by Jonathan Wright, Asia-Pacific Advisory Center Leader Ernst & Young Advisory Pte. Ltd.;
Kimjin Gan, Asia-Pacific Operating Model Effectiveness Leader, Partner, Advisory, Ernst & Young Advisory Pte. Ltd.;
and Paul Griffiths, Partner, Tax, Asia-Pacific Tax Center Ernst & Young Solutions LLP
Thirty years ago, setting up an Asian supply chain was a relatively simple matter. Many multinationals began their Asia Pacific adventure by shipping product from western factories to supply local agents or distributors and watching local consumers rush to buy their brands.
Wind forward to 2016 and supply chains in Asia Pacific have evolved almost beyond recognition. Volumes and complexity have increased multi-fold as the region becomes a source of growth with local manufacture commonplace.
More than ever, as companies pivot, they need to weigh a host of options when deciding how best to serve what many consider the world’s most exciting markets. Decisions on assets (i.e., where to locate plants and warehouses) and flows (i.e., how to move product around) have become complex. The challenge is now to build capabilities in high performing teams that will execute the strategy in an increasingly volatile, uncertain, complex and ambiguous region. Let’s start with geography. From India in the west to Japan in the east, from China in the north to New Zealand in the south, Asia Pacific is enormous and diverse in topography, climate and culture. It is geographically fragmented – Indonesia alone has close to 18,000 islands. A centre of gravity analysis will place you in the middle of the South China Sea. Though Japan and Korea – and increasingly China – have notably efficient transport networks, most companies move product around the region by sea, and coastal locations have historically been vital to achieve efficiency when supply chains extend across borders. The role of supply chains is to establish the multiple complex channels required to reach the consumer as efficiently as possible.
Catering to Asian cultures
Markets are huge but diverse. Consumers are increasingly wealthy and sophisticated, and in some cities, better off than the west. Western brands no longer automatically command pride of place. Rather, companies have to discover local tastes, develop products to please them, then underpin this with efficient manufacture and distribution. The major competitor in most categories is typically a local player. Making decisions will require supply chain executives to analyse complex data sets and make sense of what is happening across heterogeneous volatile markets.
Stories of Asian differences are legion. Consider sales of top-end models by western car companies in China. Smarter auto assemblers make long wheelbase models for the Chinese market, catering to a culture in which the son or son-inlaw is expected to act as chauffeur to his parents or in-laws, necessitating cars that have ample space in the back. Or look at the western manufacturers of cereals, of which their product range caters for breakfast as a cold meal but are now confronted with cultures where soup and noodles are breakfast staples.
Increasingly numerous and prosperous, Asian consumers are becoming ever more discriminating. Supply chain executives now need to deliver affordable goods while maximising on-shelf availability of a wide range of products. It is not an easy balancing act.
The overhaul of supply chains now underway begins with the recognition that companies – especially of consumer products – often need to identify the cultural drivers of demand in particular Asian countries, and then research and develop in-country products that will command a local market. They need to understand the marketing importance of e-commerce in a region where many people have grown up with mobile phones and social media but may not have access to newspapers or own a car. Supply chain executives now need to think about their digital supply chains.
China, India and ASEAN too
In the meantime, China, the region’s locomotive economy, is rebalancing from an export-led infrastructure-based model to one driven by local demand and services, and a reform-minded government in India has rekindled growth in the world’s second most-populous super-state too.
So today, many of the most sophisticated multinationals in Asia are pursuing a triple supply chain expansion strategy. They increasingly see China as a self-contained market. Many take a similar view of India, where size, strong state governments and bureaucracy compound the challenges of poor communications. Third is the “rest of Asia” strategy, often centred upon the opportunities available among the countries of the Association of Southeast Asian Nations (ASEAN).
Tax is now an important factor in supply chain decision-making. In each of these regions, multinational companies face challenges in managing fiscal affairs, avoiding double taxation on profits earned in Asia as well as repatriating cash from countries where it is earned.
Within ASEAN it is sometimes easier to take a more integrated approach, though the advantages should not be exaggerated. ASEAN policymakers have set the goal of creating an ASEAN Economic Community (AEC) but tariffs often remain high for goods entering ASEAN member states that do not apply regional FTA duty rates. Customs procedures are often complex and lengthy; and non-tariff barriers, including regulatory obstructions, can be very tedious.
Goods moving around the region can often be delayed by customs procedures, especially when the principal has a head office in Singapore or Hong Kong, and the goods are passing between manufacturing sites elsewhere. Technology change and language can combine to create transit problems, because goods – labeled in English – may simply not conform to conventional product categories.
ASEAN officials are working on these problems, with plans for single-window documentation, but progress is slow. Meanwhile, the risk of challenge from customs officials can be high, and impounded product, improperly stored, may incur demurrage costs and sometimes have to be written off. The role of supply chain departments has now expanded: increased capabilities are required to manage free trade agreements, trade compliance and managing third party customs brokers.
Economic nationalism can also be problematic as countries strive to promote the development of particular industries, or protect some domestic industries from international competition. This means supply chain executives now also need to be aware of complex and ambiguous regulatory environments.
Some companies look to the newlyminted trade agreement, the Trans-Pacific Partnership (TPP), to erode trade barriers within the region. But neither China nor Indonesia, two of the most populous countries, are party to the USled agreement, which has yet to be ratified by signatories. It may be years before the benefits emerge. Supply chain executives need to build flexible agile networks.
Perhaps more important, in the short to medium term, is the global drive to stamp out transfer pricing abuses and corporate tax evasion. This is not necessarily bad for business in that more effective procedures to avoid double taxation may make tax treatments more uniform and predictable. However, there is some way to go to achieve this ultimate aim. In the long run, developments like these could considerably improve the investment and business climate in China and other Asia Pacific states.
The search by business for stability and sound, predictable governance and legal systems, balanced by the need to be closer to the market, has led to companies locating their regional headquarters and supply chain operations in hubs like Singapore and Hong Kong. Looking ahead, other states, such as Malaysia, Thailand and China that now offer appealing incentives and access to markets designed to draw in the headquarters operations of footloose multinationals may become increasingly attractive.
Today’s global supply chains are in the midst of reinvention. Supply chain executives now require new capabilities, for example to manage changes in free trade agreements, navigate oil prices that continues to be at historic lows, and ambiguous non-tariff barriers. Such new multifaceted decision-making is critical to enable businesses to keep up with the rapid changes affecting Asia Pacific supply chains.
About the Authors
Jonathan runs the Asia-Pacific Advisory Center and leads the Asia-Pacific Supply Chain and Operations practice. He has over 20 years of experience in business transformation, particularly in transforming global operations and supply chain functions. He sits on the World Economic Forum’s Global Agenda Council for Trade and Investment.
Kimjin leads the Operating Model Effectiveness practice across Asia-Pacific. He has extensive experience assisting multinationals to build profitable platforms for growth, which include building models for market access, leveraging scale from functional hubs, and establishing regional headquarters to optimise activities across a region.
Paul is a partner in the Asia-Pacific Tax Center, based in Singapore. He is part of the Operating Model Effectiveness team, focused on helping companies undertake business restructuring across the region. He has been working in Asia for five years.