Asia’s factories sustain expansion, supply chain woes cloud outlook

Asia's factory activity continued to expand in May thanks to an ongoing recovery in global demand, surveys showed on Tuesday, though rising raw material costs and supply chain constraints clouded the outlook.

A spike in Covid-19 infections in countries like Taiwan and Vietnam could disrupt semiconductor output and supply chains, posing a headache for manufacturers and weighing on Asia's export-driven recovery, analysts say.

Japan and South Korea saw an expansion in factory activity moderate in May, purchasing managers' indexes (PMI) showed on Tuesday, underscoring the fragile nature of their recoveries.

"A spread of new variants is already having a negative impact on supply chains. If this situation persists, it would hit Asian manufacturers that had been scrambling to diversify supply chains out of China," said Toru Nishihama, chief economist at Dai-ichi Life Research Institute.

"Asia's recovery has been driven more by external than domestic demand. If companies have trouble exporting enough goods, that bodes ill for the region's economies," he said.

China's factory activity expanded at the fastest pace this year in May on solid demand at home and overseas, though sharp rises in input prices and strains in supply chains crimped some firms' production, a survey showed on Tuesday.

The Caixin/Markit Manufacturing PMI, which focuses on smaller firms, rose to 52.0 last month, the highest since December and inching up from April's 51.9. 

The survey followed China's official PMI on Monday, which showed factory activity in the world's second-largest economy slowed slightly in May on surging raw material costs.

Factories in Taiwan and Vietnam were so far holding up despite rising infections. Taiwan's PMI stood at 62.0 in May, slowing from April but remaining well above the 50-mark that separates growth from contraction.

Vietnam's PMI also stayed above 50 at 53.1 in May, though slowing from 54.7 in April.

The final au Jibun Bank Japan Manufacturing PMI dropped to a seasonally adjusted 53.0 in May from 53.6 in the previous month, but higher than a 52.5 flash reading.

A global chip shortage and supply chain disruptions have hit car production, causing Japan's output growth to miss expectations in April. 

Japanese auto giants Toyota Motor (7203.T) and Honda Motor (7267.T) have suspended output in Malaysia due to lockdown measures imposed to combat the pandemic, Kyodo news agency reported on Tuesday.

Separate data released on Tuesday showed Japanese companies cut spending on plant and equipment for the fourth consecutive quarter in January-March, as the economy struggles to shake off the drag from the coronavirus pandemic.

South Korea's PMI stood at 53.7 in May, slowing from April but extending growth into an eighth straight month.

In a sign South Korean firms were facing rising cost burdens, however, the survey also showed a gauge of input prices surging to its highest level in over 13 years.