Since the outbreak of the COVID-19 pandemic, companies across virtually every goods-based industry have been re-examining their reliance on China, which accounts for roughly 28% of global manufacturing and is a leading source of critical commodities such as rare earth minerals and ingredients for pharmaceutical products.
The China re-think didn’t start with COVID-19
Well before the pandemic, many companies relying on Chinese producers for finished goods and parts were looking to de-risk by finding alternative suppliers in other countries. Why? Geopolitical tensions, trade disputes, and rising costs in China.
Trade tensions and national security concerns have led to a wave of legislation in the United States, where there are more than 60 bills pending in Congress aimed at changing economic relations with China. In addition, U.S. brands and manufacturers comparing China’s labor costs to those in Mexico have seen China’s labor costs rising faster. That has eroded China’s competitiveness and made Mexico more attractive.
Outward migration of production was underway before the pandemic because tariffs imposed by the U.S. and China had increased supply chain costs by up to 10% for as much as 40% of companies sourcing in China, according to Kamala Raman, a senior director analyst at Gartner.
The U.S., Germany, Japan and other countries have expressed strategic concerns about overreliance on China for critical products: 5G telecommunications gear, semiconductors, steel, cranes, electrical power equipment and more. McKinsey identified 180 different products for which one country — most often China — accounts for more than 70% of the global export market. Many of the products are chemicals and pharmaceuticals.
Intel recently divested itself of a business in politically sensitive memory chips because the business was heavily dependent on China sales. Samsung and others have cited cost considerations for production moves or asset sales.
The pandemic is turning concern to action
China’s assertive response to the pandemic included lengthy, mandatory lockdowns that froze manufacturing and stranded global cargo shipments for several weeks in the spring of 2020. That caused unprecedented disruption in supply chains and led to shortages of everything from household goods and consumer electronics to industrial components and healthcare products.
The pandemic exposed the fragility of sprawling global supply chains. In one recent survey, one-quarter of businesses sourcing from China indicated plans to transition all or some of their operations to other countries over the next three years. In a Gartner survey, an even higher percentage – 33% — said they intend to pull manufacturing or sourcing out of China in the next two to three years. Sixty-four percent of North American manufacturing and industrial professional said they were likely to bring manufacturing production and sourcing back to North America, in a Thomas Publishing survey.
Look for knock-on effects
Any exodus from China will ripple around the world so expect huge and uneven consequences in other markets. The modest movement to other production and sourcing locations has already led to overheated labor markets and infrastructure bottlenecks in other Asian manufacturing countries.
In some cases, the effort to build supply chain resilience is felt most in far off warehousing and distribution hubs, where companies are adding safety stock or shifting from just-in-time inventory to beefed up “just-in-case” models.
Sourcing diversification is altering the flow of goods into U.S. ports. West Coast ports continue to have a lock on ocean traffic from China and serve as the primary gateway for Chinese goods. But now East Coast ports are receiving higher volumes of containerized ocean goods because, in addition to vessels traversing traditional routes from Europe, the Mediterranean and the Caribbean, they receive cargo from Vietnam, Thailand, Malaysia and India, which have found it economical to ship via the Indian Ocean and Suez Canal.
In turn, the shift toward the East Coast has driven up industrial real estate prices along the eastern seaboard of the U.S. as companies scramble to set up distribution hubs and e-commerce facilities.
Japan is pushing an ‘Exit China’ strategy
At least 87 Japanese companies have shuttered production in China, moving it back home to Japan or relocating to Southeast Asian countries in response to incentives offered under the Japanese government’s $2 billion Exit China program. Nikkei Asia says Japanese companies “wary of rising labor costs in China and geopolitical factors had already begun reorganizing production prior to the pandemic.”
Japanese investment in Southeast Asian manufacturing – specifically in Vietnam, the Philippines, Malaysia, Indonesia and Thailand – was already increasing at twice the rate of investment in China.
It’s not just China
Supply chain risk has been rising for years as costly disruptions become regular occurrences.
McKinsey says weather disasters alone accounted for 40 separate incidents involving damage in excess of $1 billion in 2019. Add the risk from trade disputes, retaliatory tariffs — and a doubling of cyberattacks in a single year at a time when companies are increasing their reliance on digital systems.
Geopolitical risk is unavoidable. Today, 80% of trade involves countries with declining stability scores. “Companies can now expect supply chain disruptions lasting a month or longer to occur every 3.7 years, and the most severe events take a major financial toll,” McKinsey says.
Economic trauma caused by COVID-19 will initially shrink the universe of suppliers, not expand it. And new layers of protectionism will leave companies with even fewer choices of supply because they will rob efficient producers — in China and elsewhere — of their competitiveness and make them too expensive.
Uprooting from China is not as easy as it seems. Forty years after it began modernizing, China today holds advantages available nowhere else: unmatched scale; abundant skilled and unskilled labor; sophisticated automation, engineering and sciences; world-class infrastructure and logistics; closely synchronized and integrated supplier networks both in-country and across Asia.
