Fighting Inflation - Southeast Asia Sectoral Cost Indices Q2 2022 Update

What does comparative advantage look like in practice? How are costs shifting across key supply chain sectors and countries? The latest report covers data for Q2 2022. It shows the cost of production in furniture, electronics and auto-parts have all increased in Q2’22 versus Q1’22 while the cost of apparel sourced from China and Vietnam has fallen. China has lost competitiveness to Vietnam in furniture but held steady in apparel.

The Methodology: Flexport’s Southeast Asia Sectoral Cost Indices (SEASCI) provides a comparison of the wholesale cost of US imports of a range of products including apparel, electronics, furniture and automotive components from China and selected Southeast Asian countries. Calculations are based on identical SKUs imported from each country available in the Flexport database on a consistent quarter-to-quarter basis. While coverage may therefore change from quarter-to-quarter, our methodology is meant to minimize composition effects.

Update - July 15, 2022 As measured by BEA data, U.S. import price inflation - the trend three-month change in prices - has accelerated in the past year and crested in March 2022 vs. December 2021 at 6.9%, as shown in Figure 1 below, before decelerating to 4.1% in May 2022 vs. February 2022.

The acceleration was due in large part, but not entirely, to the disruptions caused to commodity supply chains by the conflict in Ukraine. Even excluding food and fuels - the dotted line in the chart above - U.S. import price inflation on a trend basis rose to 3.4% in March before slowing to 1.4% in May.

The prospects for an economic downturn and a desire to mitigate inflation more broadly may lead firms to consider cheaper sourcing alternatives. Notably in that regard, three-month trend inflation on imports from China slowed to 1.0% in May while prices for imports from ASEAN accelerated to 3.1%.

Apparel - Thailand Leads Rising Costs

Flexport data shows that the cost inflation that has beset consumers in North America has not been present in all sectors or all supply origins. The cost indices for the Apparel sector have diverged, with prices for imports from mainland China down by 4.1% sequentially and by 8.2% year over year in Q2’22. Prices for imports from Thailand and Vietnam meanwhile have increased by 3.2% and 0.8% respectively on a sequential basis, as shown in Figure 2 below.

The decrease in the cost of imports from China is notable given rising global commodity prices and comes at the same time as factory closures.

Over the longer-term there’s been a similar pattern of Chinese factories losing competitiveness. The cost index for Chinese apparel in Q2’22 was 4.4% higher than that in Q1’19 while Thailand’s fell by 1.4%.

Furniture - Little Sign of Inflation Aside from Mainland China

The cost of furniture imports from China was broadly unchanged in Q2’22 compared to Q1’22 while import costs from Indonesia and Vietnam fell by 3.1% and 0.3% respectively as shown in Figure 3. Note that Figure 3 has a different scale than Figure 2.

The more recent increase in costs for supplies from China has not offset the marked decline seen in 2019 into early 2020. One reason for the slide may be a desire to offset the cost of the imposition of tariffs under the Section 301 program by the US on imports from China. Imports from Vietnam and Taiwan have become steadily more expensive, potentially reflecting the impact of such substitution.

Electronics - Chip Shortage Costs Start to Bite

One area where cost inflation has proven widespread is consumer electronics. The cost of imports from four of the five geographies tracked have increased, led by a 1.4% rise in costs for imports from Taiwan and 1.3% from mainland China in Q2’22 versus Q1’22.

Over the long-term there tends to be cost deflation in the electronics sector for a given level of technological capability. However, supply chains have been up-ended by the ongoing shortage of semiconductors. There are some reports that the shortage may be dissipating for specific chip types, such as memory, though many industries are struggling with a lack of specific components.

Automotive Components - Commodities Come at a Cost

The automotive industry has faced wide-ranging and long-lasting supply chain disruptions during the pandemic. Cost indices have increased steadily since the start of 2021 with growth of 9.2% year over year in Q2’22 for shipments from Taiwan and 8.0% for Vietnam. The price of Chinese supplies only rose by 2.8%.

Some care with interpretation is required with auto components given the breadth of products ranging from steel-heavy components such as body panels to electronics focused in-car systems. The escalation in commodity materials, principally metals but also plastics which are tied to the energy complex, may have been a broad contributor as a result of the conflict in Ukraine increases.

Relative Competitiveness Shifting

Comparing identical products sourced from China and Vietnam provides a wider overview of the shift in competitiveness between the two countries over time. The dots in Figure 6 show the individual products with the y-axis scaled as the Chinese sourcing cost divided by the Vietnam cost for products that are sourced commonly from both locations. The solid lines represent a simple average of the dot readings.

On an average basis, Chinese suppliers appear to have become less competitive versus those in Vietnam in furniture in Q2’22 versus Q4’21. Importantly, the number and spread of data-points have increased in Q2’22 versus Q1’22 and Q4’21.

That may indicate that more firms are sourcing from both China and Vietnam. Reasons could include: a use of more suppliers to meet higher demand; the continuation of reshoring plans; and/or signs of the impact of closures of factories in Shenzhen and Shanghai in Q1’22. Similar closures may have been a factor in sourcing in Q3’21 due to closures in Vietnam.

The Flexport SEASCI is published quarterly, with the next update - including data for Q3’22 - scheduled for October 2022.

Please direct questions about the Flexport SEASCI to economics@flexport.com.

Disclaimer: The contents of this report are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. Flexport does not guarantee, represent, or warrant any of the contents of this report because they are based on our current beliefs, expectations, and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This report has been prepared to the best of our knowledge and research; however, the information presented herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this report.

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