Understanding Supply Chains 2023

Outlook for friend-shoring in Southeast Asia is mixed, experts say. Many companies are considering shifting some supply chains to Southeast Asia as a hedge against disruption. But will they do it?
by Sonni Efron, National Press Foundation

Many multinationals might like to shift at least part of their operations out of China, and Southeast Asian nations are trying to attract their business. “Friend-shoring,” also called “near-shoring” and “ally-shoring,” are the trending terms for companies moving at least part of their manufacturing, processing or sourcing raw materials out of China into nations that are seen as more friendly or stable. The Asia-Pacific nations are eager to expand these relationships but are not a perfect substitute for China, which remains the manufacturing superstar in the region. Multinational companies already have production bases in Thailand’s eastern seaboard, the Malaysian peninsula and increasingly now in Vietnam and Indonesia Harrison, said Harrison Cheng, associate director of Control Risk, a global consultancy firm. Advantages include the strategic geographical location of Southeast Asia, proximity to large markets like China and India, government investment in infrastructure and the pro-free trade orientation of the governments, Cheng said.

The 12 Asian Pacific Economic Cooperation (APEC) nations are particularly eager to expand trade. Supply chains have not yet fully recovered from the triple shock of the pandemic, U.S.-China trade war, and Beijing’s zero-covid policy, said Carlos Kuriyama, senior policy analyst at APEC. Market prices for moving a 40-foot-equivalent container (TEU) are still four times higher than before the pandemic, Kuriyama said, and the average delay of a vessel, about 4.75 days before the pandemic, is now about six or 7 days, he said. At beginning of the pandemic, the average delay was about 4.75 days. “There are still issues with supply chain, connectivity issues, knowing of vessels, knowing of container capacity” – and rising inflation. “Demand is recovering faster than supply,” Kuriyama said.

Companies are eager to expand resilience, the ability to weather shocks and pivot in the face of disruption and accept that this comes at the cost of lower efficiency. “They are also moving from what we call the “just-in-time model” to “just-in-case” inventory management,” Kuriyama said, including having additional precautionary stocks, building redundancies and diversifying suppliers. APEC is working on several measures to improve trade and supply chain efficiencies, he said. But the shift out of China could take five to 10 years, he said.

But many companies are not keen to pull out of China entirely, as they will continue to serve the Chinese market. Despite the rhetoric about China’s exit, Control Risk thinks only 10% to 20% of production might actually shift out of China, said Harrison Cheng, associate director of Control Risk’s Singapore office.” Actually, we’re getting market entry work for China, at this point, when so much rhetoric is about, “Oh, we have to leave China right now.” That’s not happening. And they’re still going to base most of their production in China. At least that’s my take without that crystal ball. They’re still going to base a lot of their production in China because that’s where the labor force is.” The Southeast Asian nations’ labor force is not as skilled as China’s, and allegations of forced labor and environmental violations deter some investors, particularly from the EU.

Southeast Asian countries will not want to adopt policies that might deter investors from any nation. “They are going to capitalize on the rhetoric to attract [foreign direct investment],” Harison said. They’re not going to give up on the opportunity. But to what extent are they going to exclusively enable access for companies from a certain country simply because of their strategic relationship between the two? Unlikely. They are not doing it right now, even as Indonesia welcomes US and Australian companies and they’re setting up joint ventures with Chinese companies in nickel mining. They’re not going to disadvantage investors. And so, they’re going to be friends to all.”

Speakers: Carlos Kuriyama, Senior Policy Analyst, Asia-Pacific Economic Cooperation
Harrison Cheng, Associate Director, Control Risks

National Press Foundation’s International Trade Fellowship in Singapore is sponsored by the Hinrich Foundation. NPF is solely responsible for the content.