China tests Asean industry

MALAYSIA looks set to strengthen its position as one of South-East Asia’s more resilient manufacturing hubs over the coming decade, even as a new wave of competitive pressure from China reshapes industrial dynamics across the region.

The country’s diversified industrial base and established electronics ecosystem give it a stronger cushion than many of its neighbours against the challenges ahead.

According to Moody’s Ratings, however, the broader Asean-5 manufacturing landscape is entering a more demanding phase as Chinese exports increasingly compete directly with local producers.

The ratings agency says China’s export redirection is “credit negative” for highly exposed Asean-5 local manufacturing segments because it intensifies import competition and price compression, weighs on profit margins and slows industry upgrading.

While the Asean-5 – comprising Malaysia, Indonesia, Thailand, Vietnam and the Philippines – has long benefitted from China’s economic rise and deep supply-chain integration, that relationship is becoming more complex.

For years, manufacturers across the region have largely navigated trade tensions from the sidelines. Now, that is changing.

“This positioning is becoming harder to sustain as Chinese export pressures broaden across sectors, increasing risks to operating performance for affected manufacturers in the next five to 10 years,” Moody’s cautions.

Sweet spot

The challenge is not evenly spread.

Outcomes differ depending on industrial structure, domestic supplier networks, and the ability of local industries to move up the value chain.

“Overall displacement risks are moderate, with differences in industrial structure and domestic absorptive capacity, rather than aggregate trade dependence on China, driving the divergence,” Moody’s notes.

Malaysia emerges as one of the better-positioned economies in the group.

In its report, Moody’s writes: “Malaysia has the largest share of sectors in the low-risk category, reflecting greater diversification and higher local content.”

“A well-established semiconductor and electronics ecosystem moderates vulnerability in electrical and optical equipment despite elevated economic sensitivity,” it adds.

That relative strength matters because electrical and optical equipment sits at the centre of the region’s competitive battle with China.

Moody’s identifies electrical and optical equipment, alongside machinery, as the sectors facing the greatest displacement risk.

Chinese manufacturers increasingly compete head-to-head with Asean producers across a broad range of products and export markets, squeezing margins and making differentiation more difficult.

The agency says “the strongest overlap” with China is found in electrical and optical equipment, particularly in Vietnam, Malaysia and Thailand.

As industrial capabilities converge, Asean manufacturers face greater exposure to Chinese pricing strategies and intense competition in third-country markets.

Still, the bigger threat is not factory closures or a sudden collapse in output.

Rather, Moody’s argues that “the key risk is not a sharp contraction in manufacturing activity, but a slower and more uneven pace of industrial upgrading”.

Industries that have yet to achieve efficient scale may find it harder to justify investment, while profitability remains under pressure.

Higher risk

Indonesia and Thailand face the greatest risks.

Moody’s says they have “the largest share of sectors classified as high risk”.

In Indonesia, exposure stems from industries such as textiles and apparel, rubber and plastics, and machinery, all of which maintain significant sourcing links with China.

The report notes that a shallow domestic supplier base leaves local manufacturers with limited protection against aggressive Chinese pricing.

Thailand faces a different set of pressures. Its exposure is concentrated in sectors such as metals and refined petroleum, while its automotive industry is grappling with the transition from conventional vehicles to electric vehicles.

Chinese carmakers are intensifying competition at a time when domestic demand is already weakening.

Nevertheless, Thailand retains some resilience through its deep integration into established global automotive supply chains.

Vietnam occupies a middle ground. The country’s manufacturing sector has expanded rapidly and strengthened its role in global value chains, particularly in electronics.

However, Moody’s points out that export growth “has not been matched by a corresponding deepening of domestic supply chains”, leaving some industries reliant on imported intermediates and potentially limiting the development of local suppliers.

The Philippines appears relatively insulated, with most manufacturing sectors falling within low-to-medium risk categories.

Moody’s says its lower vulnerability reflects “more contained direct trade exposure to China rather than broad based industrial competitiveness”.

Shifting patterns

Underlying all of this is a profound shift in regional trade patterns.

As access to the US and European markets becomes more challenging following trade restrictions introduced during the first US President Donald Trump administration, Chinese exporters increasingly look towards South-East Asia.

Moody’s says the region has become “a key destination for Chinese manufacturing output”. Geographic proximity, open trade regimes and expanding consumer markets have made Asean a natural outlet for Chinese goods.

The bloc now absorbs roughly 15% of China’s total goods exports, much of it in intermediate and capital goods that feed directly into regional production networks.

At the same time, China’s growing presence is reshaping investment flows. Chinese outbound direct investment has accelerated as companies seek to diversify production and navigate tariff uncertainty.

The Asean-5 has become one of the main beneficiaries of this trend.

Yet, the gains are not always straightforward.

Moody’s notes that while Chinese investment supports employment and strengthens value-chain integration, “domestic benefits remain uneven”.

High reliance on imported inputs and vertically integrated operations can limit technology transfer and reduce opportunities for local suppliers.

Capital-intensive projects may also create fewer jobs than expected while exposing host economies to swings in global demand.

Governments across the region are responding cautiously.

Rather than pursuing broad protectionist measures, they are increasingly adopting targeted trade remedies.

Anti-dumping actions are becoming more common in sectors such as metals, chemicals, textiles and machinery, particularly in Thailand, Vietnam and Indonesia.

For policymakers and manufacturers alike, the challenge is finding the right balance between benefitting from China’s scale and protecting domestic industrial development.

Deeper integration continues to deliver efficiencies and growth opportunities, but it also increases exposure to pricing pressure, supply-chain concentration and shifting trade rules.

As China’s export footprint expands and competition intensifies, Asean’s manufacturing future will depend less on low-cost production and more on innovation, supplier development and the ability to move up the value chain.

For Malaysia, that transition appears more manageable than for many of its peers, but the pressure to keep upgrading is only growing.