SOUTHEAST ASIA S SUPPLY CHAIN CHALLENGE: BUILDING A PLATFORM FOR GROWTH

Transcription

1 MALAYSIA INSTITUTE FOR SUPPLY CHAIN INNOVATION WHITE PAPER SOUTHEAST ASIA S SUPPLY CHAIN CHALLENGE: BUILDING A PLATFORM FOR GROWTH BY KEN COTTRILL GLOBAL COMMUNICATIONS CONSULTANT MIT CENTER FOR TRANSPORTATION & LOGISTICS AND MAHENDER SINGH EXECUTIVE DIRECTOR MIT GLOBAL SCALE NETWORK IN ASIA SUMMER 2011

2 CONTENTS Executive Summary...3 Introduction...4 Sector Based Issues...6 Clouds on the Horizon...6 Talent Pipeline...9 The Way Ahead...10 Acknowledgements...11 SOUTHEAST ASIA S SUPPLY CHAIN CHALLENGE: BUILDING A PLATFORM FOR GROWTH 2

3 Executive Summary The countries of Southeast Asia are an integral part of the Asian economic miracle. In addition to benefiting from the growth of China and India, domestic markets in Southeast Asia are expanding and the region is forging stronger links with other developing economies. The Association of Southeast Asian Nations (ASEAN) is actively working on creating a single market that will compete with other international economic community in terms of its global and regional influence as a trading bloc. However, if such a vision is to be realized, one of the things that Southeast Asia must focus on is developing world class supply chains. Presently, inconsistent quality and availability of transportation infrastructure is impeding the flow of goods in the region, and adding significant cost to logistics operations. Cutting-edge supply chain expertise can address some of these challenges and drive economic growth. Southeast Asia must devise and implement a long-term strategy to build its supply chain capabilities if it intends to be a serious competitor in world markets. Accordingly, achieving excellence in supply chain education and research will be a cornerstone of such a strategy. The newly created Malaysia Institute for Supply Chain Innovation (MISI) is a key step in this direction. Created to propel the region to the forefront of supply chain research, education and thought leadership, MISI will seek to bring academics and practitioners together for supply chain advancement in Asia. SOUTHEAST ASIA S SUPPLY CHAIN CHALLENGE: BUILDING A PLATFORM FOR GROWTH 3

4 The stage is set for Southeast Asia to take its place as a world-leading trading power. Located in the heart of a vibrant economic zone, ASEAN countries have a combined population of 600 million people and a GDP of $1.5 trillion. They generate $1.7 trillion worth of trade annually, a figure that is likely to increase significantly if Southeast Asian countries maintain projected growth rates of 5% to 6% over the next few years ASEAN aims to establish a single market, the ASEAN Economic Community (AEC), by Ministers at an AEC Council meeting this May noted that implementation of the AEC blueprint has progressed, particularly in creating a single market and production base, as well as establishing a competitive economic region. But more importantly, regardless of whether the target date for creating the new community is met, the goal is indicative of the region s economic ambitions. Another reason to believe that Southeast Asia is on the cusp of a new era of prosperity is that its expansion is fuelled by several new sources that reinforce its links with regional and global economies. Some of these sources are presented below: China and India. Together these countries are the engine that drives much of the world s trade and investment. Accordingly, the exports from ASEAN countries to China and India have almost tripled over the last decade (see Table 1 and Table 2). The volume of trade is expected to climb even further as Chinese and Indian consumers gain more purchasing power and create greater demand for products manufactured in neighboring countries. Table 1: ASEAN-5 share of total exports and value of exports to China and India Exports to China and India % of total exports (average) Value (USD mil) ASEAN $17,703.1 ASEAN $2,581.0 Note: ASEAN-5 refers to Indonesia, Malaysia, Philippines, Singapore and Thailand Source: World Trade Atlas (WTA) SOUTHEAST ASIA S SUPPLY CHAIN CHALLENGE: BUILDING A PLATFORM FOR GROWTH 4