Twenty-five years ago, leaving China meant leaving a low-cost manufacturing center. Today, for some multi-nationals, it would mean giving up on the world’s largest consumer market and an economy growing at twice the rate of the United States before the COVID-19 crisis.
Willy Shih, a Harvard Business School professor, says: “There’s a lot of impatience about this supply chain resilience and reshoring. I like to remind people that it took 20 to 25 years for China to capture the supply chain for many products. And if you want to move the supply chain, we’re not talking about something that will happen in a year, or in a couple of years.”
As the World Economic Forum comes to Ha Noi for this year’s ASEAN meeting, we’re reminded of how far Viet Nam has come since the country first hosted the gathering in 2010. Viet Nam experienced over 6% GDP growth last year, but it’s not the only country in the region with a remarkable growth story.
Indonesia, Thailand, Myanmar, the Philippines and Cambodia – countries that all followed in the footsteps of Viet Nam as first-time hosts of WEF’s annual Asian regional meeting – along with others in the ASEAN bloc, are experiencing strong growth too. The 10 member states are expected to generate GDP growth rates between 3% and 8% over 2017-2021.
While the growth of these individual countries is impressive, the real success story belongs to the region. ASEAN has long heeded the connectivity imperative, and the benefits of regional cooperation and economic integration, through initiatives such as the ASEAN Economic Community (AEC), are paying dividends. ASEAN commands a combined GDP of about $2.4 trillion, and GDP per capita has increased by 63.2% from 2007 to 2015. If it were a single country, it would be among the top 10 economic powers in the world. To further drive growth, ASEAN and its six strategic partners will come together in November for the hotly anticipated signing of the Regional Comprehensive Economic Partnership. This will create the world’s largest free-trade area, representing nearly 30% of global GDP, and demonstrates ASEAN’s commitment to removing barriers to trade and expanding market access both within the region and with its partners.
With a population of over 600 million, ASEAN is the world’s third-largest market. It also offers the third-largest labour force, behind China and India, and has some 67 million households that are part of the “consuming class”, a figure that could almost double to 125 million by 2025. Between 2007 and 2014, ASEAN trade increased by a value of nearly $1 trillion. While nearly a quarter (24%) of trade was within the region, this was followed by trade with China (14%), Europe (10%), Japan (9%) and the United States (8%). During the same period, foreign direct investment rose from $85 billion to $136 billion. As nations elsewhere redefine their approach to international trade, one thing’s for sure: ASEAN is open for global business.
Embracing the 4IR
While significant steps have been made to enhance the free flow of goods, services, investments and people, new challenges lie ahead. The technological advancements brought on by the Fourth Industrial Revolution (4IR) are placing new demands on governments and businesses across the region. However, the 4IR also presents great opportunity, if member states can respond to its challenges with speed, flexibility and agility in order to make these new technologies part of its success. Entrepreneurship could play a key role here. SMEs are the backbone of local economies across ASEAN, and often the largest source of local employment across all economic sectors. In countries such as Thailand and Viet Nam, for example, they account for nearly 99% of all registered businesses and employ more than 70% of the workforce. To unleash this potential, the region must ensure that policy reflects the interests of SMEs, affording them the best environment for growth.
E-commerce is a prime example of how 4IR technologies are disrupting traditional sectors. While e-commerce remains relatively underdeveloped in ASEAN today, accounting for less than 1% of total retail sales, this will soon change as internet penetration spreads and the region’s consumer base continues to grow. Given this potential, large local providers such as Lazada and Tokopedia are competing for market share with global players. With SMEs poised to play such a key role in the region’s success, it will be crucial for governments to ensure the internet infrastructure they require is in place, so that entrepreneurs can future-proof their businesses and actively participate in e-trade.
4IR technologies are also enabling logistics providers to take supply chains to the next level in terms of speed and accessibility. This is contributing to the rise of e-commerce, but also driving business more broadly across the region. Drones are operating in warehouses, artificial intelligence is automating processes and blockchain has the potential to transform decentralised supply-chain functions. Logistics providers are also offering online freight forwarding platforms that ease the process of doing business for SMEs, both within the region and more globally. Unsurprisingly, global logistics hub Singapore is leading the way in adoption of technologies into the supply chain, through its Smart Logistics initiative.
Taking an agile approach
However, to truly ascend the global value chain, ASEAN needs to look beyond trade facilitation and advancements in technology. In reality, the very 4IR technologies that are driving growth are at the same time disrupting the region’s traditional strengths in low-end manufacturing in the form of automation, robotics and 3D printing.
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Governments and businesses need agile approaches to upgrade education, R&D, lifelong learning and skills development. This will create the necessary conditions for ASEAN to better close income gaps, create employment, support SMEs, expand the pool of knowledge workers and – ultimately – to rise in global value chains. Therefore, preparing the capable and young workforce for new realities must happen with close coordination between industry, governments and civil society. These will complement the tremendous efforts leaders are already making in supporting cross-border trade and enhancing mobility.
