Supply chain disruptions: A critical window of opportunity
In August, the world’s third busiest container port, Ningbo-Zhoushan was partially shut down for two weeks due to a positive COVID-19 case, leading to significant shipment delays in products from toys to auto parts. The closure is contributing to waves of congestion at ports globally and higher transport costs, stoking fears that this may impact retailers and consumers alike this holiday season. But this is just the tip of the iceberg in a long list of disruptions that have been pushing global supply chains to the edge in recent years, including those caused by natural disasters and geopolitical tensions.
In response, companies are urgently exploring diversifying their production and sourcing to alternate locations, notably in the Indo-Pacific region. Governments, in turn, have discovered a window of opportunity to capitalize on this development by strengthening incentives for foreign direct investment. Both companies and governments alike will need to act quickly and adapt this reality in order to thrive in a world of increasing uncertainty. The question remains, who will ultimately benefit from this shift and what steps could be taken to seize these gains?
Supply chain disruptions are costly and what is becoming increasingly evident is that successful companies are those that are investing in resilience, whether it be diversification or the use of advanced technologies to anticipate and minimize risks. While supply chain disruptions are not new, the COVID-19 pandemic’s global scale and prolonged impact has only reinforced the importance of strengthening supply chains and accelerated companies’ plans to employ strategies to mitigate risk. A Gartner survey conducted in 2021 revealed, 87 percent of 1,300 supply chain professionals reported plans to invest in supply chain resiliency in the next two years.
Although China continues to be the world’s foremost destination for high-quality and low-cost manufacturing, more and more companies are at the very least considering a China+1 strategy. This involves maintaining a manufacturing base in China, which continues to be a critical market, while developing smaller-scale operations elsewhere, to prevent over-reliance on a single market. Another strategy including nearshoring or regionalization, which involves setting up manufacturing in multiple locations globally to supply goods to consumers in nearby markets. Finally, companies are looking to alternative sites as they look to expand production.
The Indo-Pacific region is particularly well suited to absorb supply chain shifts from China and other economies due to its proximity and position as one of the world’s fastest growing markets. Furthermore, with the signing of Regional Comprehensive Economic Partnership among fifteen Asian countries in November 2020, the region will become even more integrated, reducing barriers for goods and trade, establishing common rules of origin and streamlined customs paperwork.
Beyond pursuing trade agreements, Asian governments are implementing business-friendly measures and incentives, including tax breaks, financial assistance and deregulation, to attract foreign direct investment. Vietnam and India, for example, stand to benefit when it comes to manufacturing, due to their relatively young workforces, their improving infrastructure, policy incentives, special economic zones and competitive labor costs. More advanced economies including South Korea, Japan and Singapore also have the potential to attract more investment, including research and development centers for emerging technologies. Governments, including South Korea, Japan and Taiwan, are also providing generous tax and financial incentives to bring their companies back home.
Supply chain disruptions are only expected to increase in magnitude and frequency. According to McKinsey, companies are expected to experience disruptions lasting at least a month-long approximately every 3.7 years. The stakes are high but those firms and governments that are able to anticipate and adapt to change stand to benefit. Specifically, companies that restructure their supply chains to be more resilient and agile will be able to thrive in an increasingly uncertain and interconnected world. Governments that leverage this shift to their benefit by introducing attractive financial incentives while simultaneously strengthening infrastructure, upskilling workers and improving business climate, will be able to move up the value chain in a wide variety of sectors, boost economic growth and create new jobs.
Wendy Cutler is vice president of the Asia Society Policy Institute (ASPI).
Jenny Kai is senior program officer at ASPA.
ASPI has created an interactive tool mapping out over 180 concrete supply chain and foreign investment policies of 17 economies in the Indo-Pacific region, as well as key investment climate and foreign investment data.