OPPORTUNITIES FOR MANUFACTURING GROWTH AND SUPPLY CHAIN OPTIMIZATION IN SOUTHEAST ASIA

By Atul Chandna, EY Asia-Pacific Supply Chain Leader

Manufacturing companies investing in Southeast Asia can accelerate growth by having a deep understanding of the operating landscape and maintaining agile supply chain strategies.

Situated at the confluence of major trade routes with US$3.4t of global trade passing through each year, Southeast Asia (SEA) has been a focal point for cooperation and tensions, among both regional and global powers.

Amid rising global trade and technology tensions, a new EY report, Investing in Southeast Asia: Reimagining manufacturing and supply chains, highlights that SEA nations have now surpassed the US as China’s secondlargest trade partner. Rising imports from China have also put downward pressure on prices in the region.

Despite these roadblocks, SEA is poised for growth in the upcoming years. With a combined GDP of over US$3.2t[1], it is currently the fifth-largest economy in the world. Home to 656 million people, a young demographic and a growing middle class, the region holds immense potential, seen in the gross domestic product (GDP) growth in the region over the years.

Multiple free trade agreements (FTAs) between SEA nations, along with its loosening tariffs, also attracts crossborder trade. Initiatives like the Southeast Asian Manufacturing Alliance (SMA) and Regional Comprehensive Economic Partnership (RCEP) connect companies with a network of trusted partners to navigate and grow in the diverse SEA region with confidence while being economically integrated to around 30% of the world.

For companies and investors in search of their next phase of growth, SEA brings opportunities for integration of production processes and leverage the region’s unique natural resources, structural capabilities and labor skills. Further, the region’s digital economy is projected to exceed US$240b by 2025.

Together with technological advancements and their rapid adoption, continuous improvement to provide state-of-theart infrastructure facilities and development of a sharing based economic model, SEA is fast becoming the desired region for expansion of manufacturing and supply chain capabilities.

Post-pandemic economic outlook

Despite the contraction in real GDP during the pandemic, the International Monetary Fund expects growth to remain at 3-5% in 2021-2025.

Malaysia is expected to see the strongest growth trajectory in 2021, with real GDP growth forecast to hit 7.8%, followed by the Philippines at 7.4%[2].

Notably, the region’s growing trade and strong fiscal policies have helped the SEA countries witness a boost in manufacturing and service sectors growth. Post-pandemic, real estate, fast-moving consumer goods (FMCG) and food logistics, and manufacturing industries are expected to emerge transformed, due to major shifts in supply-demand dynamics.

The integration of information and communication into health care will also drive sectoral reforms. Usage of health care apps will transform the way that hospitals and doctors collect, store, and share patient data and records.

Major strides of development in new industries, such as agritech, medtech and edtech, together with radical shifts in certain industries like automotive and electronics manufacturing services can be expected. In this new era, SEA can play a pivotal role in shaping the global supply chain landscape.

At the same time, Industry 4.0 is transforming how entities optimize their manufacturing processes. Manufacturers in SEA are leveraging digital technologies such as advanced manufacturing methods, human-machine interaction, advanced analytics and intelligence to overcome low productivity concerns and further strengthen their position as “factories of the world”.

Top sectors in SEA

Analyzing the pre-pandemic metrics, the following sectors are expected to see strong growth post-pandemic:

Consumer goods

The consumer goods sector comprises home care, personal care and apparel. For the six biggest economies in SEA, the consumer goods market is forecasted to grow at 9.06% in 2020-2025, and is expected to be valued over US$107b by 2025[3].

Shift in consumer purchase patterns, support from government institutions, economic integration toward a digital infrastructure is improving the overall feasibility the sector’s expansion in SEA. Supply chain resilience and reliance on multiple sources of supply are giving rise to significant opportunities.

Further, consumers are now moving toward convenient, personalized and sustainably sourced products that can simplify everyday living, and consumers are increasingly willing to pay a premium for these products. The emergence of super apps across SEA has also altered how people engage and purchase within the apps, bringing significant growth opportunities for the sector.

Health care equipment

The health care equipment market in SEA is expected to see a compound annual growth rate (CAGR) of 10.2% in 2020-2025[4].

In particular, Singapore is among the fastest-growing innovative production hubs of this sector. Favorable business environment, strong intellectual property laws, expansive research network and incentives provide conducive reasons for companies pursuing new opportunities in the country and region.

