Many companies have looked to Asia for product sourcing in the pursuit for lower costs. Even countries with underdeveloped logistics industries and lagging infrastructure can benefit from the advances of global players. Here is an overview of some of the movers and shakers in Asia.
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In the globalized business world, there are factors more important than price, and companies that understand the global supply chain function will have greater chances to be global players. To that end, many companies have looked to Asia for product sourcing. Of course, Asia Pacific is a massive region, and the state of logistics services and infrastructure across the region is extremely varied.
As such, companies considering locations in Asia for supply chain processes should know what they’re getting themselves in to. The following is an overview of World Trade magazine writer Andrea MacDonald’s realistic assessment of some of the movers and shakers throughout the Asian nation.
China’s gross domestic product (GDP) is rapidly approaching US$3 trillion, making it one of the world’s largest economies with a growing and unsaturated market demand for pretty much everything. In effect, it is the world’s factory floor. It is a low-cost manufacturing center for the global economy in both labor and land, on par with perhaps no other country in the world and definitely not any other country in Asia. Its pricing is competitive, and the skills of its workers and the quality of its product have improved recently.
On the other hand, its consumption is as exceptional as its production. China is a vast consumer for imported products, due in no small part to its thriving middle class: 250-350 million people with unprecedented demand for foreign products, ranging from raw materials to consumer goods.
As far as challenges go, China remains a one-party Communist government, so politics and the economy are particularly interrelated in China. Before investing there, businesses need to consider what it will mean to their company if issues such as human rights, terrorism, arms sales and the U.S. trade deficit begin to have a negative impact. Moreover, there is the major issue of China’s currency, which currently is appreciating by about two percent, but in the past year appreciated 3 percent to 4 percent after an official adjustment of 2.1 percent in 2005, still too slow for some economists.
Finally, China has substantial infrastructure challenges, and any company seriously considering doing business there should closely inspect the structural conditions for impact on its business.
Even with the knowledge of the importance of China as part of a strategic business plan, Europe and the U.S. are lagging behind their Asian counterparts in their plans for the Chinese market, according to business leaders, government officials, leading academics and futurists from across 60 countries who participated in a survey entitled, “The Future of China’s Economy, The Path to 2020 — Opportunities, Challenges and Uncertainties”. (IndustryWeek provides highlights)
See also: China Supply Chain Council
Driven by the emergence of a vast domestic market and relatively low-cost workers with advanced technical skills, increasingly more companies are setting up operations in India. India is like the world’s back office — its contributions to global business include doing things from fixing software glitches to chasing down credit card debt. Yet while its services sector may be red hot, India’s potential manufacturing renaissance is still in its early stages.
And it is already clear that it will look very different from China and East Asia. India’s literacy rates lag East Asia’s, and average unskilled labor productivity in India is lower than in China or Vietnam. However, there are many instances where average productivity is much higher due to superior management practices.
Restrictive labor laws make India a poor choice for larger, labor-intensive industries. But, according to Knowledge@Wharton, “a clutch of competitive Indian manufacturing companies — many of them in the automobile industry — have inserted themselves into the global supply chain”: making generator caps for General Motors; manufacturing data storage media such as CDs and DVDs; and about 60 plants that meet the stringent quality standards of the U.S. Food and Drug Administration (the largest number outside the U.S. itself) opening new markets around the globe.
See also: India Supply Chain Council
Foreign investment in Indonesia has never fully rebounded since the collapse of the Asian markets in 1997, and a corrupt bureaucratic and legal system has hindered growth. Yet things appear to be changing.
Companies are once again looking to invest in Indonesia, particularly due to the low labor rates in the country. Last November, the new president asked foreign investors to pump US$22 billion into the country’s infrastructure. Many shippers are trying to avoid shipping direct from Indonesia to the U.S., as the export permit process is challenging and expensive.
Although political stability is improving, concerns with the government remain; there are variances between the national and local governments, which can cause difficulties for shippers. Likewise, there remain concerns with the legal system, particularly as it relates to intellectual property (IP); if it’s a high-end, information technology (IT) product with lots of margin, then you may need to be more careful about where you choose to go.
Then there are the pirates; not the swashbuckling Johnny Depp kind, but the critical shipping kind.
Piracy has been a problem for decades in the Malacca Straits, a busy shipping channel between Indonesia, Malaysia and Singapore. However, worldwide piracy attacks in 2006 fell for the third year in a row, according to the latest annual report from the International Maritime Bureau, whose experts, based at Kuala Lumpur’s Piracy Reporting Center, counted 239 pirate attacks last year — or roughly four each week. Improving technology, revived naval budgets in Indonesia after recovery from the Asian financial crisis, and international agreements on protection of shipping in the Strait of Malacca have combined to cut attacks in the Strait and Indonesian territorial waters by nearly two-thirds — from high points of 119 in 2002 and 149 in 2003 to last year’s 61. Experts Jane Chan and Joshua Ho at Singapore’s Rajaratnam School of International Studies found the downward trend continued late in 2006, according to the Progressive Policy Institute.
