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Re-thinking Factory Asia

Re-thinking Factory Asia


by Jeff Stryker, Partner, Thailand, Heidrick & Struggles

Factory Asia is the catchy name given to the concentrated manufacturing and supply chain hub in the Asia Pacific region. For years, China had the undisputed monopoly of Asia’s manufacturing sector, literally putting its ‘Made in China’ stamp on a vast array of products. However, other players in Southeast Asia, including Vietnam, Thailand, India, Malaysia and Indonesia, are stepping up their game to become attractive alternative manufacturing centres.

In the challenging business environment, there are greater demands on supply chain professionals and also increased competition for supply chain talent. The challenge is finding talent with the ability to work seamlessly across multiple geographies, with the relevant knowledge, language skills and overseas experience. Staff retention can also be difficult, as star players may have numerous attractive offers due to the talent shortage.

China – The challenge to stay on top

Due to its low-cost labour, efficient supply chains and relatively lenient regulatory system, China earned itself the title of ‘the world’s factory’. However, the global financial crisis, rising labour costs and environmental concerns have all contributed to slowing manufacturing growth in the country, with year-on-year growth of 12.1 per cent in 2010 dropping to about six per cent in 2015. With labour and production costs on the rise, many businesses have moved their manufacturing bases out of China to Southeast Asia.

Another factor that has affected China’s dominant position in the global supply chain is the stricter regulatory environment amidst the push to ensure companies are accountable for the quality of their products, standards, and possibly most importantly, the well-being of their workers and the environment. In tandem with these increased regulations, China’s President Xi Jinping started an anti-corruption campaign in 2012, with the aim of rooting out corruption in government and businesses.

While worker productivity in China remains high, many supply chain executives are increasingly concerned about geopolitical turmoil, and are “de-risking their supply chain platforms” by seeking other countries that can offer an attractive manufacturing base. Although Thailand and Malaysia were often seen as alternatives in Asia Pacific, Vietnam has truly become the darling of supply chain executives looking for such diversification.

Vietnam – The supply chain darling of Southeast Asia

The world’s largest emerging economies – including Russia, Brazil and China – have been stumbling. At the same time, Vietnam’s economic growth was 6.7 per cent in 2015, making it among the fastest growing markets globally and one of the hottest markets in Southeast Asia – particularly its burgeoning manufacturing platform.

Vietnam has a young and vibrant workforce with a strong educational footprint that will allow the country’s labour force to grow by more than one million people per year. This is in stark contrast to other Southeast Asian countries, which are experiencing shrinking labour pools. In addition, Vietnam is part of the Trans-Pacific Partnership, a US-led trade deal, which is proving quite attractive for foreign direct investment (FDI) into Vietnam. The treaty will cut some 18,000 tariffs in 12 countries, helping Vietnam increase exports of locally made products and find new markets.

Exports of manufactured products in Vietnam will continue to expand, given that 66 per cent of disbursed FDI in the first nine months of 2015 was directed into manufacturing. Yet, although companies are anticipating double-digit growth for the foreseeable future, most are aware that there are still some pitfalls. “Logistics costs are one of our major concerns. We just do not get the economy of scale pricing when shipping products from our factories out of Vietnam versus China,” stated a consumer supply chain executive. “We expect the cost curve to come down over time, but currently we are disadvantaged in this key logistics metric.”

The Vietnam supply chain narrative looks strong going forward. However, companies are not looking at Vietnam in a singular vacuum, but rather as part of an overall Asia Pacific supply chain diversification strategy that is driven by their end-customers.

Enhancing the supply chain model

While it is challenging to find top executives in general, most companies specifically struggle to find the right people at the supervisor, manager and director level. Reasons include organisations not having a talent pipeline in place, or that more experienced workers in mature markets may not be willing to move or may not be familiar with the work culture in Asia Pacific.

These days, many search projects are regional and even global. Companies have had to compromise – looking for candidates outside their industry, or easing requirements for in-country experience – sometimes sacrificing sector/product knowledge in favour of cultural fit.

What does the future hold?

The factory of the future will likely look at centralising supply chain functions, and limiting the number of locations to areas where talent supplies are abundant, rather than having multiple supply chain points physically close to the factories. This can help address many of today’s pressing concerns, including talent, costs and risk mitigation.

The reality is that it can be hard to find candidates with the right hard skills to run a supply chain effectively, and the soft skills to navigate business in the Asia Pacific region. However, by being innovative, organisations can address the issues and still come out on top.

Next-generation supply chains need to be agile and responsive, and must be able to compete in a VUCA (volatile, uncertain, complex and ambiguous) world. At the end of the day, talent is at the core – and to succeed, organisations need to create a new talent paradigm that aligns with their corporate strategy.

About the Author

Jeff Stryker is a partner in charge of Heidrick & Struggles’ Bangkok office, serving Thailand and surrounding countries. Having worked in the executive search industry for nearly 14 years, his practice focuses on the industrial, manufacturing and supply chain & logistics sectors. He also works closely with clients on engagements ranging from talent assessment to compensation and benefits.