Why are Asian Manufacturing Supply Chains Declining?

Manufacturing activity across Asia experienced a notable slowdown in March 2026, with PMI (purchasing managers' index) data revealing the extent to which supply chain disruptions and escalating costs have affected industries throughout South Korea, Japan and China.

The downturn has been linked by analysts to the US and Israel's war in Iran, which has intensified pressure on manufacturers across the region.

The closure of the Strait of Hormuz, one of the world's most critical shipping routes, combined with surging oil prices, has created significant supply chain bottlenecks affecting multiple manufacturing sectors, including semiconductors and batteries.

Regional manufacturing indices contract

S&P Global Japan Manufacturing PMI, a composite single-figure indicator of manufacturing performance in Japan, fell from a 45-month high of 53.0 in February to 51.6 in March 2026. S&P Global China General Manufacturing PMI dropped from 52.1 in February to 50.8 in March. S&P Global Taiwan Manufacturing PMI declined from February's 55.2 to 53.3 in March.

South Korea's manufacturing performance proved an outlier, with S&P South Korea Manufacturing PMI rising to 52.6 in March from 51.1 in February.

However, South Korean manufacturers have not been immune to the supply chain challenges, experiencing sharp increases in raw materials costs and elevated oil prices linked to the conflict.

Usamah Bhatti, Economist at S&P Global Market Intelligence, comments on South Korean manufacturing firms: "Firms looked to protect against higher costs by raising prices charged at the steepest rate since July 2022, while also attempting to build safety stocks to guard against future price and supply issues."

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Critical material shortages emerge

The closure of the Strait of Hormuz has disrupted the flow of essential resources beyond oil.

Helium, a by-product of natural gas processing used in multiple stages of semiconductor manufacturing, has been particularly affected. Prices of helium have risen dramatically since the start of the war, having roughly doubled.

Samsung Electronics and SK Hynix, two leading South Korean chipmakers which supply roughly two-thirds of the world's memory chips, have four to six months worth of helium inventory, an industry source tells Reuters.

The supply chain disruption extends to sulphur, produced in large quantities in the Middle East for use in rare metals processing on metals such as nickel, lithium and cobalt.

These metals are key to the manufacturing of batteries, including electric vehicle (EV) batteries.

Automotive sector faces compounding challenges

The Asian automotive industry faces multiple supply chain pressures.

According to The Japan Times, 70% of Japanese carmakers' supply of aluminium comes from the Middle East, creating additional vulnerability beyond battery component shortages.

Koji Sato, who is both Chairman of the Japan Automobile Manufacturers Association and President and CEO of Toyota Motor Corporation, says in a statement on the Japan Automobile Manufacturers Association's website: "Companies are simultaneously facing a multitude of challenges that cannot be solved by individual companies alone, such as decarbonisation, rising geopolitical risks, resource and energy constraints, and changes in the human resource structure.

"The rising geopolitical risks, including the situation in the Middle East, make strengthening resilience against uncertainties in energy and supply chains a major theme.

"Another point that has been emphasised through the negotiations this spring is the competitiveness of the industry."

The conflict in the Middle East has sent oil prices above US$100 per barrel, disrupting industries worldwide, but its impact on manufacturing in Asia has been unique and multifaceted.

Prior to this shock, S&P China Manufacturing PMI was at a peak of 52.1 in February while S&P Japan's Manufacturing PMI was riding a 45-month high of 53.0.

Annabel Fiddes, Economics Associate Director at S&P, says: "The slowdown coincides with the outbreak of war in the Middle East, which according to survey respondents directly contributed to stronger cost pressures at the end of the first quarter.

"The war has also fuelled greater uncertainty about the global economic outlook, dampening business confidence and resulting in more cautious hiring and purchasing activity."