While there is much for the region to consider as it sets its sights on ascending the global value chain, what is clear is that now is the time for ASEAN to shine. The theme of this year’s World Economic Forum summit, ASEAN 4.0: Entrepreneurship and the Fourth Industrial Revolution, could not be a more timely one.
Written by Sushant Palakurthi Rao, Head of Global Partnerships, Agility
This article was originally published by The ASEAN Post in collaboration with the World Economic Forum.
Read the full article here: https://www.weforum.org/agenda/2018/09/trade-entrepreneurship-and-the-future-of-asean
From 2007 to 2014, trade by ASEAN nations grew by a value of nearly US$1 trillion to a total of US$2.5 trillion. A quarter (24 percent) of ASEAN’s total trade was within the region, followed by trade with China (14 percent), Europe (10 percent), Japan (nine percent) and the United States (US) (eight percent). During the same period, foreign direct investment (FDI) rose from US$85 billion to US$136 billion.
Initiatives such as the ASEAN Economic Community (AEC) and the highly anticipated signing of the Regional Comprehensive Economic Partnership (RCEP) in November demonstrate ASEAN’s commitment to regional and global business. Efforts are paying off: today the region commands a combined gross domestic product (GDP) of about US$2.4 trillion; GDP per capita increased 63.2 percent from 2007 to 2015. If it were a single country, ASEAN would be among the top 10 economic powers in the world.
A crucial role to play
Small and medium-sized enterprises (SMEs) in ASEAN account for more than 50 percent of a country’s GDP and up to 30 percent of its exports, according to a report from the United Overseas Bank, Dun & Bradstreet and EY that focused on the six largest ASEAN countries: Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. SMEs are often the largest source of local employment across all economic sectors. In Thailand and Vietnam, for example, SMEs account for nearly 99 percent of all registered businesses and employ more than 70 percent of the workforce.
The future success of ASEAN’s SMEs, and to an extent the success of the region, will depend on the ability of these businesses to deepen their participation in global trade. SMEs expect revenues from North and South Asia to increase, and those from the Americas and Europe, the Middle East and Africa (EMEA) to double, by 2020. This reflects an appetite for international growth among SMEs more globally. In a recent study by Shipa Freight, an online forwarding platform which enables businesses to quote, book, pay and track freight online, examined the trade patterns and barriers of SMEs, and found that 89 percent expect their exporting revenues to increase in the next three years while 71 percent are concentrating on international growth over their home markets. However, roadblocks to international trade remain with 42 percent of SMEs saying that the costs of shipping abroad are too high, or they do not have an accurate picture of costs; and 40 percent find it difficult to understand documentation requirements.
Breaking down barriers
Fortunately, the technological innovation of the Fourth Industrial Revolution (4IR) is enabling SMEs, both globally and across ASEAN, to break through these barriers. What’s more, they’re embracing this pace of change: 86 percent of SMEs recognise that technology is “levelling the playing field” for them to operate globally.
Technology is transforming the logistics industry and easing the process of doing business overseas for SMEs. Logistics providers now offer online freight forwarding platforms for SMEs, that remove the challenges of exporting abroad by providing instant quotes, ensuring full cost transparency and compliance, and enabling SMEs to keep a secure digitised record of all paperwork.
Digital innovations are providing cost-effective answers to the first and last miles in logistics, enabling SMEs to be more competitive when it comes to customer service. Drones are operating in warehouses. AI (artificial intelligence) is automating processes and improving route planning, resource allocation, scheduling and condition monitoring. The gig economy, through platforms like Amazon’s Flex, is driving greater utilisation of existing vehicles, infrastructure and storage facilities when it comes to delivery.
A number of other technologies are also being piloted by the sector, such as autonomous vehicles for deliveries, and the secure, distributed-ledger innovation known as blockchain, which has the potential to transform decentralised supply chain functions.
E-commerce is another 4IR technology opening up international trade for SMEs. It gives SMEs the ability to offer products and services online and enables them to reach a global consumer base. For SMEs to take full advantage of this trend, it will be crucial for governments to ensure that the high-quality internet infrastructure they require is in place. Although e-commerce remains relatively underdeveloped in ASEAN today, accounting for less than one percent of total retail sales, this will soon change as internet penetration spreads and ASEAN’s “consuming class,” some 67 million households, continues to grow and nearly doubles to 125 million by 2025.
With 4IR technologies developing apace, the process of doing business overseas will only continue to ease for SMEs across ASEAN. Given the contribution these businesses make to the economies of the member states they belong to, and the region as a whole, this is an extremely positive, and important, development.
Toby Edwards is the CEO of Shipa Freight, the new online platform powered by Agility that makes it easy to get air and ocean freight quotes, book, pay and track your shipments online.