Amid U.S.-China tensions, Southeast Asia is a popular destination for companies looking to diversify their supply chains.

• The "China Plus One" strategy has made Southeast Asia a top beneficiary, as businesses look to minimize risks by diversifying their market or supply chain beyond China.
• By expanding into other countries such as Vietnam and Indonesia, companies are diversifying their manufacturing operations while maintaining a presence in China.
• According to Kuo-Yi Lim of Monk's Hill Ventures, Southeast Asia is well-positioned to gain significantly from the China+1 phenomenon as both foreign and Chinese companies shift their supply chains and operations.

Amid escalating tensions between Washington and Beijing, Southeast Asia has become a top choice for firms seeking to diversify production away from China, including Chinese companies.

According to Kuo-Yi Lim, co-founder and managing partner of Monk's Hill Ventures, Southeast Asia is well-positioned to gain significantly from the China+1 phenomenon as both foreign and Chinese companies shift their supply chains and operations.

During the Covid lockdowns, geopolitical tensions accelerated these activities, according to Lim.

To minimize the risks of relying solely on China's market or supply chain, the "China Plus One" strategy involves diversifying manufacturing operations and expanding into other countries while maintaining a presence in China.

The ASEAN bloc has attracted more foreign direct investments in 2023, with a total of $236 billion compared to an average of $190 billion annually from 2020 to 2022, according to OCBC economists in a May report.

The majority of inflows originated from the U.S., Japan, European Union, Mainland China, and Hong Kong.

The ASEAN-6 region has gained from diversifying its global and regional supply chains and adopting 'China+1' strategies. As a result, FDI inflows from Mainland China and Hong Kong SAR into the region have increased, with manufacturing and certain services receiving the majority of the inflows, according to OCBC economists.

Vietnam

Apple has chosen Vietnam as a crucial manufacturing site to reduce its reliance on China for product assembly.

The production at Foxconn's flagship iPhone factory in Beijing was severely impacted due to the strict Covid-19 measures and worker unrest.

MacBooks, iPads and Apple Watches are reportedly being manufactured in Vietnam.

According to Yinglan Tan, founding managing partner at Insignia Ventures Partners, Vietnam's proximity to China has made it a popular destination for supply chains to offshore processes that can significantly reduce production costs.

Samsung has established Vietnam as a significant research and development center, manufacturing, and export base for its smartphones, according to local reports.

Vietnam has several benefits, including its low labor costs, market access, and numerous free-trade agreements, which make it easier to export to other markets, such as the EU, according to Kai Wei Ang, an ASEAN economist at BofA Securities, who spoke on CNBC's "Squawk Box Asia" earlier this month.

Malaysia

Over the past few years, semiconductor companies such as Intel, GlobalFoundries, and Infineon have established or expanded their operations in Malaysia amid rising tensions between the U.S. and China.

The semiconductor industry in Malaysia is experiencing a resurgence, drawing fresh investments from companies including Intel, according to Lim of Monk's Hill Ventures.

Malaysia's competitive advantage lies in its skilled labor for chip packaging, assembly, and testing, as well as its lower operating costs, according to industry observers.

According to Ang of BofA Securities, Malaysia is experiencing a surge in investments, not only in semiconductor stories but also in data centers, especially in the last couple of months. Additionally, there may be other sectors, such as solar and EV-related components, receiving investments as well.

Indonesia

The manufacturing of electric vehicle batteries requires crucial resources such as copper, nickel, cobalt, and bauxite, which are abundantly available in the archipelago.

"Indonesia is another country with great potential to become an integrated EV hub, as they are currently in the early stages of scaling up capacity across the entire supply chain."

The Indonesian government has been enticing EV companies to establish local manufacturing facilities through incentives.

Chinese manufacturers are not only diversifying their production geographically due to foreign companies in China, but also due to geopolitics and international trade developments, as stated by Anders C. Johansson, director of Stockholm China Economic Research Institute under Stockholm School of Economics, in a LinkedIn post last week.

Earlier this month, the industry ministry announced an agreement with four Chinese companies – Neta, Wuling, Chery, and Sokon – to make Indonesia a hub for electric vehicle production.

According to local reports, BYD, a Chinese electric vehicle manufacturer, plans to commence commercial production of EVs in Indonesia in 2026.

Singapore

A report by ASEAN Briefing states that Singapore has long been a top destination for companies seeking to establish regional headquarters and expand their operations across the region.

Insignia Ventures Partners' diversification has extended to global businesses like Apple and supply chains, as well as entrepreneurs and startups looking to build global businesses in the Asia-Pacific region, according to Tan.

Tan stated that Singapore has become a popular destination for entrepreneurs to headquarter global businesses while still being able to raise money from the U.S. and employ engineers in China.

TikTok and Shein, among other Chinese companies, have established regional headquarters in Singapore, which is viewed as a secure location amidst geopolitical turbulence.

In these uncertain times, Singapore's reputation as a reliable financial and regulatory hub will continue to draw companies seeking an Asian base, according to Lim of Monk's Hill Ventures.