- US-China trade tensions and COVID-19 have highlighted that the global supply chain model is increasingly untenable.
- Asia-Pacific executives are proactively rethinking their supply chains.
- The supply chain of the future must include responsiveness, reconfiguration and resilience.
The global supply chain, as we know it today, 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 beginning 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 so-called “holy trinity” of supply chain along the dimensions of cost, quality and delivery.
China, with its entry into World Trade Organization (WTO) in 2001, supercharged the global supply chain by positioning itself as “factory to the world” with the country’s vast workforce and world-class infrastructure.
For many supply chain specialists who subscribe to the just in time (JIT) manufacturing methodology invented by the Japanese in the 1970s, the way to maximize the “holy trinity” triangle 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, recent trade tensions between the US and China, as well as the COVID-19 pandemic, have highlighted that this supply chain model is increasingly untenable.
Two changing forces in Asia-Pacific
First, the Asia-Pacific middle class population, already exceeding 1 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 relegated to the East. As a result, China, as the largest 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 prompted policy actions to reverse globalization efforts, such as enacting stiff tariffs, the fragmentation of trade blocs, and even the possibility of currency wars. In other words, the low-friction environment the world 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 report provides a glimpse into how proactive Asia-Pacific executives are in rethinking their supply chains relative to their global counterparts. From the survey, 67% of Asia-Pacific respondents are taking steps to change supply chains – compared to 52% of global respondents. The Asia-Pacific cohort is actually 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, down from 92% in 2017 and 90% in 2018.
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, labour cost in China has been increasing steadily thanks to four decades of uninterrupted growth. In fact, China’s continued efforts to move up the value chain, combined with a massive domestic consumer market, are the deciding factors for many firms to adopt the “China + 1” approach to supply chain management.CORONAVIRUS, HEALTH, COVID19, PANDEMIC
For products and tasks that are labour-intensive and add low value, businesses actively diversify their operations to other regional locations, such as Bangladesh, Cambodia and Pakistan with garment manufacturing, 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 links for Internet of Things (IoT) devices, systems software with artificial intelligence, and digital capabilities will play a key role.
The announcement at the National People’s Congress in late May, where the Chinese government made an additional commitment totaling $1.4 trillion to new technology infrastructure in the next five years, 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, neighbouring 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 drives (HDD), 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, despite its negative consequences, provides an unprecedented opportunity for businesses to act now by assessing business impacts in the near, medium, and long term. 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.
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 the flood in Thailand, could certain business functions like procurement and finance continue their operations from other less, or least affected locations? What are the necessary changes to enable that?
Resilience: Think bigger and be prepared to build resilience from the ground up, starting with organization structure, business processes and performance metrics to future-proof for the next disruptive event. There is no one-size-fits-all for what this looks like, as every business is different.
Patrick Winter, Asia-Pacific Area Managing Partner, EY
The views reflected in this article are the views of the author and do not necessarily reflect the views of Qrius
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