6 minute read 18 Nov 2019
Working man carrying cardboard box  through aisle

How to build supply chain resilience in Asia-Pacific operating models

By EY Global

Multidisciplinary professional services organization

6 minute read 18 Nov 2019
Related topics Supply chain Global trade AI

The supply chain of the future will integrate decentralized, yet interconnected, ecosystems underpinned by AI and other emerging technology.

Over the past two decades, a gradual trend has emerged towards centralized regional operating models and mega factories supplying products globally in many industries. Such structures were largely driven by the harmonization and globalization of customer demand, enabled by a pre- Base Erosion & Profit Shifting (BEPS) global tax framework and a relatively benign global trade environment.

Recent changes in international geopolitical, tax and trade winds will require a different course to be navigated by companies seeking to sustain and grow in the Asia-Pacific region. Expecting unexpected shocks and surviving such events will be the new norm and will force companies to re-examine their supply chains and operating models, so they become more agile and resilient, achieving supply chain resilience. 

Asia-Pacific operating models increasingly complex

The increase in complexity of Asia-Pacific operating models is inevitable given the ever-evolving and voluminous changes that companies and supply chains are facing. Beyond the China-US trade standoff, which will probably go down in history as the singular defining economic event of the late 2010s, many other factors are subtly shaping Asia-Pacific supply chain disruptions.

Other trade tensions, such as that between Japan and Korea, have already negatively affected the world’s technology supply chain; and fallout from the Hong Kong political impasse also looms. 

Beyond the China-US trade standoff, which will probably go down in history as the singular defining economic event of the late 2010s, many other factors are subtly shaping Asia-Pacific supply chain disruptions.

Companies subject to competitive and economic pressures worry about the tradeoff between costs and ethics, industry shifts in demand and supply, and the changing cost structure of locations abetted by technology and digital transformation such as 3D printing and the eventual shortening of supply chains.

Large geographical developments such as the Belt Road Initiative and the emergence of the Northern Sea route have a lasting impact on the movement of goods and people, no matter how quietly or slowly the change occurs.

Lastly, BEPS 2.0 and the consequential tax regulations and new nexus and profit attribution principles are likely to lead to re-evaluation of supply chains and business structures by companies and governments alike.

The crux of the problem is how a supply chain can achieve resilience in the face of this onslaught of complications with unknown and intertwined implications.

Assessment and adjustment

The first step is to assess the current state of supply chain resilience through a strategic review. Several tools are available for both self-assessment as well as aided assessment. Comprehensive reviews can identify key areas of weakness and help formulate appropriate improvements.

With the current state understood, companies can then choose to integrate the necessary mechanisms or strategies in the physical supply chain, the financial supply chain and/or the operating model to improve resilience to shocks.

A common financial supply chain adjustment especially for China-based multinational companies faced with US tariffs is to implement the “first sale for export” methodology. In addition, in recent months, many companies have abandoned hope that the trade winds will return to their familiar course, and now actively plan for alternative or multiple manufacturing locations.

In an AmCham China survey from May 20191, 41% of the respondents have considered relocating or already relocated manufacturing facilities out of mainland China. Some toy and mobile camera makers shifted production to Mexico; personal computer makers looked to Taiwan; and tire, machine tools and metal makers are considering Thailand. The largest beneficiary seems to be Vietnam, where a Guangzhou-based transport company helped 10 firms move their entire plant from mainland China since 2018, with 500 companies moving part of their production.2

Relocation

41%

of survey respondents have relocated manufacturing facilities out of mainland China, or are considering doing so.

What is less well-publicized is that Chinese factories in Vietnam such as shoemaking, furniture and clothing manufacturers have closed their Vietnamese plants and moved back to China due to rising costs, low productivity and difficulty in buying land. Anecdotal accounts from Vietnamese industrial park managers suggest that many of these supply chain movements could have been caused by being coerced to make hasty decisions, with one account taking just 19 minutes to make a land purchase decision.

Clearly, a well-considered strategic approach focusing on stability and resilience can go far to avoid costly reversion, especially for a major design decision on location. In general, manufacturing location studies should consider factors such as incentives, property, labor cost and availability; while regional distribution centers should consider ease of doing business, customs environment and logistic competence, among others. Separately, if the location consideration is for a supply chain control tower, then more emphasis can be placed on corporate tax, talent availability and operating costs.

In addition to the above considerations, companies need to be specific in asking themselves what will be the most suitable and resilient supply chain of the future for them and how they can achieve it.

The supply chain of the future

In general, the resilient supply chains of the future will be likely decentralized, yet interconnected, ecosystems facilitated and underpinned by technology enablers such as data analytics, machine learning and the use of artificial intelligence.

Faced with more factories, more markets and extended supply chain partners with more and different responsibilities, companies need to be on top of total landed cost trade planning, trade land optimization, capital expenditure planning and even agile tax incentive planning, among others. These greater planning and management capabilities will need to be executed in real-time and must necessarily turn to more advanced technologies to access diverse data points to formulate increasingly complex strategies. Heavy technology evolution may also result in less need and desire for co-location of resources.

Above all else, it is essential that goods keep moving and products continue to cross borders efficiently and steadily even in light of unexpected shocks. To accomplish this optimally and resiliently, companies need to assess the regional impacts of global trends.

The likely new operating models evolving to manage these supply chains will include flexible supply chain control tower and supply chain centers of excellence. Such centers will likely involve distributed IP models and be enabled by internal and external cost sharing arrangements; a need to balance the network operating model underpinned by profit split; and an extended industry supply network with in-house value concentration.

Such decentralized supply chain ecosystems require enabling tax models including, but not limited to, alternative transfer pricing models such as profit split mechanisms and process contribution analysis methods reflecting the value generation of the parties involved. Careful tax planning is also required to consider available tax incentives as well as adequately plan and mitigate wider direct and indirect tax risk. Critically, it is important that mechanisms are in place to avoid decisions being taken that may result in unnecessary tax costs being added to the supply chain.

Above all else, it is essential that goods keep moving and products continue to cross borders efficiently and steadily even in light of unexpected shocks. To accomplish this optimally and resiliently, companies need to assess the regional impacts of global trends, the responses of supply chain partners and competitors, and the likely evolving Asia-Pacific supply chain of the future. Effective management requires an integrated approach that takes into account tax, trade, technology, business and supply chain planning and management, rather than siloed decision-making. 

  • Show article references

    1. ‘Second Joint Survey on the Impact of Tariffs’, AmCham China, 22 May 2019.
    2. He Huifeng, ‘US-China trade war manufacturing exodus creating boom times for Chinese logistics companies’, South China Morning Post, 22 May 2019.

Summary

Shifting geopolitical, tax and trade dynamics are testing operating models in the region. With the unexpected now the new normal, companies must strategically rethink their supply chains to remain agile and resilient.

About this article

By EY Global

Multidisciplinary professional services organization

Related topics Supply chain Global trade AI