Manufacturing Supply Chains in Asia Pacific

Continuing Inflation and the war in Ukraine has caused prices spikes and supply interruptions globally. These short-term problems are made worse by longer-term factors such as ongoing US-China geopolitical tensions, and the increase in Chinese labour costs. The methods through which American and European companies are handling these challenges have been widely covered. However, relatively little has been said in the English-language media about how Asian companies are reorganising to meet these problems, while simultaneously handling the slow shift away from China as the ‘workshop of the world’.

HSBC’s recent report Global Supply Chains – Networks of Tomorrow, is based on surveys of senior management in 450 Asian-headquartered corporations. Key trends include:[1]

• Regionalisation – This includes a range of strategies, including ‘re-shoring’, ‘friend-shoring’, and ‘near-shoring’. 53% of companies polled expect to base more than half of their supply network within the APAC region in the next 1-2 years, an increase of six percentage points in two years, driven by regional groupings such as RCEP.
• Supplier diversification – 27% of firms state that they are following such a strategy, which could include approaches such as ‘China+1’, where firms seek to augment their Chinese supply chain with suppliers from other countries.
• Relationship deepening – Interestingly, two-thirds of firms indicated that they were increasing concentration risk by seeking more strategic relationships with key suppliers. The logic being that at a time of heightened geopolitical risk and disruption, it is worth working closely with your most trusted suppliers and offering ‘more’ (be that better prices, higher volumes or something else) in order to demonstrate the value attached to the relationship.
• Move from ‘Just in time’ to ‘Just in case’ – The final mechanism Asia’s corporate leaders are using to cope with their supply chain bottlenecks is the failsafe method of simply holding increased inventory. While working capital constraints mean that there are limits to this approach, the huge cost of factory shutdowns due to lack of components means corporate leaders can justify substantial inventory increases, especially given how far levels have been reduced in recent decades.

If not China, where?

One of the main challenges faced by Asian companies seeking to move production away from China is the lack of any single country with the both the scale and the depth of expertise and infrastructure required for modern manufacturing. While Japan, Singapore, Taiwan and Korea can all offer excellent capability in very high-quality manufacturing, Malaysia and Thailand offer factories capable of upper-mid skill work, and Indonesia and others can offer young, dynamic, fast-growing population able to master lower-skill assembly, this may still not be enough. Many finished goods are assembled from semi-finished, processed and intermediate goods from a range of suppliers, which require combinations of high-, medium- and low-skill work. The obvious problem is that these capabilities are all located in different countries, separated in some cases by thousands of miles. Currently, China handles manufacturing at most skill and quality levels. The nexus of Chinese manufacturing is so deep and the labour pool so large, that it can be done at almost any scale required, in factories often literally next door to each other. While a range of regional organisations (ASEAN, CPTPP, RCEP) exist to offer degrees of economic integration between various groups of countries, the inescapable fact remains that APAC political-economic integration of the type taken for granted in Europe remains a distant prospect.

If Southeast Asia is not the answer, perhaps we should conclude that only India, the other Asian giant, has the potential to offer something of the range and scale of China, which much lower labour costs. However, the infrastructure and pool of talent available in most areas of Indian manufacturing does not yet approach that of China. Indeed, the gap is large enough that, despite the efforts of the Indian government, the capacity of Indian manufacturing will not approach that of present-day China for a decade or more.

For many manufacturing companies in APAC, the question ‘Where next?’ does not have a definite answer, and it seems highly likely that the Sino-centric manufacturing system will slowly fragment over the next decade. While all of us may have to get used to paying more for everything from coffee machines to toys to home electronics, this will undoubtedly offer opportunities to those countries able to form a core value proposition around demonstrate expertise in a sector or industry, and develop the skills base, market depth and infrastructure to complement it.