It is manufacturers of electronics and industrial goods that have suffered the most so far from the U.S.-China trade war. Investors should follow five companies I'll identify below that have already started adjusting their manufacturing base and supply chains. That reduces their exposure to the higher costs now in place.
The real-world impact of the higher tariffs on Chinese goods has not hit people's wallets yet. But that will happen hard if the United States does slap trade penalties on the other US$300 billion list it is considering.
So far, precision instruments, integrated circuits and electrical apparatus are the largest categories hit by the initial US$50 billion in tariffs announced by the United States. Computer parts, auto parts and furniture are the top categories in the US$200 billion subsequently announced.
The next massive list of goods to be hit in the US$300 billion category would be led by smartphones. Computers come next, followed by clothing, toys, shoes and monitors. Of the round, US$110 billion would be electronics products and another US$100 billion run-of-the-mill consumer goods.
Where the first and second rounds of tariffs have affected manufacturers in certain industries, the third round would affect the goods you find on store shelves. The reshuffling of trade and investment flows has begun with electronics and machinery, as Société Générale notes in a report today on the topic, and is accelerating.
Companies like computer and computer-parts maker Pegatron TW:4938 have reacted first. The Taiwanese company is starting to move part of its manufacturing of networking equipment to Indonesia. Pegatron is also looking to expand its production base into Vietnam and India.
Those are popular destinations for Asia-based suppliers to the United States. The trade war is speeding up a process that was already under way. China's economic development and educated workforce are leading to higher wages and allowing the production of more-sophisticated goods. Low-cost industries such as apparel, footwear, furniture and now even electronics assembly are shifting to cheaper Asian nations.
Chinese GoerTek assembles Apple's (AAPL) Airpods, as well as making drones, smart watches and speakers. The company has a mainland listing in Shenzhen SZ:002241 that's accessible in Hong Kong via the stock-connect scheme. GoerTek is shifting production of those smart headphones to Vietnam.
The Japanese heavy industry giant Komatsu (KMTUY) has diverted production of some of its construction and mining machines from China back to Japan, as well as to Mexico.
It is not just Asia-based companies that are adjusting Asia-based production. Universal Electronics (UEIC) , which makes universal remotes and a bunch of Internet of Things controls, recently moved its headquarters from expensive Santa Ana, Calif., to still-sunny but cheaper Scottsdale, Ariz.
Universal says it is responding directly to offset tariffs by expanding its manufacturing footprint outside China. It plans to shift around 40% of its production volume out of China to Monterrey in Mexico and to a contract manufacturer it has newly signed on in the Philippines. The China production facilities are shifting to making goods for customers outside the United States.
That's a common move, with most manufacturers shifting part of production away from China particularly when destined for the United States. Electronics companies also relocate final product assembly and finishing out of the mainland.
Their hands are tied in moving more-sophisticated manufacturing out of China because the supply of skilled labor and the delivery of specialized equipment aren't available elsewhere in Asia.
Emerging Asia is the main beneficiary of the relocations. In a survey by the American Chamber of Commerce, 40% of respondents said they were considering relocating or already had relocated manufacturing out of China. Of those, 25% favored Southeast Asia, 11% mentioned Mexico, and only 6% said they'd move manufacturing to the United States.
Only 6% of European companies said they were moving production out of China. A separate survey showed that 70% of European companies said trade tensions would not make them change their business strategy.
India, with an urban population of 450 million, and Indonesia, with 140 million people in its cities, have the demographics and scale as destinations for China relocation. But the Philippines, Vietnam and Bangladesh have the cheapest wages. The base salary of a Vietnamese factory worker is US$227 per month, half the US$493 companies pay in China.
Smaller companies may be able to operate in nations with scattered work forces and smaller pools of labor. But large multinationals will find it hard to recreate the supply China permitted by the city network and smooth infrastructure of China.
You do get what you pay for in production location. Malaysia and then Thailand score the highest in SocGen's ease of doing business assessments. They have the highest wages in the region. But they also have stronger governance, more enthusiasm for and protection of foreign investment, and simpler day-to-day issues like getting the electricity to run, let alone secure permits or trade across borders.
Samsung (SSNLF) doesn't count among the companies that are responding to the latest trade tensions. It had already made its move based purely on business costs.
Last year, Samsung already had Vietnam as its largest manufacturing base. It has a capacity of 240 million smartphones in Vietnam, over 80% of its 2018 shipments.
The fifth on the list is the Taiwanese company Foxconn (FXCNY) , the world's largest contract manufacturer of electronics. Its exposure is massive to China, where its 12 factories employs 1.3 million people, around 500,000 of them working on products for Apple.
The company's founder, Terry Gou, is now running for president in Taiwan. He says the sea goddess Mazu told him to do that, to encourage peace across the Taiwan Strait. It's an obvious metaphor in a nation now run by Tsai Ing-wen, who says she does not accept China's "One Country, Two Systems" policy insisting Taiwan is part of China.
Gou may be making overtures toward Beijing; he's also diversifying his risk. Foxconn has already expanded its operations in India, investing US$300 million there.
The company, full name Hon Hai Precision Industry (HNHPF) , has also acquired the rights to 2.7 million square foot of space in Vietnam in response to the trade tensions.