Chinese manufacturers have been growing in strength and capabilities while benefiting from the significant market available within their home country. As a result, they have been seeing many international opportunities such as expansion and export market access. Taking advantage of these opportunities, however, has been hindered by trade challenges related to the US-China trade tensions and rising industrial nationalism. The pandemic has not helped, as it amplifies ongoing global trade uncertainties and supply chain challenges. Rising industrial nationalism means that economies often encourage manufacturers to produce in the countries where they intend to sell, either formally through tariffs and policy or informally through urging the use of locally based suppliers.

The Association of Southeast Asian Nations (ASEAN) is a significant Asian trade bloc, in close proximity to China, which comprises ten countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. The region is becoming an attractive choice as a production location for Chinese manufacturers seeking to enter the global market. ASEAN, which the Organisation of Economic Co-operation and Development projects will have a 5.6% growth in 2021, already has many bi- and multi-lateral trade agreements in place which adds further to the region’s appeal.

 

Creating opportunity while managing complexity

As we look forward, one thing is obvious; the factory ecosystem and associated supply chain will be increasingly complex, increasing the need for visibility, diversity, and security at both company and country levels.

As mentioned in the previous post on supply chain diversification, companies need to assess the direct costs of relocation and manufacturing and the “total supply chain cost” when investigating options for production relocation and sourcing alternatives outside of China. The strengths and weaknesses of setting up operations within a destination country or region will also need to be evaluated in this context.

Managing multiple locations with ecosystems that need a network of providers to supply raw materials, services, talent, infrastructure, and regulatory frameworks at a competitive level will increase the coordination complexity. There will be a need for IT to provide infrastructure that supports data complexity across the ecosystem and provide decision support and autonomy across these local “micro- chains” to ensure accuracy and agility. Systems and platforms that offer new levels of supply chain visibility and partner integration will be a must. Only with this framework in place can manufacturers rapidly respond to new challenges and opportunities.

 

Guidance for enabling a diversified supply chain

When considering where to set up operations, companies should contemplate the following areas:

• Identify economies that provide support. All major ASEAN nations have strong Industry 4.0 policy support which will parallel similar policies from China. These include tax breaks and incentives, grants and funding, R&D support, ecosystem capacity building support, and skills development and will make expanding into a strong Asia-Pacific ecosystem supported by platform capabilities an easier journey.
• Take advantage of trade agreements. For Chinese companies, the ASEAN-China Free Trade Area (ACFTA) as well as the recent signing of the Regional Comprehensive Economic Partnership (RCEP) provides opportunities to reduce trade friction, tariff reduction and regional accumulation regarding country-of-origin considerations.
• Utilize vendor capabilities. Consider vendors that will help you build an investment roadmap that spans core manufacturing domains that integrate suppliers and other supply chain partners.
• Integrate beyond Tier 1 suppliers. The IDC 2020 Supply Chain Survey showed that 54% of ASEAN manufacturers focus on overall supply chain visibility as the top area for risk mitigation. Procurement-supply-production-delivery is one area where risk, with the right tools, can be monitored and managed to reduce disruptions.
• Design the logistics and transportation network. Include logistics and transportation network optimization in the decision-making process to calculate “total costs.” Leverage additional services from logistics service providers to make the expansion to a new country a smooth one.
• Manage talent. Evaluate countries that support skills development and training. All major ASEAN nations have policies for worker development and training. In cases where this may take time, or if there is uncertainty about such policies, explore “factory of the future” initiatives that increase process and physical automation.

Chinese stainless-steel maker, Tsingshan Holding Group, is one company that has benefited from expanding its supply chain ecosystem into ASEAN. Recent policies in Indonesia have allowed the company to establish partnerships to take advantage of the country’s available manpower and land to establish and support a robust steel and metals supply and distribution ecosystem. The steel manufacturer is joining more than 1,000 Chinese companies in Indonesia, which allows them to leverage an ecosystem with similar experience to achieve a competitive advantage and deliver on company strategies in the region.

Chinese electrical appliance manufacturer, Midea Group, is another company that is benefiting from the robust ASEAN supply chain ecosystem. Initial forays have been through partnerships, with plans for factory construction once the spread of COVID-19 abates. They also manufacture in Vietnam, but will be seeking to increase the scope and sophistication of their manufacturing operations in Thailand, taking advantage of the existing electronics goods ecosystem in the country.

Companies like Midea and Tsingshan show that the strong ASEAN supply chain and partner ecosystem have much to offer Chinese manufacturers. Companies seeking to increase supply chain resilience in the wake of US-China trade tensions and COVID-19 must evaluate the strength of partners and the destination country business ecosystem.

 

 

ICYMI: ON-DEMAND WEBINAR – DIVERSIFYING GLOBAL SUPPLY CHAINS FOR AGILITY AND RESILIENCE

On 2 December 2020, IDC & Dassault Systèmes organised a webinar to discuss global supply chain diversification trends and where the opportunities are for ASEAN manufacturers.

If you missed the webinar, you can watch it on-demand at this link: https://event.on24.com/wcc/r/2809216/A39480F70A1FA7FF7B67AD0B429F5E4D