The comments follow widespread commentary about supply chains shifting to South-east Asia because of the region's growing economies and consumer markets, especially with trade tensions and rising production costs affecting other markets. Despite the speculation, there has been little evidence of a wide-scale shift occurring to date.
Kelvin Tan, Chief Executive Officer, HSBC Thailand said: "The changes in global trade are causing businesses to re-visit their supply chain investment and capacity strategies, but we are yet to see this convert into wide-scale shifts to South-east Asia, South Asia or other parts of the world."
Rather than see a wide-scale shift to ASEAN, due to trade tensions, multinationals are diverging in their supply chain strategies with a mixture of localization, offshoring and re-shoring activity emerging.
Recent examples include:
- Japanese firm, Toyo Tires and Rubber, is budgeting more than US$187 million for expansion of plants in the US and Malaysia
- Guizhou Tyres – based in China – has expanded plans for its previously announced tyre plant in Vietnam increasing the budget investment to nearly $500 million.
- Elsewhere, there are instances of western companies, such as Intel, Whirlpool and Catepillar re-shoring to be closer to home markets and higher-end technology.
- Across Euope, firms like British manufacturer, Dyson, are forging ahead with South-east Asian investment to cater for the local consumer market whilst retaining existing production facilities for exports elsewhere.
- In semi-conductors, net FDI into SEA rose 18% in the first half of 2018 from a year ago. The biggest beneficiaries were Thailand and Philippines. Some examples include Delta Electronics made a $2.1 billion buyout offer to its Thai affiliate Delta Electronics, New Kinpo to open new factories in Philippines, Hysoung Corp is investing $1.2 billion in a polypropylene production project.
Mr Tan continued: "Shifts in supply chains have been a multi-year phenomenon due to structural changes in production technology, labour costs and emerging consumer markets. Over the past decade, ASEAN has been perceived as a strong production option for multinationals given its role within existing supply chains, growing consumer base, and strong trade and investment ties."
"Businesses from China, Europe and the US want to see South-east Asia, and Thailand in particular, further position itself as a viable alternative for lower-end production, and initiatives - like 'Belt and Road' - are further accelerating the region's production capacity. However, to convert its much-touted supply chain potential, South-east Asia needs to build more visibility and credibility amongst international firms, particularly in their ability to handle and deliver production orders."
The hot buttons that will matter for both large and small firms include how ASEAN can deliver competitive production costs, and how technology and innovation are being introduced to improve productivity. It will also come down to the relationship factor and whether businesses feel confident that orders will be serviced on time and on budget.
At a government level, this will require educating international firms about the regulatory frameworks, tax incentives, and free trade zones, along with demonstrating the improvements in ports and rail and other transport infrastructure.
It will also require ASEAN governments to demonstrate a pathway to longer-term initiatives to remove the non-tariff barriers around the flow of goods across ASEAN, the development of skilled labour; and the protection of IP, cybersecurity, and movement of commercial data across borders.
Areas of specific focus to improve intra-ASEAN trade flow include:
- Improvement in ASEAN's transport infrastructure including roads, rail and ports
- Policies that raise the level of technological adoption
- Increasing skilled labour and the flow of skilled labour
- Increase the minimum threshold for goods that would require a Certificate of Origin
- Establishing automation of customs clearance across all ASEAN member states
- Introduce simplified and expedited clearances for low-value shipments
- Introduce electronic system for the payment of cross-border duties and taxes
- Harmonising of goods standards across sectors amongst ASEAN members to avoid country-specific standards.
- Policies that encourage the cross-border sharing of commercial data
- Link up each of the ASEAN countries' payment systems to make payments convenient, affordable, fast, seamless and secure.
Reducing supply chain barriers of this nature could increase South-east Asia's gross domestic product by 9.3 per cent and exports by 12.1 per cent, according to the World Economic Forum.
Mr Tan concluded: "While trade relations between Thailand and the world's major economies, like China, have generally been positive and steadily growing, there is a lot of ground still to cover within ASEAN's backyard to further improve the intra-regional flow of trade and investment. Agility and responsiveness to these challenges by ASEAN governments and corporates will determine whether the region's supply chain potential can be realised amongst international firms who are re-examining their options."