Building supply chain resilience is more about diversification, rather than localisation. Supply chain disruptions, after all, are not limited to a particular country.
China has played a central role in global supply chains to date. Its competitive advantage lies not only in cheaper labour costs and high productivity. China has, over the decades, built a comprehensive supply chain ecosystem, which reduces logistical and coordination costs, making production far more economical than in other countries. It is therefore not surprising that China accounts for a quarter of the world’s manufacturing value add.
The quest for greater diversification, concerns over US-China trade tensions, heightened geopolitics and intensifying nationalism may, nonetheless, compel some companies to move part of their supply chains out of China. Should this occur, other Asian economies offer viable production locations.
The Institute of International Finance believes that countries with similar production intensity within the same sectors across major tradable products are better positioned to capture existing production from China.
Vietnam and India appear well placed to compete in textile exports. Besides textiles, India could become more important for labour-intensive production such as iPhone assembly. Vietnam is also poised to become a major production hub for Apple peripherals such as AirPods and the Apple Watch.
Meanwhile, Korea and Taiwan are well positioned to compete in higher-end manufacturing. Taiwan may become a critical location for global tech giants’ R&D efforts, given Google’s and Apple’s recent investments in Taiwan for datacentres, system integration, new display technology, chipset and optical electronics.
Other than manufacturing capabilities, important considerations include the ease of doing business and government policies.
The 2019 Global Competitiveness Report shows that Asian economies in general are ranked in the top 50% among 141 countries, with a few ranked within the top 30.
Robotics and automation
Diversifying supply chains can be costly, but robotics and automation will play a big role in trying to keep costs down as companies re-orientate their supply chains to higher-wage countries. Artificial intelligence will make it easier (and more cost effective) to relocate production, track supply chains, perform automated manufacturing and produce on demand.
This trend may benefit Japan, the world’s largest manufacturer of industrial robots. Besides the auto industry, research indicates that the food & beverage, life sciences, electronics and logistics industries will become the next big users of robotics1.
Meanwhile, as semiconductors are the backbone behind our computing power, Asia’s semiconductor and related industries will likely benefit from the higher penetration of factory automation and robotics.
Going forward, efforts to reduce carbon footprint, uncertainty regarding the future quality and availability of raw materials, as well as concerns over worker welfare, will have greater influence over where companies source and manufacture their products.
According to the World Health Organisation, International Labour Organisation and United Nations Development Programme, productivity losses from heat-related disruption and injury could rise above U$2 trillion by 2030. The Germanwatch Global Climate Risk Index 2020, which measures exposure and vulnerability to extreme climate events, ranks The Philippines, Thailand and Vietnam among countries which have been most impacted by physical climate risk.
While Asia is more reliant than most developed countries on fossil fuels, Southeast Asia has ambitious plans to grow the share of renewables in its electricity production mix to 20% by 2040. Vietnam also aims to increase the share of renewables to 25% by 2030.
Tomorrow’s supply chains
Global supply chains will become increasingly diversified, although the pace of change will differ across industries. The preference for critical goods with high social utility such as medicine and medical equipment, to be manufactured closer to home or by strategic allies, will rise. Countries may also start to view selected technology products as strategic.
As China is the second largest consumer market in the world, the desire to be ‘close to the customer’ may help keep production lines in Asia. Given Asia’s rising income levels, firms are also building self-contained regional supply chains just to service Asian markets2. Meanwhile, supply chain diversification may not be a losing proposition for China as it has been increasingly moving up the value chain and becoming more service oriented.
Competitive costs, proximity to China and rising regional growth are Asia’s key advantages today. As the region builds on these advantages, it will need to incorporate greater climate considerations and more automation to continue to play a key role in tomorrow’s supply chains.
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1. The Industrial Robot Market - 2019. Interact Analysis
2. Asia’s future is now. McKinsey Global Institute. 2019