The Coronavirus outbreak and lock downs imposed by the Chinese government are starting to impact supply chains in sectors including pharmaceuticals, automotive and telecommunications. Many companies that rely on their products being manufactured from facilities in Wuhan, China, are considering alternative suppliers, as facilities in the region face potential production delays and difficulties shipping goods out to other regions.
This is forcing brands to reflect on their supply chains and consider where else might serve their requirements. Beyond China, where could manufacturing companies look for alternative suppliers?
Three countries within the Association of Southeast Asian Nations (ASEAN) community – Vietnam, Malaysia and the Philippines – are a good bet. They have high quality infrastructure and are heavily investing in technology solutions and automation, including warehouse management systems (WMS). The ASEAN warehousing and distribution logistics market is showing strong growth, owing to increased demand from the expanding e-commerce sector and from brands seeking manufacturing partners. What are the other plus points offered by these countries?
Top of the list of countries that supply chain experts will consider as an alternative to China is Vietnam. Due to the US/Chinese trade dispute, this country is tipped to be the biggest winner in the ASEAN region and exports continue to grow. Labour costs in Vietnam are around half of what manufacturers can expect to pay in China. Many large brands have already started or expanded their manufacturing in Vietnam, accelerating a trend that began some years ago when Chinese inflation pushed manufacturers to seek cheaper locations. Dell, Kyocera, Sharp, Ricoh and other industrial brands already announced plans to shift some manufacturing into Vietnam. Consumer brands are sourcing from Vietnam too. Nike started sourcing 37% of its manufacturing in 2010, while China remained at 34%. By 2018, Vietnam had grown to 47% of production, while China reduced to 26%.
Malaysia is another option, with its relatively open, state-oriented and newly industrialized market economy. Many companies believe Malaysia offers benefits that its Asian counterparts currently can’t provide. Location is a prime consideration – there are seven international ports across Malaysia delivering products around the world. In addition, the country’s overall infrastructure is highly developed and shipping fees may be cheaper than in China. Other costs can also be lower, especially tax and utilities rates. Electricity costs in Malaysia are about 50% of what they cost in China and corporate tax in Malaysia has reduced to 24%. All products manufactured in Malaysia and imported goods are taxed at 5 to 10% but Malaysia has cancelled import duties on various raw materials, machinery and parts. In contrast, China adds VAT for non-Chinese companies which can reach to about 4%.
The Philippines is home to some of the newest manufacturing technology in the world and one of the fastest growing economies in Asia. It is well known for manufacturing of semi conductors and electronic components, computer consumables and food. In addition, the country has a reputation for manufacturing high quality beauty products and furniture, using natural resources. In terms of resources, 70% of the population speaks English, the country has a 94% literacy rate and highly skilled labour pool. According to Oxford Economics, The Philippines is expected to out-perform China in terms of growth in the next ten years and many global brands have already started sourcing products from this country including Victoria’s Secret, Nike, adidas plus Avon and Johnson & Johnson.
Will the recent Coronavirus outbreak become a trigger for manufacturers to reconsider where they are manufacturing in Asia? Potentially it could signal a new, regionalised production era for brands, looking to manufacture in a wide range of locations to ensure their supply chains are better protected. In reality, China’s dominance in terms of labour resources and potential output is so vast, no single country can really absorb that existing production, but considering the alternatives within the ASEAN countries especially, could be a wise strategy.
Author
Gregg Shenton is Marketing Manager at Indigo Software
