The great supply chain relocation

Even before the onset of COVID-19, multinational companies had already started diversifying their supply chains beyond China, owing to tariffs arising from US-China trade tensions. The pool of companies deliberating supply chain relocation has grown in recent months as frustration with COVID-19 management policies in China continues to mount.

Some appear ready to exit the Chinese market and relocate production to countries and regions that have more readily adopted endemic policies. South-East Asia is one such region, with most countries reopening their borders, dropping or significantly loosening quarantine and testing requirements, and easing domestic restrictions.

Bucking the trend of economic nationalism and outright protectionism elsewhere in the world, South-East Asia is also likely to become increasingly intertwined in regional and global trade as it tries to navigate its way through big power rivalry. This makes it an attractive region for companies looking for a long-term export base.

Moving next door

Firms considering diversifying into South-East Asia should first look at the complexity of their supply chains and the support that the country in question has in place for manufacturing operations. For example, companies involved in traditional manufacturing of goods with short supply chains, such as footwear and apparel, are more likely to be able to relocate their whole supply chain.

Vietnam, Malaysia and Thailand have benefitted from previous rounds of supply chain relocation, both before and during the pandemic – largely due to an established electronics and medical devices manufacturing base, supportive transport and logistics infrastructure, and pro-foreign investment regimes.

Companies should be prepared for extended, even unpredictable, processes that require careful management to avoid operational and reputational risks. Timelines may not be fixed, as illustrated by the abrupt 2019 move by a Japanese consumer electronics company of their factories from China to Thailand to cut costs. Shifts may also be gradual processes carried out over multi-year periods.

With US-China tensions likely to persist in the coming years, policies by the US and its close diplomatic allies to encourage or compel the decoupling of supply chains from China will be another hurdle. For firms in critical sectors, producing and sourcing from such countries will be crucial to mitigating risks of supply chain disruption posed by geopolitical tensions in the long term.

Look across the region

South-East Asian markets are far from homogeneous and a one-size-fits-all approach to market entry is unlikely to fare well. Countries in the region have different business risks that require sustained attention and management.

Vietnam promises long-term political stability and a pro-foreign investment regime but is currently grappling with heightened risks of electricity shortages and labour activism, for instance. While established manufacturing bases like Malaysia and Thailand offer robust logistics and transport infrastructure, but have higher labour costs and pose reputational risks linked to allegations of forced labour.

Companies should also be wary of emerging risks that will apply to different degrees across the region for at least the next few months as the implications of the conflict in Ukraine continue to ripple through the world. Persistent energy and fuel shortages of varying severity will contribute to operational risks and also drive inflation.

Companies should conduct a full review of their existing supply chains to understand current risk exposure, before contemplating which risks the business can and is willing to mitigate, and finally identifying a diversification strategy involving products, services and locations that can best mitigate those risks and build overall resilience.

In comparing countries across the region, one way to reduce the uncertainty around risk exposure is to conduct a benchmarking exercise and compare risk levels across a range of factors, including security, labour, infrastructure and access to external markets.

Hua Zhen Goh is political and regulatory risk analyst at Control Risks