Vietnam among most sensitive to China supply shocks: report

Workers in a textile factory in Vietnam.
Workers in a textile factory in Vietnam. Intermediate textiles are one area where Vietnam's manufacturing industry is vulnerable to supply disruptions in China.
MARCH 04, 2020 - 6:06 PM

AMONG Asian economies, Vietnam is the most vulnerable to China supply shocks while Singapore is the least, according to a Deutsche Bank research note on March 3.

"This suggests that unless Vietnam can reduce its dependence on China for its intermediate goods, it should not be seen as an alternative to China, although that may be the case for a few sectors like electronics," said the report.

In contrast to the widespread view that Asia is dependent on China for intermediate goods in electronics, such vulnerability is actually low, the report shows. Instead, Asia's vulnerability to the electronics supply chain in China is in finished consumer goods.

In its study, Deutsche Bank built a trade database of individual goods which have a dependence on production in China, such that a risk is posed to the importing economy. Ten Asian economies were assessed for their vulnerability to supply disruptions in China, including six in Asean: Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam.

Imported items were deemed to be "China critical goods" (CCG) if an economy a net importer from China and two-thirds or more of its imports of that good come from China.

Among the economies studied, Vietnam was the most vulnerable with China critical goods making up 15.1 per cent of total imports.

At the product level for Vietnam, textile intermediate imports were the most vulnerable, with nearly half coming from China. But Vietnam's vulnerability to supply disruptions of electronics and parts was low, with a CCG share of 1 per cent, as most such components come from South Korea.

Thailand was the second most vulnerable, with CCG imports making up 11 per cent of all imports. Similarly, however, the vulnerability of electronics was low at 1 per cent.

While Indonesia had the third highest CCG share of total imports at 8 per cent, disruption to domestic manufacturing, "is likely to be significantly lower, given that finished products dominate much of its CCGs", said the report. Consumer-focused goods such as electronics and household goods account for over two-fifths of Indonesia's CCGs.

The Philippines came in sixth, after India and Sri Lanka, with a CCG share of 7 per cent. Its manufacturing vulnerability was highest for textile intermediates. Steel was also significant, with disruptions in steel supply for China potentially having an impact on infrastructure projects in the Philippines.

Malaysia and Singapore were least at risk, with CCG shares of 3.5 per cent and 2.6 per cent respectively. Regarding Singapore, the report noted: "Its vulnerability is largely due to its status as an entrepôt hub, not to disruptions to its own manufacturing."

Nonetheless, the report did caution: "It takes just one missing component in the supply chain – however insignificant and low value-add it may appear to be – to stop the entire production line altogether, as has been the case in the auto sector."