As China turns from being the home of mass-produced goods to consumer market, and grapples with the US's expensive trade tariffs, manufacturers are moving production to its Asian neighbours. But upping operations to a new overseas market is not a simple process, as Kimberley Long reports.  

Asian Shuffle

China has ambitions to scale up its production capabilities, moving towards a more highly skilled labour force and greater levels of automation, removing the need for large-scale unskilled manual labour. Outlining 10-year plans as part of the Made in China 2025 initiative, premier Li Keqiang stated that he wants the country to move towards the production of finished electronic goods and pharmaceuticals.

The wider Chinese manufacturing sector is also looking into how it can overhaul its production methods. The upgrading of the workshop of the world: Can automation spur economic development in China? – a report published by Hong Kong University of Science and Technology in 2017 – explains how the Chinese government is pushing for the country’s manufacturers to increase the use of robotics to move up the value chain.

The move towards robotics has already begun, however. To combat years of economic decline as low-skilled textile and toy manufacturing moved away, the local government of industrial city Dongguan established the 'Replacing Humans with Robots' scheme, a Rmb200m ($29.17bn) programme to encourage automation. This saw the city produce 300 million mobile phones in 2017. It is forecasting gross domestic product growth of 8% over the coming five years.

Remapping manufacturing

Even as China moves to realise its ambitions, lower skilled manufacturing is still in demand. As China becomes more sophisticated, labour costs are going up, and the flows of the supply chains are seeking out cheaper locations.

Shifting to a new location is not as simple as finding the cheapest alternative, however. Taking into account infrastructure requirements, as well as the changes in currencies, and be made easier using new technology.

Elisabetta Gentile, an economist at the Asian Development Bank (ADB), says: “Moving a manufacturing location needs a labour force that is capable of the production demands. There needs to be the skill set. This is an issue that will likely increase in the future if there is not a move to modernise education practices to create a labour force that is flexible to changes.” Ms Gentile says the ADB has observed a trend of task relocation in the region, recording 17 million jobs being created in 12 Asian emerging market economies between 2005 and 2015. 

Moving a supply chain is not a simple thing to do, however. John Laurens, global head of transaction services at DBS, says: “It is difficult and costly to unpick and rearrange supply chains, so change will not happen overnight. Companies would have to first see clear sustainable benefits that are realisable before making a decision to relocate their operations.”

US tariffs

The moving of supply chains is not happening only because of the changing manufacturing base in China; geopolitics is also playing a part. Some companies are wary of the impact that the simmering trade war between China and the US could have on their businesses. Facing the prospect of tariffs on Chinese-made goods, this may cause companies to accelerate the moving of production to other countries in Asia.

This year has already seen US tariffs of 25% imposed on Chinese goods in July and August, and a further round is expected by the end of 2018. About $506bn of Chinese goods were sold in the US during 2017, so the impact of the tariffs could be huge.

Although the impact may not be felt overnight, many companies operating in China have shown that they are willing to move to another country. Lisa Robins, global head of transaction banking at Standard Chartered, says: “The geopolitical issues between China and the US will take time to play out. But at the present time we are seeing companies looking to move their production out of China and manufacture elsewhere in the region. This started before the trade wars surfaced – with companies seeking lower labour costs – but the focus has heightened.”

Fast turnover

The relocation of manufacturing within Asia is also happening due to demands surrounding the supply chain. “Supply chains are following the spider model, where pipelines are consolidating into one place for final assembly,” says Ms Gentile. “Under this model, production cannot be located too far from the final point of manufacturing to keep production both time- and cost-efficient. Even in the search for cheaper labour, chains can’t move too far. With this in mind, what facilitates the relocation comes down to logistics; there needs to be ports, roads and internet access.”

Having the production base close to the intended consumer market is also key for high-turnover products. Carmen Chan, regional head of financial supply chain, Asia, at Deutsche Bank, says: “The desire is still to have proximity to the selling location. As China moves from being a producer to a consumer, there is reluctance to leave Asia, as companies want the time to market and replenishment cycle to be as short as possible.”

As customers are increasingly able to contact companies directly online, businesses are finding they have to respond quickly to new requests or to make changes in the event of problems to keep customer loyalty. All of this requires keeping production flows close to home to reduce the amount of time it takes for products to hit the shelves.

