Asean countries and businesses have implemented strategies to diversify and enhance the supply chains resilience. — Reuters
IN recent years, the landscape of global and regional supply chains is constantly evolving and transforming, necessitating businesses and industries to strengthen their immune systems (supply chains) to mitigate the risks of multiple challenges and threats amid opportunities.
From the Covid-19 pandemic-inflicted severe disruptions to geopolitical fragmentation, rising political pressures to deglobalise, economic uncertainty, the rise of digital technologies, the growing emphasis on sustainability, and unprecedented trade turbulence due to the Trump’s Liberation Day tariffs, they highlighted the vulnerabilities inherent in a complex and interconnected global supply chains.
The shifting of global supply chains has begun with a notable shift toward reshoring and nearshoring production closer to home and consumer markets.
During the US-China trade conflicts in 2018, manufacturers and businesses have indulged in the diversification of supply chain strategies to adjust suppliers and transshipment to avoid tariffs.
The China+1 strategy has become one of the most prominent strategies whereby manufacturing companies expanded their operations outside China’s borders to manage and mitigate supply chain risks.
Businesses are strategising and consolidating their trusted suppliers and networks to ensure supply chain resilience and cost savings.
Companies have moved part of their operations, leveraging on opportunities in alternative locations where labour and production costs are more competitive such as South-East Asia.
Vietnam, Indonesia, Thailand and Malaysia have benefitted from the shift in supply chains.
Reshaped by geoeconomic globalisation, economic nationalism for national security, and the US’ stepping up pressure in implementing strategic decoupling from China in strategic industries such as technology, semiconductor, pharmaceuticals, iron and steel, and critical minerals, global supply chains reconfiguration is likely to accelerate going forward.
With the strategic decoupling pressures growing, the supply chains bifurcation will increase as companies create separate supply chains to navigate trade barriers, and reduce dependence on single suppliers or regions, thereby minimising disruptions and costs.
This can lead to a global marketplace where some products are produced by duplicate supply chains, one catering to specific markets or regions with restrictions and another for the global market in the face of geopolitical disruptions.
The semiconductor supply chain is indeed a prominent and complex industry that gears towards a bifurcation of global trade, leading to the US and China pursue their respective semiconductor ecosystems so that they can control the supply chains.
If Trump succeeded in using the weaponisation of reciprocal tariffs or sector specific tariffs targeting countries that are considered as “close allies” with China, any geographical reconfiguration of supply chains to circumvent the tariffs will render the relocation ineffective.
The diverging US-centric and China-centric supply chains could force governments into making difficult strategic choices, potentially leading to trade fragmentation, often motivated by geopolitical and strategic considerations, as well as domestic economic objectives.
The push-and-pull between these two systems could create a complex environment where governments must balance their economic interests, national security concerns, and forming strategic partnerships.
Aligning closely with either power risks alienating the other; trying to balance both sides may expose industries to trade barriers, technology conflicts, financing constraints or diplomatic spats.
Another trend is the expansion of regional localisation in the semiconductor supply chains within East Asia and South-East Asia to reduce dependency on foreign sources for greater supply chain resilience.
While supply chains are being reconfigured towards more resilient and geographically diverse, a complete decoupling from the US and China is not possible and disruptive, meaning that these supply chains in the region cannot operate without China or the US.
Global and regional supply chains remain interconnected, with China still being a major player in the core structure of the global web of manufacturing supply chains and trade.
It is challenging and costly to remove China from global production processes and replicate elsewhere, given China’s scalable, capabilities and technology-driven manufacturing ecosystem.
There remains cost-efficient and economies of scale consideration. When policy distortions drive the creation of multiple supply chains, it leads to inefficiencies and higher prices due to the compromising of economies of scale and misallocation of resources.
Diversifying supply chains is a complex process which requires consideration of other factors in addition to cost.
These are conducive place for doing business, fair and transparent governance, credible economic policies, political stability, and effective dispute resolution mechanisms.
The global supply chain continues to evolve rapidly, and Asean remains a prominence player in this shift, with individual countries specialising in certain sectors.
Malaysia, Indonesia, Thailand and Vietnam, being manufacturing hubs and major trading partners of China and the US are strategically positioned themselves to benefit from global supply chains reconfiguration while navigating geopolitical pressures and strategic economic rivalries between these two major powers.
Asean countries benefit from the reconfiguration of the global supply chain by leveraging their specialised capabilities in certain sectors. Malaysia is a major hub for semiconductor assembly, packaging and testing.
Under the New Industrial Master Plan (NIMP), the government is confident that Malaysia’s semiconductor industry has the potential to expand its value chain into the front-end segment.
Meanwhile, Singapore is a preferred location for semiconductor companies, with investments in new chip factories and expansions of existing facilities.
For example, STMicroelectronics partnered with A*STAR to establish a leading-edge R&D line in its Singapore manufacturing facility.
Vietnam and Cambodia are known for electronics manufacturing, particularly consumer electronics. Indonesia is rapidly emerging as a potential global hub for electric vehicle (EV) production, particularly focusing on EV batteries and other related component.
Thailand is a leading automotive manufacturing centre in South-East Asia.
Regional free trade pacts such as the Asean Free Trade Area, Regional Comprehensive Economic Partnership – the world’s largest trade blocs, and Asean-China Free Trade Area as well as the free trade agreement with the European Union, India and the US allow Asean countries tapping into integrated supply chains and could accelerate near-shoring and reshoring to South-East Asia.
This will be powered by investments in the electronics manufacturing industries, AI, data centres, EVs, EV batteries, green industries, biomedical and pharmaceuticals.
Asean must prioritise policies that enhance its supply chain resilience and efficiency through strengthening transportation and connectivity infrastructure, fostering technological advancements, including digitalisation, and supporting the growth of logistics services providers, particularly for micro, small, and medium-sized enterprises (MSMEs) to see a wide-scale divergence of supply chains moving to the region.
Forging mutually beneficial cooperation and partnerships among Asean countries allow businesses in member states to collaborate, share resources and create a more efficient and resilient regional supply chain.
Asean’s commitment to digitalisation is evident through initiatives like the Asean Single Window, which streamlines trade by integrating National Single Windows.
This regional platform facilitates electronic exchanges of trade documents and data, accelerating cargo clearance and reducing costs for businesses.
As Asean’s chair, Malaysia is also actively engaged in the Asean Digital Economy Framework Agreement, which will open new opportunities for regional investments, enhance market access, streamline supply chains and harmonise digital regulations across Asean.
In the ever-evolving and complexities of today’s global supply chains, governments and businesses must adapt, innovate, embrace strategies and leverage advanced technologies to thrive in this new era.
Asean’s high trade and investment reliance on China and the US as well as having both China and the US as Asean’s key source of technology transfers will place it on a tight spot to navigate growing political pressures and economic disruptions if the US-China supply chain decoupling intensifies.
Asean countries and businesses have implemented strategies to diversify and enhance the supply chains resilience through near-shoring and reshoring investment, increasing self-reliance through localisation and import substitution.
The adoption of “China Plus One” or “China Plus Two or Three” model to broaden their supply chain, not depending on one or two countries, or even just Asia.
Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own.
