- THE MAGAZINE
Southeast Asian countries have an aggregate population of over 600 million people and a cumulative gross domestic product of $1.5 trillion. By 2011, Southeast Asia was generating $1.7 trillion worth of trade annually – and the market has continued to boom.
Indonesia’s economy is forecasted to finish 2013 at 6.1 percent growth. This is followed by the Philippines at 5.7 percent. Closely trailing are economies in Thailand, Malaysia and Vietnam, which are estimated to achieve between a 4.5 and 5.5 percent growth in their respective economies by year end.
“The rise of the middle class will continue to be the big story for Southeast Asia’s economies over the coming years,” says Gareth Leather, a London-based Asia economist at Capital Economics Ltd. “More and more people have more money in their pockets so that they don’t only spend on surviving goods, but also in a more discretionary manner on consumer goods.”
The consumer goods likely to be in greatest demand are foods, beverages, consumer electronics, financial services, health care products and services and industrial products.
In contrast, East Asia manufacturing output has shown mixed performance in 2013.
This uneven performance was partly responsible at the end of September 2013 for prompting Thailand’s Finance Ministry to cut its growth outlook for 2013 from the originally forecasted 4.5 percent to 3.7 percent. Exports were also projected to increase more modestly to just 1.8 percent in 2013, resulting in an estimated trade surplus of $4.9 billion and a current account surplus of $1.3 billion, according to the ministry’s fiscal policy office chief, Somchai Sajjapong.
Despite the moderate slowdown, analysts remain bullish on the long-term prospects for the Thai economy, which is the second largest in Southeast Asia after that of Indonesia.
Accordingly, supply chain logistics providers are continuing with efforts to further expand their East Asia infrastructures.
One example is DHL, which is investing €140 million into Southeast East Asia facilities, information technology, transportation and staff development through 2015. Oscar de Bok, CEO for South and Southeast Asia with DHL Supply Chain, further comments that by the end of this year, DHL will have constructed seven best-in-class multi-user facilities across strategic Southeast Asia locations.
There is also no question that companies that desire to expand their activities in Southeast Asian markets need to be aligning their strategies for both selling to and shipping from Southeast Asia now. The real questions become: What are the best supply chain practices for getting goods to eager consumers in Southeast Asian countries, and What are the least costly, least-risk ways of continuing to get manufactured goods out of Southeast Asia countries to other world markets?
State of the Supply Chain
One of the thorniest issues Southeast Asian countries face is an underdeveloped supply chain infrastructure. In summer, 2011, the Malaysia Institute for Supply Chain Innovation, in concert with MIT’s Global Scale Network, published a white paper titled, “Southeast Asia’s Supply Chain Challenge: Building a Platform for Growth.” The report notes that economic growth in India and China have been the driving factor for Southeast Asia’s own economic ascent. This is evidenced by an overall 10 percent growth of exports from Indonesia, Malaysia, the Philippines, Singapore and Thailand to India and China in the 2000-2010 timeframe.
The same report also noted that while world trade expanded by 16 percent over the period 2004–2008, Asia’s trade with emerging countries in the Middle East and Latin America increased by an average of 30 percent during the same period.
But whether it is getting goods to a new Southeast Asia “middle class” or shipping goods manufactured in Southeast Asia to other geographical locations, the supply chain infrastructure in Southeast Asia is far from a “fait accompli.”
S. Pushpanathan, deputy secretary-general of ASEAN (Association of Southeast Asian Nations) cited the following regional supply chain challenges in June 2010:
- Fragmented roads. The number of vehicles has doubled in countries such as Indonesia, Vietnam, Cambodia and Myanmar over the past decade, but the development of highway systems has fallen behind. Road quality and capacity throughout the region is inconsistent.
- Gaps in rail transportation. Except for Vietnam, the development of rail systems lags. Substantial resources are needed in rail infrastructure.
- Uneven port development. Singapore and Malaysia’s Port Klang are leading port facilities, but the remainder of Southeast Asia’s ports vary widely in cargo handling capabilities.
- Air shortfalls. Some Southeast Asian countries have invested in airport improvements, but in many cases, airport freight handling terminals do not meet required standards.
- Regional logistics capabilities must be enhanced.
It is evident that physical infrastructure investments will need to be made (and they are being made). Additionally, there are other shortfall areas in the region that have to be addressed, like technology and supply chain knowledge and skills.
Industry analyst firm Frost & Sullivan discussed this in its “2020 Supply Chain Technology Roadmap: Southeast Asia” report, by calling for state-of-the-industry transportation management systems (TMS) and warehouse management systems (WMS) capable of importing to the region best practices and system-integrated “know how” to help fledging infrastructures currently characterized by a lack of supply chain experience.
This isn’t all that is needed. An integrated supply chain network of producers, suppliers and logistics providers (likely based in a cloud-based application) would help streamline supply chain communications, eliminating confusion and mistakes.
On the ground, in the air and on the water, intermodal and integrated logistics talent and operations will additionally be in demand.
Meeting Consumer Needs
A rising middle class is certainly one established fact in Southeast Asia that invites active market participation from global companies. Just as important, however, are two other characteristics of the Southeast Asia market: A tendency to “trade within” the region whenever possible. And, an evolutionary movement within the region into a more monolithic market economy that encompasses all Southeast Asian countries as a single market entity, so that more can be demanded from producers.
This comes at a time when global companies are taking hard looks at in-sourcing manufacturing in some of their largest economic opportunity zones like the U.S. As a natural follow-on thought, the idea of producing products locally in Southeast Asia, also seems sensible.
