping point is reached, consumption is expected to grow exponentially, significantly impacting mobility demand. The potential can be easily seen in vehicle ownership in these countries, which currently stands at 5%-10% on a per-capita basis compared to the West, and a fifth of China.
In conclusion, the geopolitical tension between China and the West, the rise in ESG legislation and the push for robust supply chains are all contributing to the emergence of a middle class in Alt-Asia. Over the next decade, a population larger than China’s is expected to replicate China’s middle class growth story. As these countries continue to develop and their middle classes grow, consumption will increase, impacting mobility demand and the need for lubricants and fuels. The key challenge will be whether this growth can be met with energy-efficient supply.
To reiterate the main message of my inaugural column, Asia is a vast and diverse region that should not be viewed through a single lens. It appears that fortune does indeed favor the diversified.
Eugene Tan is past-chief executive of the Asian Lubricants Industry Association, director supply chain council of The Conference Board, and managing director of Emvolution.