SINGAPORE -- Southeast Asian countries received more foreign direct investment in the first half of this year from a year ago, and this trend is set to continue as escalating U.S.-China trade tensions prompt manufacturers to relocate production from China.
According to last week's report by the United Nations Conference on Trade and Development, net FDI flow into Southeast Asia rose 18% to $73 billion in the first half of 2018 from a year ago, compared with a global total of minus 41% over the same period. The biggest beneficiaries in the region in terms of growth rate were Thailand, followed by the Philippines and Cambodia. Investment into South Asia -- mainly India -- also surged 13% to $25 billion.
Southeast Asian countries offer the twin benefits of geographical proximity to major markets like China and India and relatively low labor costs, which make them natural homes for foreign manufacturers wanting to relocate their Asian bases.
A recent survey by the American Chamber of Commerce in China showed that 18.5% of U.S. companies in China are planning to relocate or had already moved their manufacturing facilities to Southeast Asia as a result of high import tariffs that the U.S. and China are slapping on each other's products.
Singapore benefitted from new investments such as new battery production lines and also became the digital innovation center of a few multinational corporations in the first half.
In Vietnam, the manufacturing sector is also enjoying a surge in FDI. Maybank Kim Eng Research said in a recent report that FDI in the manufacturing sector soared 18% in the first nine months of this year, driven by two projects led by South Korean companies. Hyosung Corp is investing $1.2 billion in a polypropylene production project, while LG Innotek poured $500 million into its production facilities in the northern city of Hai Phong.
As for Thailand, the available data through July does not include a large investment in the pipeline. Taiwanese electronics supplier Delta Electronics made a $2.1 billion buyout offer to its Thai affiliate, Delta Electronics (Thailand), in July. Delta wants to diversify its production bases that are mainly in China, which means its goods are exposed to tariffs imposed by the U.S.
Other companies diverting investments into Southeast Asia include Taiwanese electronics manufacturing service operator New Kinpo Group that intends to open new factories in the Philippines.
Although Southeast Asian countries are increasingly facing capital outflows due to U.S. interest rate hikes and the spillover effects of market turmoil in Turkey and Argentina, analysts said that for now, they still provide the best alternatives to manufacturers seeking new Asian bases.
"The ASEAN [Association of Southeast Asian Nations] economies remain an attractive region for foreign direct investments, with relatively stable and resilient growth prospects." said Selena Ling, head of treasury research & strategy at Singapore's Oversea-Chinese Banking Corp.
"Multinational corporations usually take a medium to long-term perspective with respect to their investments with a fair bit of due diligence, so it would take some serious and structural risks to change their minds," Ling said.
Nikkei staff writer Masayuki Yuda in Bangkok contributed to this story.