Further, the SEA region is enjoying strong growth in telehealth, digital therapeutics, diagnostics, remote patient monitoring and analytics, all of which can help to drive growth opportunities in this sector.

Electronic manufacturing services (EMS)

Globally, the EMS sector is forecasted to grow at a CAGR of 5%. In SEA, opportunities are opening up as well, as entities seek to develop more resilient supply chains networks and expand into the region. Notably, six of the world’s top 10 EMS companies are present in Singapore.

Governments are also seeking to attract EMS companies into the region. For example, in Singapore, under its Research, Innovation and Enterprise (RIE) 2020 plan, the government plans to invest US$3.3b in advanced manufacturing and engineering R&D[5].

Agritech

With an increasing focus on healthy food options and sustainability, the agritech sector is growing at a rapid pace in SEA.

The biggest driver for innovation in agritech in SEA is Singapore, which currently imports 90% of its food. The Singapore government has allotted US$21m in support of its “30 by 30” target, with the aim to have 30% of Singapore’s food produced locally by 2030. SEA received approximately US$700m of investments in 2020 in this sector, with the majority going into Singapore[6].

Opportunities to reimagine supply chain

The pandemic has exposed the fragility and inherent inefficiencies of traditional supply chains, with industries caught off guard and routine operations impacted.

The just-in-time (JIT) methodology that many companies relied on for supply chain was developed in the 1970s, and it was designed to optimize the supply chain through reduction of inventory and work processes. However, many industries today have complex supply chains, and face significant pressure to achieve cost advantage by sourcing materials and conducting value addition activities across multiple geographies, making unfettered interconnectivity the primary key to success.

There are four major shifts expected to impact the traditional supply chain:

• Acceleration of online retail penetration in next five years: With distancing measures and the pandemic transforming gradually into an endemic, online retail penetration will continue to accelerate. Estimates indicate that online retail in SEA will reach US$53b by 2023[7].

• Shifting and expansion of new business models: There are new developments in how products and services are presented to and consumed by consumers. An example is the development of community platforms, which enable multichannel engagement directly with consumers through gamification and personalization.

•Supply chains will become complex and agile: Combining physical shopfront, online and mobile app presence that companies use to better connect with customers, the omnichannel outreach also means companies may need to leverage predictive and demand forecasting capabilities to improve merchandise planning and product development.

• Supply chain optimization will become an important driver in decision-making: Supply chain strategy will shift from focusing only on traditional costs like logistics and warehousing, to include the impact of lost sales, inventory holding and obsolescence costs.

The dependence on a single source of supply enhances reliability, but hampers flexibility. With the pandemic, companies have been forced to identify alternative, lower-risk and local suppliers for diversification. Additionally, proximity to consumers would result in faster time-tomarket, lower logistics costs and provide companies higher flexibility to adapt to local demand.

Further, global trade tensions have indicated that the political landscape may face heightened uncertainty and challenges in the decade ahead. With SEA nations now being increasingly seen as low-cost manufacturing hubs, there provides a key opportunity for companies to diversify and develop a resilient supply chain while reducing overheads in the long run.

For this, the requisites of a resilient supply chain include:

• Speed: Customers expect their suppliers to anticipate their needs. With the pace of change, supply chains must be able to turn on a dime to match fast-changing customer preferences.

• From linear to a digitally networked value chain: Although most companies are evolving from a linear supply chain, only approximately 25% consider themselves digitally networked or autonomous. Supply chains are moving to become a networked ecosystem where all data is in the cloud, and any event can be seen and acted on by players across the value chain simultaneously.

• Supply chain investment priorities: A key goal is to adopt and pilot emerging technologies with scale in mind — not as an afterthought. Traditionally, supply chains were viewed as a cost center. However, going forward, decision-makers should see their supply chain as a way to effectively compete in the marketplace and steer strategy.

• Overcoming talent shortage: People are the backbone of an entity, and as industry transforms, so must the talent that drives it. Supply chain leaders need to drive the vision and rethink ways of working to attract and retain the right talent. The workforce must transform as the supply chain reinvents through retraining, recruiting and retention.

Further, supply chains of the future should be redesigned with responsiveness, reconfiguration and resilience in mind. In responsiveness, it is important to note that 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 real-time updates on these inputs by upgrading from legacy systems.

