Australia
China
India
Indonesia
Japan
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Philippines
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Taiwan
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Vietnam
In recent years, Asia’s supply chains have experienced changes influenced by a multifaceted interplay of elements. The supply chains in the region have been affected by the Covid-19 pandemic, the conflict in Ukraine, inflationary pressures, and shifting geopolitical dynamics.
The Covid-19 pandemic disrupted production and transportation, leading to delays and shortages. The conflict in Ukraine added pressure to global commodity markets, raising costs. Inflationary pressures further strained supply chains, increasing expenses for materials and logistics.
Nevertheless, experts emphasise that a key factor behind the changing nature of the region’s supply chain is China. During the post-pandemic period, supply chain issues and escalating US-China tensions have highlighted the need for businesses to reevaluate their relationship with China.
Inbok Song, a Portfolio Manager at Matthews Asia, highlights that Malaysia, Vietnam, the Philippines, and India have reaped the rewards of this shift, especially when it comes to the production of intermediate goods. According to her, these countries possess a skilled labour force capable of manufacturing processes and have the economic strength to sustain the growth of local production facilities.
Meanwhile, UBS specifically stresses the role of India. “India is better placed in terms of size to match China’s edge in low-cost, large-scale manufacturing. India’s policy reforms and improving macro stability are clear advantages even though it is disadvantaged by high logistics costs, low labour productivity and regulatory impediments,” said the investment bank.
Asia supply chain networks affected by shift to developed economies
In Asia’s supply chains, offshoring is becoming evident as high-value industries such as technology hardware and semiconductor companies are moving their operations to advanced economies. However, instead of completely relocating supply chains, companies are opting to establish new production facilities in different locations, reducing disruptions to their core operations.
For instance, Ford and South Korea’s SK Innovation have intentions to construct a battery manufacturing facility in Kentucky. Samsung is currently in the process of establishing a state-of-the-art semiconductor plant in Texas.
Meanwhile, TSMC (Taiwan Semiconductor Manufacturing Company) is engaged in the construction of manufacturing facilities in the United States, Japan, and Germany, driven by the aim of catering to the diversification requirements of their clientele.
“…firms have been allocating units away from locations that are simply the most cost-efficient and instead settling on destinations that have some financial benefit and also help insulate them from geopolitical tensions or other issues (like another pandemic) which could interfere with future production,” writes Peeyush Mittal, Portfolio Manager at Matthews Asia.
“Some of these shifts are tied to overseas government incentives like the CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Act and the Inflation Reduction Act in the US,” he adds.
Asian supply chains moulded by e-commerce, regional trade integration
Among other factors, the e-commerce boom in Asia is driving changes in Asia’s supply chain networks, particularly in last-mile delivery logistics. Companies are investing in innovative delivery solutions, including drones and autonomous vehicles, to meet the growing demand for quick and efficient delivery services.
Along with that, e-commerce has emphasised the importance of supply chain visibility. Companies have invested in technologies like blockchain and RFID to track products throughout the supply chain, improving transparency and reducing errors.
According to Statista, the revenue generated from Asia’s e-commerce market is anticipated to reach $1,811.00 bn in 2023. Looking forward, it is projected to experience a CAGR of 11.64% from 2023 to 2027, leading to an estimated market size of $2,813.00 bn by 2027.
Furthermore, the “Factory Asia” paradigm that characterised the late 20th century, where Asia manufactured goods primarily for American and European markets, is gradually diminishing. As per data from the Asian Regional Integration Centre, only 46% of Asian trade occurred within the continent in 1990, with a significant portion of goods heading to the developed Western nations. However, by 2021, this proportion had increased to 58%, approaching the levels seen in Europe, which stands at 69%.
“The current worldwide wave of populism has helped justify policy actions to reverse globalisation efforts… In other words, the low-friction environment the world has enjoyed with the movement of physical goods and raw materials across borders can no longer be taken for granted and is subject to impulsive change,” says Ernst & Young.
Along these lines, the IMF contends that ASEAN-5, which comprises Indonesia, Malaysia, the Philippines, Singapore, and Thailand, are highly vulnerable to global economic fragmentation, particularly through trade-related channels, as supply chain disruptions could adversely impact important sectors of their economies that are highly integrated into global value chains, for example, electronics.
“Rising risks of geoeconomic fragmentation could reverse some gains reaped from globalisation over the past decades. In this context, advancing regional integration among ASEAN-5 members has the potential to enhance the region’s resilience against external headwinds,” adds the global lender.
Moreover, Asian investors currently possess 59% of the foreign direct investment (FDI) stock within their region, excluding the financial centres of Hong Kong and Singapore, as per The Economist. This represents a notable increase from the 48% recorded in 2010. In countries like India, Indonesia, Japan, Malaysia, and South Korea, the proportion of direct investment originating from Asia has surged by more than ten percentage points, ranging from 26% to 61%.
ESG considerations in the limelight
Increasingly, investors and consumers are favouring companies with strong ESG profiles. Asian businesses are responding to this demand by integrating ESG practices into their supply chains to attract investments and customers.
In the Asia-Pacific region, over 15 countries and 670 companies have pledged to reduce emissions. For instance, Finnish engineering services company Neste has invested $1.4 bn in Singapore, leading to 30% of its renewable production capacity now located in Asia. India’s Adani Group has also committed to a $70 bn investment in green energy and infrastructure initiatives.
“The addressable market size for green businesses in Asia is expected to reach between $4 tn and $5 tn by 2030. Entering the green space will likely come with risks, but also potential rewards for businesses that move early,” writes McKinsey & Company.
