5 minute read 19 Aug 2020
Aerial top view of container cargo ship in hong kong harbour

Why the evolution of supply chains is picking up speed in Asia-Pacific

By Patrick Winter

EY Asia-Pacific Area Managing Partner

Focused on promoting Asia-Pacific innovation and technology. Committed to client service by driving EY cross-border collaboration. Passionate about inclusive long-term growth. Husband and father.

5 minute read 19 Aug 2020
Related topics Supply chain COVID-19

The disruption from COVID-19 provides an unprecedented opportunity for businesses to redesign their supply chains.

In brief
  • Trade tensions and COVID-19 have posed increased challenges to the existing supply chain model.
  • Businesses are rethinking their supply chains to diversify operations – especially with regard to China.
  • To address a world with rapid changes in demand, supply chains must be designed with a focus on the new 3Rs: responsiveness, reconfiguration and resilience.

The global supply chain is a manifestation of incremental technological improvements over centuries. The latest of such step changes have stemmed from the widespread adoption of trucking, containerization and computerization that began in the 1960s.

As a result, raw materials, work in progress (WIP), and finished goods could be shipped and delivered around the world at scale, effectively creating an improvement in the three major dimensions of supply chain – cost, quality and delivery. 

The new 3Rs for supply chain

China, with its entry into the World Trade Organization in 2001, supercharged the global supply chain by positioning itself as “factory to the world” with the country’s diligent workforce and robust infrastructure. 

For many supply chain specialists who subscribe to the just-in-time manufacturing methodology invented by the Japanese in the 1970s, the way to maximize the three major dimensions of supply chain is through reduction of inventory and WIP.

For industries with complex and long value chains, such as automotive and semiconductors, where there is a significant pressure to achieve cost advantage by sourcing materials and ferrying WIP across multiple geographies, unfettered interconnectivity is key to success.

However, the recent trade tensions between the US and China, as well as the COVID-19 pandemic, are disrupting the established supply chain model.

Two changing forces in Asia-Pacific

First, the Asia-Pacific middle class population, already exceeding one billion, is forecasted to comprise 66% of the world’s middle-class population by 2030. The continued prosperity for this new consumer class will challenge the long-held concept that consumption typically takes place in the West and production is done in the East. As a result, China, as a strong economy in the region, will continue to have a profound impact on how the global supply chain is restructured.

Second, the current worldwide wave of populism has helped justify policy actions to reverse globalization efforts, such as enacting stiff tariffs, balkanization of trade blocs and even the possibility of currency wars. 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.

Reality check for Asia-Pacific supply chain

The latest EY Capital Confidence Barometer provides a glimpse into how proactive Asia-Pacific executives are in rethinking their supply chains relative to their global counterparts. 

Rethinking supply chains

67%

of Asia-Pacific respondents are taking steps to change supply chains – compared to 52% of global respondents.

The Asia-Pacific cohort is ahead in most measures of recovery planning, where:

  • 55% plan to change management of workforce (compared to 39% globally)
  • 47% plan to change speed of automation (compared to 36% globally)
  • 39% plan to change digital transformation (compared to 31% globally)

At first glance, the stance of Asia-Pacific business leaders in making changes to their supply chains appears to conflict with the attitudes of foreign businesses in China, specifically. A recent survey conducted by the American Chamber of Commerce in China suggests 84% of survey respondents have no plan to relocate their manufacturing operations out of China, whereas similar surveys in 2017 and 2018 had such contingent at 92% and 90% respectively.

The story becomes clearer when probed beyond the initial numbers. For these multinational businesses, their attempt to diversify their supply chain operations actually began several years earlier, as trade tensions between the US and China were heating up.

On the other hand, labor cost in China has been increasing steadily thanks to four decades of uninterrupted growth. In fact, the continued endeavor for China to move up on the value chain, combined with a massive domestic consumer market, are the deciding factors for many firms to adopt the “China Plus One” approach to supply chain management.

For products and tasks that are labor-intensive and add low value, businesses actively diversify their operations to other regional locations, such as Bangladesh, Cambodia and Pakistan with garment, Vietnam with electronics, and increasingly Thailand and Indonesia with toys.

To maintain productivity and profit margins, factories in China have to accelerate their adoption of digital transformation and automation where production robots, 5G communication link of data generating internet of things (IoT) devices, systems software with artificial intelligence and digital twin capabilities will play a key role.

At the National People’s Congress in late May, the Chinese government made an additional commitment totaling US$1.4 trillion to new technology infrastructure in the next five years. This reinforces the notion that China is doubling down on technology to reach its long-term prosperity goal.

Sensing the opportunity for an acceleration in tech transformation, neighboring countries are actively vying for the demand of low-value production left by China.

  • The state of Haryana, for instance, is actively looking to encourage businesses to relocate production to India.
  • Major Korean manufacturers have long established their production of electronic goods in Vietnam.
  • For specialized electronic components such as hard disk drive, Thailand is already home to more than 70% of all production worldwide.

The new 3Rs for supply chain

The unexpected disruption from the current pandemic provides an unprecedented opportunity for businesses to act now by assessing business impacts in the near, medium, and long term. Supply chains of the future need to be redesigned with the new 3Rs.

  • Responsiveness: Systems respond to inputs from the external environment. The supply chain system relies upon inputs such as customer order volume, commodity prices and freight rates to act. Therefore, businesses should appreciate the value of obtaining real-time updates on these inputs by upgrading from the archaic systems that often involve phone calls and fax machines.

  • Reconfiguration: Diversifying one’s supply chain is not as simple as building additional plants in other jurisdictions. It involves revamping and redesigning functions in the system to be more plug-and-play. For example, in the event of future pandemics and extreme events such as flooding, could certain business functions like procurement and finance continue their operations from other less affected locations?  What are the necessary changes to enable that? These questions need to be answered.

  • Resilience: Think bigger and be prepared to build resiliency from the ground up, starting with organization structure, business processes and performance metrics to futureproof for the next disruptive event. There is no one size fits all for what this looks like, as every business is different.

This article was originally published by the World Economic Forum, under the headline “Why the evolution of supply chains is picking up speed in Asia-Pacific”.

Summary

In an environment where demand changes rapidly and immediacy is expected, the supply chain of the future must not only continue to focus on cost, quality and delivery, but will also need to be designed with responsiveness, reconfiguration and resilience in mind.

About this article

By Patrick Winter

EY Asia-Pacific Area Managing Partner

Focused on promoting Asia-Pacific innovation and technology. Committed to client service by driving EY cross-border collaboration. Passionate about inclusive long-term growth. Husband and father.

Related topics Supply chain COVID-19