WHERE IT’S GOING
by Tim Foster, Managing Director of Asia Pacific, Chainalytics
The past decade has seen tremendous economic and cultural changes within Asia. Most striking has been China’s rapid acceleration away from low-cost production centre to a more diversified consumer-driven market, an evolution that has had a ripple effect throughout Asia and its trading partners around the globe. Understanding where China has been and where it is headed is critical to forecasting the viability and success of any supply chain operating within Asia and the Pacific region.
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China’s massive socioeconomic progress
Stark evolution in China’s culture is quite straightforward and comes as no surprise to most analysts. The past 10 years have marked a turning point as the country’s manufacturing labour pool entered its second generation of workers. With higher education, broader exposure to other markets and cultures, and a shifting desire to live in dense urban centres, this enlightened generation is severely hampering China’s access to its previously abundant, cheap labour. This labour pool is enjoying higher wages, quality of life, and is subsequently creating a domestic market that will thrive more on consumption than the production it has in the past. Rapidly adding additional complexity to China’s evolving consumer mix is a growing pool of rural Chinese consumers that are turning to e-commerce to satisfy their new shopping desires.
Slowly tilting towards a more service-centric economy, China’s citizens are beginning to use discretionary income to fund extracurriculars, lavish restaurant meals, luxury items, and financial investments.
Other pivotal changes that have affected Asian markets over the past decade include:
Expansion of suppliers, sourcing approaches, markets, channels and distribution networks
Responding to rising manufacturing costs in China, trading partners are developing new supply channels throughout the rest of Asia. Measures like the Trans-Pacific Partnership and heavy infrastructure investments in Asia’s emerging nations are providing these markets with a plethora of sourcing alternatives.
For its part, China is also engaging in an active outward expansion. Serving a dual purpose as it seeks to manufacture closer to consumers to cut inventory holding and transportation costs as a means to offset increased labour rates, the acquisition of offshore manufacturing facilities is opening new doors to serve markets locally while also giving Chinese companies exposure to a wider range of established best-in-class manufacturing practices.
In an effort to gain even more global influence, the Chinese government is also developing trade alliances internationally, through its Silk Road and Silk Maritime Route initiatives, as well as investmenting in foreign infrastructures, as seen in its bid to buy the Grecian port of Piraeus and infrastructure development in Cambodia.
Evolving intellectual prowess to meet new consumer and market demands
A decade ago, when its economy was a manufacturing pure play, China derived much value from gathering R&D and intellectual property (IP) from external foreign markets, licensing or pirating IP and then reverse engineering it to manufacture products more cost effectively internally.
In light of new economic developments, it is become clear that China must lessen it is reliance on low-cost manufacturing and continue to export in order to thrive, all while protecting its manufacturing stronghold. As such, China has been slowly shifting its strategy: Acquiring and owning IP— via top-notch Chinese educational institutions and incentivising multinational companies to establish R&D centers within China. This strategic move hedges China against production cost inflation all while investments in foreign infrastructure and offshore manufacturing only help China to further diversify, gain more economic strength and expand access to new and emerging markets.
The importance of enabling process innovation throughout asian value chains
For a market with such a diverse group of rapidly evolving consumers, changing preferences and demands for innovative products, agility throughout the total value chain is imperative to success.
In order to continue to enhance the customer experience, entire processes throughout supply chains will need to be reengineered to provide critical network-wide visibility. This requires a transformation of end-to-end supply chain planning, upgrading processes and increasing automation to supply retailers in new ways, helping to reduce costs and inventories while enabling the agility needed to be more responsive to the consumer.
Successful transformations will rely on:
1. Integrated business planning
Enhancing supply chain visibility to match supply with demand across the entire network throughout Asia will require even more sophistication and data integrations as additional markets continue to emerge and mature. Specifically, product lifecycle management, demand and supply balancing and strategic portfolio management around new product introductions will give manufacturers a competitive advantage from both a cost to serve and working capital perspectives.
The current fragmentation among distributors and customer bases in Asia make these emerging markets considerably more chaotic and less stable to forecast than traditional economies such as North America and Europe. Additionally, the lack of market homogeneity through Asia makes integrated business planning an even more important part of the equation in order to continue to rivaling its western counterparts.
2. Network segmentation
Successful supply chain leaders are managing a suite of supply chains that serve an array of different customers, geographies and different product categories. Each network is unique and should not be aggregated under the umbrella of one single strategy in order to also achieve optimal performance.
The best supply chains leaders leverage the right data to gain actionable insights that ultimately help them to align supply chain infrastructure and network designs, consistently refreshing outdated models of each unique supply chain network, to positively impact profitability and customer satisfaction as service requirements continue to expand while the consumer base continues to become more educated and well-versed in competitors offerings. This network complexity can be effectively and centrally managed by setting up supply chain centres of excellence and by partnering with experts to help constantly manage and optimise each supply chain node.
3. Logistics management
China’s market is evolving rapidly, breaking new ground almost daily. Logistics areas such as last mile delivery provide a real opportunity for Chinese companies to innovate in ways that are difficult in more rigid markets. Strategic partnerships with experienced providers and innovative technologies will help overcome the delivery challenges evolving markets often face. The wise will see these obstacles not as a disadvantage but as an advantage in the fact that new frontiers are void of most proverbial baggage that tends to heed rapid innovation which comes with the past of most matured markets.
China remains a powerhouse of growth opportunity, despite the recent Chinese stock market volatility, valuation bubbles and slower economic growth, especially when compared to the world’s established economies. The aforementioned underlying supply chain fundamentals and best practices will always remain applicable to China’s continued growth.
Both China and the APAC region already have many of the tools and most of the know-hows to continue along a successful path. Continuing to remain competitive over the long-term will require proper mitigation and supply chain execution in response to the consumer evolution happening within its own borders as well as kilometers beyond. When considering all the spectacular changes Asia has seen over the past decade, it’s easy to imagine how radically different China and the APAC region could look over the next decade and beyond 2025.