See also: Supply Chain Asia
Malaysia has earned a reputation as a steadily growing economy with well-thought-out development plans. The World Economic Forum’s Global Competitiveness Report 2006-2007 states that “Malaysia has one of the most efficient economies in the region.”
To run efficiently, the country has slowly developed and upgraded its infrastructure. For instance, the country boasts well-maintained highways linking major centers to seaports and airports. Moreover, it relies largely on its ports to support trade; in fact, 95 percent of the country’s trade is through Malaysia’s seven international ports, two of which have been rated among Asia’s 10 best seaports and terminal operators. Further, air cargo facilities are well developed in the five international airports.
Malaysian industry has been developing at a steady pace over the years, with the country having established a reputation as a significant manufacturing area, “somewhat on par with China,” World Trade magazine quotes David Lucyk, VP International Development, Mach 1, as having said. Like Vietnam, increased costs in the coastal areas of China have manufacturers looking to Malaysia as an alternative for locating facilities and operations.
Most industries in Malaysia are located in industrial estates or parks, or in the Free Industrial Zones (FIZs), which are export processing zones focused on serving export-oriented industries. Companies in FIZs are allowed duty-free imports of raw materials, components, parts, machinery and equipment required for the manufacturing process.
Malaysia is set on encouraging further development of the logistics sector, with incentives for companies to develop integrated logistics solutions across the entire supply chain.
See also: Supply Chain Asia
According to a report by the Logistics Institute Asia Pacific, Singapore’s supply chain management systems are among the most sophisticated in the world, with the focus now on providing total integrated logistics solutions for businesses operating in the region. In fact, the country aims to become the leading integrated logistics hub in Asia by 2010, says World Trade magazine.
Its role far exceeds its borders as a logistics hub for the Asia Pacific region — the country is already home to the world’s largest container port, connecting to 123 countries and more than 600 ports — for almost 6,000 multinational corporations in a number of sectors, including oil and gas, chemicals and, of course, electronics manufacturing, with almost 60 percent of these functioning as the regional headquarters.
The country is known as the key hub in the development of innovative technological applications and platforms for logistics, as well as developing talent and knowledge leadership specialized in logistics, notes Schenker Singapore managing director Charlie Kok in World Trade. Unlike some other countries in the region, Singapore has strict IP standards and policies in place to protect the rights of companies conducting research and development (R&D).
… is “a market in flux.” Since the fall of 2006 saw a military coup overthrow the former government of Thaksin Shinawatra amid allegations of corruption, the new government initiated a monetary policy that placed some capital controls on the Thai currency (the baht), followed earlier last month by changes to the Foreign Business Act (FBA) that tightened the rules of foreign business ownership.
There are privileges for factories and operations that operate within sectors or regions identified by the Board of Investment (BOI) or within the country’s Free Trade Zones. While shippers dealing with global providers have access to traditional value-added services, local providers tend to specialize in niche areas such as transportation, customs clearance and “no-frills” warehousing.
Overall, Thailand’s infrastructure is reasonably good. Although the country’s new International Airport, which opened last September, was equipped with modern technology to attract more shipments, the facility has seen its fair share of structural and design problems. This could be a problem for goods coming in and out of the country as shippers are required to use two airports — one to move goods domestically and another to ship them out internationally.
One of the fastest-growing economies in Asia, Vietnam is now considered the low-cost alternative for manufacturers struggling with China’s rising costs. The economy is projected to grow by approximately 8 percent annually over the next decade. World Trade magazine reports:
The country has been undergoing economic reforms since 1986, culminating this year with Vietnam’s accession to the World Trade Organization (WTO). Critical to this continued economic expansion is the further development of transportation and logistics services While exports from Vietnam to North America have increased over the last five years, its export market is still largely dominated by Intra-Asian trade.
Moreover, although growth has been impressive, the nonexistent or crumbling infrastructure threatens to put constraints on development.
A recent report from Frost & Sullivan and global container shipping and logistics group Neptune Orient Lines (NOL) and its subsidiaries states that the container growth over the last 10 years has been about 19 percent annually, leading to concerns over congestion at the ports. Airports are also operating at or near capacity, according to the report. As for other transport, 19 percent of Vietnam’s roads are paved, and, in 2006, a huge corruption scandal was uncovered in the country’s Ministry of Transportation, adding significant delays to highway construction already underway.
The logistics system in Vietnam, says APL, is very immature. Because the logistics network has been developed haphazardly, total logistics costs in Vietnam average between 15 percent to 20 percent of GDP — nearly double the rate of developed nations. The lack of infrastructure and facilities is “hampering the growth of efficient logistics practices in the country,” states the report.
The logistics landscape is expected to improve as more international operators become involved through investment and joint ventures. Changes are already underway. For instance, the country has seen a sharp increase in involvement by supply chain companies since officially becoming a WTO member.
Transporting goods between Asia and the rest of the world, including North America, is far easier than it once was. Even countries with underdeveloped logistics industries and lagging infrastructure can benefit from the advances of other players.
“Vietnam Transportation and Logistics: Challenges and Opportunities”
Frost & Sullivan and Neptune Orient Lines, Jan. 25, 2007
Global Competitiveness Report 2006-2007
World Economic Forum, Sept. 26, 2006
Source: Thomas Publishing