Good time to re-evaluate supply chain strategy
Several Asian countries including India have emerged as attractive manufacturing destinations based on large capacity creation and low-cost labor as well as industry friendly policies as manufacturers look for alternative to China.
Besides growing cost competitiveness these countries, India, Vietnam, Thailand, Malaysia and Indonesia among others, also also have the advantage of Regional Trade Agreements plugging them into global supply chains.
A series of recent blockbuster trade deals have lowered barriers to trade and improved market access across Asia, write Jaldeep Sodhi, CEO of APEX Avalon in Singapore and Abhimanyu Roy, vice president at Avalon’s Delhi office.
New FTAs have enabled flows between 15 countries in Asia through RCEP, Asia and the Pacific through CPTPP, and Europe and Asia through EU agreements with Singapore, Japan, Vietnam and South Korea.
The USMC agreement between US, Mexico and Canada is also significant in this regard.
Optimally leveraging FTAs can help lower the risk from sudden shifts in government regulations, policies, tariff levels and investment restrictions.
Such Trade Agreements are a significant competitive advantage and are already driving a shift away from China towards alternative locations.
A recent example of FTA-driven supply chain shift is evident in the footwear industry. In the wake of the Trade War, US imposed 10% tariffs on footwear imports from China which led to an accelerated shift to alternatives like Vietnam.
Furthermore, sourcing from Vietnam has led to additional benefits of lower duties in supplying to several of the world’s largest footwear importers.
The trend of de-risking of the supply chain is accelerating, towards alternatives in Asia as well as towards ‘near-shoring’ or ‘localisation’ China’s share of US-bound manufacturing exports.
China lost US$31 billion of manufactured exports to US in 2019, 67% of which was captured by Vietnam, Taiwan and Mexico.
As a result, ASEAN countries have grown their share of world trade over the past few years e.g. Vietnam’s share of global merchandise exports has quadrupled in last 10 years – from 0.3% in 2008 to 1.2% in 2018.
Further evidence of the increasing importance of these alternative destinations is visible in the strong growth of Foreign Direct Investment (FDI) into these countries.
For US, the shift is not only towards ASEAN but also to locations closer home.
The US-Mexico-Canada Agreement (USMCA), signed in 2018, has driven significant increase in share of Mexico in US manufacturing imports – from US$278 billion in 2017 to US$320 billion in 2019.
Another visible trend is the renewed thrust and support for domestic manufacturing, especially by ‘strong’ political leaders like President Donald Trump’s ‘Make America Great Again’ and Prime Minister Narendra Modi’s ‘Make in India’.
This has accelerated in specific categories in the wake of Covid-19 e.g. medical equipment and pharmaceuticals wherein various countries have imposed export restrictions.
This will also drive some level of ‘re-shoring’ supported by favorable government policies.
Thus, the big picture is not of a complete abandonment of China but of a calibrated diversification towards other countries and suppliers.
This should be based on a systematic evaluation of costs and risks at a country and supplier level.
Now is a good time to re-evaluate supply chain strategy for the region and build a resilient chain capable of resisting, absorbing, recovering and adapting in an increasingly complex economic and regulatory environment.
The need is for an agile supply chain strategy which can respond proactively to changing costs structures across suppliers and countries as well as emerging country-level risks including trade agreements and barriers etc.
(Sodhi and Roy presented the report, ‘Re-configuring Supply Chain’ by Avalon Consulting and Asian Trade Centre in April 2020). fiinews.com