Guruprasad Gaonkar, software as a service leader, office of finance, operations and digital supply chain at Oracle Asia-Pacific, says: “Companies are taking feedback from the market to improve their production flows. They want to create products that appeal to their customers, and this means being nimble in their supply chain.”

Having the infrastructure in place to get products moving quickly is also high on the list of priorities of companies moving off the Chinese mainland. And simply picking out a country because it has a large and cheap labour force is not always the solution, according to Ms Chan. “India has the possibility to be the next big market because of its population and land size. However, the country’s poor existing infrastructure makes it difficult to meet production demands,” she says.

External pressures

Choosing the base for a new manufacturing workforce requires stability in order to avoid unexpected costs. Again, this means that finding a low-wage economy is not necessarily the prime consideration. Ms Chan says: “Manufacturers want to work in countries with a reliable, predictable currency. The production cost is always a big consideration, and they are put off by fluctuations in foreign exchange.”

Ms Robins says co-operation between governments is a vital element: “Trade agreements are important and need to be user friendly to make them effective. There is heightened attention on trade agreements given the ongoing rhetoric but they are vital to trade and the expansion of supply chains.”

Working capital pressures also affect the decisions of a company, according to Ms Chan, especially for those that have been used to long payment terms. “Payments terms restrictions are a consideration. In managing working capital, the question is often: How long can a term be extended for?” she says. “This is often an issue for companies that have been operating in China, where terms can be up to 180 days. In other countries the expectation can be as little as 60 days.”

The right location

To find the best new location to house its production centres, China has shown that it is prepared to invest to get theses markets up to standard. Mr Laurens says: “China has contributed significantly to direct investment into the Association of South-east Asian Nations region, recording $3.5bn in 2016. Of this, close to 40%, or $1.3bn, went into Vietnam.”

Khanh Vu,  investment director at VinaCapital, backs the view that Vietnam has benefited considerably from overseas investment as an alternative manufacturing location to China. “The General Department of Vietnam Customs reported that Vietnamese exports were up 21% in 2017. The Foreign Investment Agency under the Ministry of Planning and Investment stated that foreign direct investment was up 44% last year. And wages are less than half of what they are in China. Vietnam is connected to the Asian supply chain, it is politically stable and poised for growth. The market risk is low,” he says.

However, Vietnam’s position as a location for low-cost, low-skilled manufacturing may itself be starting to shift. Mr Vu adds: “Vietnam is emerging as a producer of more high-quality, hi-tech products. There are a number of sporting goods being manufactured in the country. Samsung has moved half of its smartphone production to Vietnam. Apple is also looking to move some of its manufacturing there.”

Another advocate of Vietnam is Ms Robins, who says: “The country has a stable political system and a young, educated population. There is access to transportation by road and sea.”

Another important factor in where foreign investment lands in south-east Asia is the language skills of the native workforce. “Both the Philippines and Vietnam have seen business offshoring in their direction [because of the language skills found there],” says Ms Gentile. “The Philippines [in particular] has been able to leverage its English-speaking labour force.” 

Technology to the rescue?

Technology is playing a significant role in helping to move business overseas by tackling some of the aforementioned obstacles. Both established and emerging forms of technology are assisting in providing detailed information to meet the environmental and humanitarian concerns of the end consumer. Knowing where products are goes beyond just keeping a track of shipping and arrival dates.

Mr Gaonkar says: “Due to the scale of supply chain operations in Asia we do see specific trends emerging in technology. There is a lot of focus on data, and how to extract information on the traceability of the product. Consumers are more concerned about where their products are coming from and who made them.”

Mr Laurens adds that DBS’s clients are seeing mounting demand from their customers for sustainable products. “With increasing attention placed on environmental, social and governance [ESG] matters globally, the potential of blockchain in providing traceability and provenance of farmed or manufactured goods is becoming a hot topic. ESG objectives may well provide a breakthrough for the meaningful application of blockchain in supply chain management and finance,” he says.

However, Mr Gaonkar stresses that there is already a wealth of information available for tracking. “Data is being used to gain insights on fleet management and logistics. As well as moving production to another location, it needs to be worked out how these products will end up at the point of sale,” he says.