Certain product sectors like consumer electronics support this strategy well, since production facilities are already well established in Singapore and Malaysia. But in other areas of consumer demand like agriculture and foodstuffs, regional production capabilities are being outstripped by expanding demand, given the impacts of global warming, recent weather disasters, a scarcity of natural resources, and also the existence of price volatility.
In these cases, consumer demand must be met by importing goods from other global trade zones. If items are perishable and must travel long distances, shipping to Southeast Asia becomes an exercise of timing and tracking shipments with market demand so the two coincide as much as possible. This kind of supply chain planning and execution requires careful orchestration of all activities, systems and parties to the transaction if everything is to succeed. Best-in-class companies engaged in this kind of commerce also take precautionary steps to ensure that “last mile” delivery hazards that could potentially be encountered because of infrastructure gaps or inconsistencies are avoided.
Exports From SEA
Since 2009, exports from Southeast Asia to the U.S. have experienced year-to-year growth. This includes shipments of products ranging from pharmaceuticals, semiconductors, consumer electronics and telecommunications equipment to fish, apparel, furniture and textiles. Most port services and a majority of global logistics providers (e.g., Yusen, UPS, FedEx and others) are concentrated in Singapore and Malaysia. Highly perishable or major time-to-market goods like holiday consumer electronics or fish are often shipped by air, but a majority of cargo goes by ocean. In this environment, it is incumbent on shippers to secure the safest and “best value” modes of shipment possible.
Many shippers choose to rely on a global logistics provider that has the infrastructure that the local market might lack. “This is a critical area,” said Fred Schardt, president and CEO of FedEx Global Logistics. “It is important for shippers to seek out a logistics provider that has the infrastructure, systems and know-how to handle the end to end logistics needs of the markets their companies are in.” Many global logistics providers also have the ability to solve “last mile” delivery problems that are endemic in Southeast Asia.
A second critical element is managing for contingencies. When flooding struck Thailand in 2011, the disaster disrupted the lives of nearly 2.5 million people.
Goods production was also disrupted, resulting in major impacts to corporate supply chains. Among companies “victimized” by the disaster were: Honda and Toyota, which suffered delays in components for automobile manufacture that set back production; LSI, Fujitsu and the Lenovo Group, which all saw their hard drive and computer equipment businesses impacted when their Thai suppliers were unable to deliver; and Nippon Steel, which incurred steel shipment shortfalls of 300,000 tons.
A combination of healthy economies, an emerging middle class, and unsatisfied and expanding consumer demand make Southeast Asia one of the world’ most attractive global markets to ship and sell to. On the supply side, areas of Southeast Asia, such as Singapore and Malaysia, also continue to shine in their ability to deliver high quality consumer electronics to North America and other global trade zones.
Balanced against this are risks that companies need to be cognizant of.
Internal infrastructure risks (and gaps) are already relatively well understood from a supply chain standpoint, and investments are being made to remedy them. However, there are also risks that threaten both security and financial loss at sea, such as piracy. This can be an important consideration, since many goods are shipped by sea to and from the region.
Engaging with countries where unfair labor practices come to light is also a growing risk for companies as they participate in emerging markets.
In the summer of 2013, Apple again experienced labor problems in China as it faced allegations of supporting abusive labor practices that included low wages, excessive overtime, dangerous conditions, and other factors that breach Chinese law, and that were being practiced by its Chinese suppliers.
Only three years earlier, the company had faced similar allegations. It endured such a public relations nightmare in the U.S. that it promised to build a U.S.-based manufacturing plant.
Can this happen in Southeast Asia?
In July of 2013, James P. Hoffa, International Brotherhood of Teamsters general president, pressed for the suspension of trade negotiations between the United States and Vietnam, citing a “Made in Vietnam” report that revealed labor rights violations in Vietnam’s export manufacturing sector. Violations included forced labor and child labor; pregnancy and gender-based discrimination; health and safety hazards; excessive working hours and inadequate wages.
Practices like these from suppliers can violate corporate governance standards. They can also place companies in jeopardy with their customers, even threatening the brands and reputations that it took companies many years to build. (Apple, for instance, was recently recognized as the top brand in the world, a distinction which is estimated to be worth $98.3 billion.)
On the other hand, it is also important for companies not to underestimate practices and expectations in emerging economy countries.
As a region with an emerging economy, Southeast Asia has high expectations in the areas of sustainability and green supply chains – and companies need to invest in these areas.
The Organisation for Economic Development-Southeast Asia (OECD), in its 2013 Southeast Asian Economic Outlook, is advocating sustainability and “green growth” as a viable long-term economic development model for ASEAN countries. It is determined to do something about these issues and will look at those who trade with member countries to do so, too.
The OECD wants natural resources to be used wisely, and is aware that CO2 emissions in Southeast Asia are growing. Energy-efficient warehouses and “green” measures for transportation will go a long way in greening up the supply chain in countries striving for sustainability.
Southeast Asia is one of the most vibrant and exciting worldwide markets today. Its consumers are just beginning to emerge from necessity to discretionary lifestyle spending. It is also likely that, at least in the near term, Southeast Asian countries and the companies that do business with them will be faced with a situation where infrastructure doesn’t always keep pace with the internal demand for imported products or the external demand for locally manufactured goods.
As area infrastructures continue to mature, so will the region’s sophistication as a trading market. At some point, Southeast Asian countries are likely to band together into a more monolithic arrangement where they can exploit their cumulative numbers to drive better market bargains. Local regulatory demands, especially in areas of sustainability, are also likely to increase.