In reconfiguration, diversifying one’s supply chain is not as simple as building additional plants in other jurisdictions. Instead, it involves redesigning functions in the system to be more plug-and-play. For example, in extreme events such as flooding, can certain business functions like procurement and finance continue their operations from other less affected locations? What are the necessary changes to enable that?

In resilience, companies need to think bigger and be prepared to build resiliency from the ground up, starting with organization structure, business processes and performance metrics to futureproof against the next disruptive event. There is no “one-size-fits-all” for what this looks like, as every business is different.

Incorporating digital capabilities to enhance supply chain

As corporate executives seek to reframe their businesses for the post-pandemic era, they should also be looking for opportunities to integrate digital capabilities to generate financial value and prioritize the development of a transformational culture in their organizations.

Development of smart factories, supply chain control towers, and supply chain intelligence platforms (SCIPs) can create end-to-end visibility through the collection of accurate cloud data to support real-time decisions for all ecosystem partners. The improvement in infrastructure shall add additional stimulus for development.

Notably, successful organizations are transforming their internal culture from one of “digital also” to that of “digital first.”

What to consider in a fit-for-future supply chain strategy

Multinational companies have traditionally leveraged economies of scale, standardization and centralization to drive efficiencies. However, this strategy is not always fit for purpose for a diverse SEA market. Language, culture, geographic landscape, regulatory and tax regimes, economic maturity and a fragmented consumer base all challenge the replication of such global models to SEA.

Further, companies are increasingly moving away from heavily centralized, co-located operating models to hybrid structures, which allow better management of regional differences and balance growth, cost and agility objectives.

In addition, the pandemic has challenged the notion that co-location is required, with virtual centralization likely more prevalent going forward.

As companies thinking their tailored regional supply chain strategies for the future, there are eight critical factors that they must consider:

1. Customer collaboration and order fulfilment: Covering inventory, warehousing, logistics and last-mile delivery planning to meet consumer expectations for quick delivery and prompt return services.

2. Regional trade and tax value chain optimization: Having an ideal positioning between jurisdictions to optimize total cost-to-serve associated with procuring, manufacturing, importing, transporting, distributing and selling goods.

3. Footprint, assets and investments: Possessing the right level of geographic decentralization attained to serve high-growth markets at compelling costs.

4. Supply chain visibility, intelligence and traceability: Having a well-integrated supply chain with minimum interruption and maximum collaboration.

5. Product innovation: Having the right balance between product standardization and product tailoring to country-specific requirements and at what stage of supply chain.

6. Supply chain resiliency and sustainability at different stages: Reducing dependence on narrow set of global vendors and increased reliance on local sourcing at competitive prices.

7. Workforce restructuring and upskilling: A workforce not only technically competent, but also equipped with strategic thinking and problem-solving capabilities at different stages.

8. Digital enablement: Bringing to life the various principles of Industry 4.0 and provide much-needed boost to manufacturing efficiency and flexibility, labor productivity and safety at workplace.

While considering the above factors, companies should adopt a step-by-step approach to shape their regional supply chain strategies. The strategy should be defined in sync with short, medium and long-term business goals and objectives; nuances of various business segments defined by geographies, products and channels; robustness of current supply chain and potential gaps while scaling up the business and eventually take a segmented approach for different business segments to develop the supply chain strategy for SEA.

Companies can shape manufacturing and supply chain capabilities in SEA into a competitive advantage by investing in custom-fit models optimized for business needs. This also depends on where businesses are at across the three dimensions of asset ownership, consolidation and digitalization.

SEA the desired region for expansion of manufacturing and supply chain capabilities

Amid global geopolitical tensions, changing business landscape and evolving demographics and consumer preferences, SEA is fast becoming a key investment location for global companies. In particular, the manufacturing sector – especially the consumer goods, health care equipment, electronic manufacturing services and agritech segments – shows strong growth potential.

However, beyond establishing a strong production base, another key consideration to ensure that smooth operations would be a fit-for-future supply chain that incorporates digital technology to support the organization even through unexpected disruptions. SEA – sitting in the crossroads of Europe, Asia and the US – is well placed for companies looking to reimagine their supply chain.

And as companies around the world are looking to recover from the pandemic, there’s no better time to embark on their manufacturing expansion and supply chain reimagination plans than now.

*The views in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.