21 May 2019

ASEAN: Stronger sales pitch to realise supply chain potential

South-east Asia cannot expect to see a wide-scale divergence of supply chains coming its way unless there are improvements in production technology & capacity, and regional integration, according to HSBC.

The comments follow widespread commentary about supply chains shifting to South-east Asia because of the region’s growing economies and consumer markets, especially with trade tensions and rising production costs affecting other markets. Despite the speculation, there has been little evidence of a wide-scale shift occurring to date.

Said Tony Cripps, CEO for HSBC Singapore: “The changes in global trade are causing businesses to re-visit their supply chain investment and capacity strategies, but we are yet to see this convert into wide-scale shifts to South-east Asia, South Asia or other parts of the world.”

Rather than see a wide-scale shift to ASEAN, due to trade tensions, multinationals are diverging in their supply chain strategies with a mixture of localization, offshoring and re-shoring activity emerging.

Recent examples include:

  • Firms, like Tesla1, see China’s production reliability, technological sophistication, and ease of business as unparalleled and are moving more of their production to the mainland
  • With China moving up the technological curve, its lower-value production is shifting to lower-cost markets. For example. Guizhou Tyres – based in China – has expanded plans for its previously announced tyre plant in Vietnam increasing the budget investment to nearly $500 million.2
  • Elsewhere, there are instances of western companies, such as Intel, Whirlpool and Caterpillar3 re-shoring to be closer to home markets and higher-end technology.
  • Across Europe, firms like British manufacturer, Dyson4, are forging ahead with South-east Asian investment to cater for the local consumer market whilst retaining existing production facilities for exports elsewhere.

Mr Cripps continued: “Shifts in supply chains have been a multi-year phenomenon due to structural changes in production technology, labour costs and emerging consumer markets. Over the past decade, ASEAN has been perceived as a strong production option for multinationals given its role within existing supply chains, growing consumer base, and strong trade and investment ties.5

“Businesses from China, Europe and the US want to see South-east Asia, and, further position itself as a viable alternative for lower-end production, and initiatives - like ‘Belt and Road’ - are further accelerating the region’s production capacity. However, to convert its much-touted supply chain potential, South-east Asia needs to build more visibility and credibility amongst international firms, particularly in their ability to handle and deliver production orders.”

The hot buttons that will matter for both large and small firms include how ASEAN can deliver competitive production costs, and how technology and innovation are being introduced to improve productivity. It will also come down to the relationship factor and whether businesses feel confident that orders will be serviced on time and on budget.

At a government level, this will require educating international firms about the regulatory frameworks, tax incentives, and free trade zones, along with demonstrating the improvements in ports and rail and other transport infrastructure.

It will also require ASEAN governments to demonstrate a pathway to longer-term initiatives to remove the non-tariff barriers around the flow of goods across ASEAN, the development of skilled labour; and the protection of IP, cybersecurity, and movement of commercial data across borders.

Areas of specific focus to improve intra-ASEAN trade flow include:

  • Improvement in ASEAN’s transport infrastructure including roads, rail and ports
  • Policies that raise the level of technological adoption
  • Increasing skilled labour and the flow of skilled labour
  • Increase the minimum threshold for goods that would require a Certificate of Origin
  • Establishing automation of customs clearance across all ASEAN member states
  • Introduce simplified and expedited clearances for low-value shipments
  • Introduce electronic system for the payment of cross-border duties and taxes
  • Harmonising of goods standards across sectors amongst ASEAN members to avoid country-specific standards.6
  • Policies that encourage the cross-border sharing of commercial data
  • Link up each of the ASEAN countries’ payment systems to make payments convenient, affordable, fast, seamless and secure.7

Reducing supply chain barriers of this nature could increase South-east Asia’s gross domestic product by 9.3 per cent and exports by 12.1 per cent, according to the World Economic Forum.8

Mr Cripps concluded: ”While trade relations between ASEAN and the world’s major economies, like China, have generally been positive and steadily growing, there is a lot of ground still to cover within ASEAN’s backyard to further improve the intra-regional flow of trade and investment. Agility and responsiveness to these challenges by ASEAN governments and corporates will determine whether the region's supply chain potential can be realised amongst international firms who are re-examining their options.”

1 https://www.bloomberg.com/news/articles/2019-01-07/elon-musk-in-china-to-break-ground-for-tesla-s-china-factory

2 https://www.tyremanmagazine.com/latest-news/posts/2019/february/guizhou-tyres-invests-500-million-in-new-tyre-site-in-vietnam/

3 https://www.usatoday.com/story/money/business/2018/06/28/manufacturers-bringing-most-jobs-back-to-america/36438051/

4 https://asia.nikkei.com/Business/Business-trends/Dyson-s-HQ-move-boosts-Singapore-ambitions-to-be-Asian-hub

5 https://www.about.hsbc.com.sg/news-and-media/are-asean-corporates-downplaying-the-trade-tension-risk

6 EU-ASEAN Business Advisory Council’s Trade Facilitation paper 2018

7 https://www.straitstimes.com/opinion/why-asean-should-push-for-seamless-payment-across-borders

8 WEF (2013): “Enabling Trade, Valuing Growth Opportunities”