“Clients like to know where their products are when they are being shipped,” says Ms Robins. “They want to follow the products en route to market to better manage their working capital flows. This is where digital solutions are becoming an enabler. Across the region there has been interest in Swift’s gpi. India and China have both looked to blockchain.”

Following products as they make their way to their point of sale is part of the ADB’s next phase of its supply chain offering. The bank has been looking to collaborate with technology companies and banks on creating a system using blockchain that will enable the identification of each component of the supply chain. Using its own supply chain finance programme as the basis, the service is envisioned as allowing companies to track the location of each part as it travels.

In the clouds

The dream of making Asian supply chains digital hits a major obstacle because of the region’s infrastructure limitations. Ms Gentile believes that what China is trying to achieve is very different to the reality of some of its neighbours. “China is keen to increase its focus on automation and the use of robots. But these ambitions are in stark contrast to other countries that may be without reliable internet connections or mobile phone coverage in some areas,” she says.

Despite this, the use of mobile has been the first step in getting some locations connected to digitised supply chains. Ms Robins says: “We have seen the rise of mobile. This is bringing digital resources to emerging markets and the more remote regions. It is a step in the right direction, but it means that products being developed now need to have mobile capabilities.”

However, as developed markets expect a certain level of sophistication, this is pushing technology adoption to move faster. Ms Chan says: “Enterprise resource planning systems are becoming more popular, and there is a move towards cloud-based technology. The biggest issue is how to facilitate the wholesale move to these technologies.”

The use of mobile in Asia, both in business and in daily life, has made many consumers comfortable using digital systems, and has increased demand among them to be able to do business this way. “Our customers in south-east Asia want to use an online platform,” says Mr Gaonkar. “But the systems that are implemented have to be adaptable to the level of sophistication in each country.”

He believes that the emergence of cloud-based technology might be the next step on from mobile, saying: “Cloud is being looked at for efficiency. It is a cheaper option for managing the supply chain as there is no need for physical infrastructure. For the less developed countries it is an entry point into using sophisticated supply chain methods and tracking.”

The wider adoption of cloud solutions has been significant in allowing emerging markets to link directly into the digitised supply chain as it does not require the same level of digital infrastructure as traditional methods. It can create customised systems, where rather than purchasing all the elements of a product whether they are needed or not, the parts required can be cherry picked. Ms Robins says: “The use of technology allows for the unbundling of products. Customers can have more choice over what they need right now and what to add later if needed.”

“Cloud-based architecture has rewritten cost and scale rules for banks with such infrastructure,” says Mr Laurens. “Cloud not only accelerates deployment across markets, but also enables the rapid development of new products and services in response to companies’ needs. This includes a faster deployment of application programming interface [API]-based solutions.”

Having APIs in place is also helping to get money moving. Mr Laurens adds: “The combination of API connectivity and the rising prevalence of new real-time domestic payments systems are transforming the way companies make and receive payments. This also opens new doors to companies seeking a lower cost option to facilitate cross-border payments, potentially disrupting traditional cross-border wire payments.”

Bold ambition

The ambitions of the wider Asia region remain high when it comes to what can be achieved in the future through technology. Mr Laurens believes that the wide-scale adoption of blockchain will bring greater efficiency. “The potential for blockchain to dematerialise trade is evident. However, widespread adoption will need catalysts such as accepted standards and clarity of legal frameworks to produce a transformational network effect,” he says.

Making the available products more adaptable to cater for exact needs at a specific time is also part of the future ambitions. Mr Gaonkar says: “The next step in supply chain is how to create products that embed new innovation services such as blockchain and AI as a subscription service. There [has been some] exploration in how to make these products self-managing with as little manual intervention as possible.”

In the future, Mr Gaonkar believes there will be even greater developments that will further reduce the need for paper processing, and with it the significant time this can add to supply chain processes. “Supply chain is looking beyond just automation – it has its sights on drones and robotics. We’re seeing a level of service sophistication that is moving towards blockchain and smart contracts. Our goal is to give everyone continuous access to these new emerging services,” he says.

Technology that is still in its nascent phase could also have significant bearing on the supply chains of the future, according to Ms Robins. “Many companies want to keep production as close to market as they can," she says. "In the future this desire may promote the use of 3D printers. It would keep production close to consumers, but the resources to fabricate could come from anywhere. Also, spare parts could be produced faster.”

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