President-elect Donald Trump has proposed tariffs as high as 60% on goods going from China to the US and 20% on everywhere else. Many manufacturing players in the region are scenario planning around 30% tariffs for China and 10%-25% for other countries. But that’s not even the biggest headache in the sector.

Earlier this month, the US Commerce Department announced an expansion of its China-focused restriction list to 140 companies. This includes Chinese-owned companies in Singapore, Japan, and Korea. Chips and technologies related to artificial intelligence are naturally high on the agenda.

It is expected to add fuel to the longstanding China-plus-one theme, whereby industrial output capacity, particularly at the lower end of the technical spectrum, is shifting from China’s increasingly high-value and high-cost manufacturing space toward cheaper, less politically sensitive shores.

Wai San Loke, co-founder of Singapore-based industrials and manufacturing-focused GP Novo Tellus Capital Partners, expects to see heightened competition. Manufacturers and exporters able to provide better services in categories where demand cannot be curbed by tariffs will be the winners. Weaker operators will fall away. Even strong players with China links will find it difficult to survive.

“If my demand drops by 30% [due to tariffs] and I’m sourcing from 10 suppliers, eight of which are Chinese owned, then I’ll load up the two non-Chinese suppliers and they’ll be doing well,” Loke said, describing Novo Tellus’ core thesis as investing in the reconfiguration of supply chains in terms of onshoring, friend-shoring, and near-shoring.

“But if you’re in China or China-owned, it’s going to be tough. It’s going to be hard to invest in those companies because for better or for worse, they’ve been caught up in this whole dragnet of tariffs and restricted lists. If you’re manufacturing in China or a Chinese company trying to establish in Southeast Asia, you’re not going to be successful for the next few years.”

Picking winners

Emerging Asia is generally expected to benefit from the likeliest changes in geopolitical dynamics in the near term. This is consistent with the long-term trend associated with China’s shift toward more advanced manufacturing and rising labour costs.

During the five years to 2013, India and Southeast Asia accounted for 43% of foreign direct investment (FDI) in emerging Asia versus 57% in China, according to commercial real estate services and investment firm JLL [NYSE:JLL]. That ratio shifted to 50:50 during the five-year period to 2018 and 67:33 during the five years to 2023.

“In the current climate of still high costs of debt – though this is moderating in some markets – many investors have pivoted to alternative or higher yielding sectors and geographies that can more easily meet their return hurdles. This may be a positive for lower-end manufacturing,” said Peter Guevarra, a director at JLL’s Asia Pacific research consultancy.

“There has also been a general shift of capital to Southeast Asia and India given the positive growth story in these regions. In addition to this shift, high-end manufacturing facilities may be more capital-intensive or asset management-heavy because of higher specifications. This may dissuade some investors away from high-end manufacturing.”

Vietnam and Malaysia are tipped to enjoy tailwinds in 2025, especially in industrial machinery and electrical equipment (Malaysia) and electronics and chemicals (Vietnam). Malaysia is also striving to be a global leader in supplying Halal food.

David Do, a managing director at Vietnam’s VI Group, sees traction in e-commerce exports as well as ancillary products and services around design, packaging, and logistics. Some of that less-skilled support capacity is expected to move out of Taiwan’s chip industry toward Southeast Asia.

Do is wary of moulded plastic categories, where China will remain competitive, but interested in discrete growth niches such as wooden toys. Shoes are compelling. Socks are not.

“There are many considerations besides tariffs,” he said, flagging variables ranging from logistics costs to the extent to which product categories require manual dexterity in the production process.

“At the end of the day, you’ve got to pick products that cannot be designed and effectively manufactured in America. We think there will be an impact from tariffs, maybe a 10% impact on the bottom line for us. It’s not life changing.”

The India question

How India will fare is less certain. Much of the buzz stems from Tata Group, which has moved aggressively into high-end electronics, acquiring local manufacturing partners of Apple [NASDAQ:AAPL] and Wistron Corp [TPE:3231] in the past year. Tata and Apple are expected to continue expanding in the country. The private equity angle remains unclear.

Meanwhile, Carlyle [NASDAQ:CG] plans to establish a platform to acquire and merge automotive – including electric vehicle – suppliers in the country. Still, manufacturing development in India is expected to be in primarily in more labour-intensive categories.

Many investments will only be viable if government plans to resolve India’s logistical disadvantages accessing North America by sea experience real progress. Investor will need to price this into deals.

To data, manufacturing hubs where product can be airfreighted have emerged around airports, notably the “Genome Valley” biotech cluster near Hyderabad. They will continue to attract private equity, although local GPs accustomed to services-oriented models in IT, healthcare, and business outsourcing will need to invest at later stages to manage capital expenditure challenges.

Bullish on the theme but cautious in deployment, Catamaran, the family office vehicle of Infosys co-founder and Narayana Murthy, exemplifies the private equity mood. It has identified near-term inroads in electronic components, which is specialised and higher margin than assembly, as well as design services, which can be played as a zero-to-one venture story.

“Everybody from Apple to Microsoft [NASDAQ:MSFT] to Intel [NASDAQ:INTC] has started doing design and R&D in India, even fabless chip design. That capacity remains captive to those companies, but at least the capability is now here,” Deepak Padaki, president of Catamaran, said.

“That could put India in an advantageous position for manufacturing in five or six years if that design capability can be married with the manufacturing of components that’s starting to happen. We don’t know how it’s going to play out, but we’re tracking it.”