Fortune Favours the Diversified: Alt-Asia's Rise

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 towards 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 geo-political 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, collectively known as Alt-Asia and often referred to as the “China + 1” source, are becoming increasingly appealing for businesses aiming to diversify their supply chains. With the Trump administration, on-shoring has received a boost but near-shoring has lost some of its lustre as Mexico and Canada attracts his ire. 

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. A north-south supply chain recognises the rise of consumerism in the developing world as GDPs reach critical middle class tipping points. 

With the growing philosophy of North-South supply chains and markets, investments are being directed towards transforming raw materials like nickel ore into nickel and battery components in 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, predicted to be 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 consumer demand and the need for mobility. 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 favour the diversified.