5 Table 2: China and India s growth potential and trade with ASEAN-5 Growth Potential Trade with ASEAN-5 China GDP growth forecast: : 9.5% ( : 10.3%) o GDP per capita: $8,118 in 2016 (2010: $4,382; 2000: $946) Total: $109.4 bn in 2010 (2000: $36.1 bn) India GDP growth forecast: : 8.1 %( : 7.3%) o GDP per capita: $2,110 in 2016 (2010: $1,265; 2000: $460) Total: $37.2 bn in 2009 (2000: $6.5 bn) Note: ASEAN-5 refers to Indonesia, Malaysia, Philippines, Singapore and Thailand. Financial figures in US dollars. Source: IMF (April 2011 WEO) and World Trade Atlas (WTA) Also of note is China s increasing investment in emerging economies, especially in commodities. ASEAN nations that stand to benefit from these investments include Indonesia (coal, palm oil, and natural gas), Thailand (rubber), and Malaysia (palm oil, natural gas, oil). Emerging Markets. Southeast Asia will benefit from closer ties with other emerging economies, a direct consequence of increasing South-South cooperation. In its Asian Development Outlook 2011 report, the Asian Development Bank (ADB) suggests that developing countries should strengthen their intra economic links. In the words of Changyong Rhee, ADB s Chief Economist, Growing South- South relations at a time of modest growth in industrial economies could be a potential new driver of global growth, but only if these economies become more open to trade and capital flows with each other. While world trade has, on average, expanded by 16% over the period , Asia s trade with the Middle East and Latin America has increased by an average of 30% during this time. The region s trade with other emerging economies stood at 13% of total exports out of Asia in SOUTHEAST ASIA S SUPPLY CHAIN CHALLENGE: BUILDING A PLATFORM FOR GROWTH 5

6 Sector Based Issues As the economic and financial linkages between these emerging economies solidify, the benefits in vital areas including trade, finance, investment, energy and technology will significantly increase. But stronger economic ties with new partner countries will require Southeast Asia to develop supply chains capable of supporting the increase in international trade volumes. Growth in the region will drive demand for sector-based supply chain solutions to address the needs of different industries. Construction. According to the ADB, approximately 44 million people are being added to Asia s urban population every year. Furthermore, there are plans for massive investment in infrastructure development to sustain the economic competitiveness of the region. The ADB estimates that Asia will require about $8 trillion of infrastructure investment during Commodities. The region is expected to benefit from robust demand for raw materials from China and India. In particular, rapid urbanization in both nations will continue to stimulate demand for commodities, mainly agricultural and energy products. Clouds on the Horizon Manufacturing. A complex web of integrated production facilities has developed in the region over recent decades, most notably in the auto industry. The growth in intra-asian trade has promoted vertical specialization within this network. More foreign direct investment coupled with increasing trade in intermediate goods is expected to further strengthen Southeast Asia s manufacturing base and boost growth. While the outlook appears bright for Southeast Asia as a regional and global trading bloc, some difficult hurdles remain. One of the SOUTHEAST ASIA S SUPPLY CHAIN CHALLENGE: BUILDING A PLATFORM FOR GROWTH 6

7 most challenging is poor supply chain infrastructure, which if not addressed, would continue to impede future growth. The following key issues were laid out by ASEAN Deputy Secretary- General, S. Pushpanathan, in a paper presented at the 24th Asia-Pacific Roundtable, Kuala Lumpur, Malaysia, June Fragmented roads. Over the last decade, the number of vehicles has doubled in countries such as Indonesia, Vietnam, Cambodia, and Myanmar, but the development of respective highway systems has lagged behind. The quality and capacity of roads vary greatly from country to country. Singapore boasts fully paved networks, while in Cambodia and Lao PDR less than 10% of the highway networks are paved. A Trans-Asian Highway is under construction, and the 38,400 kilometer-route will run through all 10 ASEAN countries when complete. About 97% of the desired length of highway had been built by 2008, but critical links are missing and the quality of some roads is questionable. Gaps in rail transportation. Over recent years the development of new rail links has not been substantial in any of the ASEAN countries except Vietnam, according to Pushpanathan. A flagship project is the Singapore-Kunming Rail Link (SKRL). Scheduled for completion by 2015, the SKRL line is built on existing national networks and will span seven ASEAN countries. Completing key links in the route will require substantial resources. Uneven port development. Maritime transportation is crucial to the region s economic future and forty-seven designated ports in nine countries form the backbone of the trans-asean port network. Singapore and Malaysia s Port Klang are leading facilities; the remaining gateway ports vary greatly in terms of their cargo handling capabilities. SOUTHEAST ASIA S SUPPLY CHAIN CHALLENGE: BUILDING A PLATFORM FOR GROWTH 7

8 Air shortfalls. A number of ASEAN member states have invested in airport improvements, and facilities are generally regarded as adequate for current traffic levels in capital cities. However, freight handling terminals in some airports do not meet the required standards. Logistics services represent another important piece of the region s supply chain puzzle. The ASEAN Roadmap for Integration of Logistics Services Sector aims to liberalize these services and related activities to rapidly enhance regional logistics capabilities. The Framework Agreement on Services sets a deadline of 2013 for finalizing commitments in this area. Meanwhile, Southeast Asia s growing economic influence is attracting attention from technology vendors. Supply chain technologies in Southeast Asia are poised to grow on the back of increased requirements for more efficient supply chain operations and end users need to reduce logistics costs, concludes a report published in December 2010 by research firm Frost & Sullivan. The report, 2020 Supply Chain Technology RoadMap; Southeast Asia, looks at the demand for transportation management systems (TMS) and warehouse management systems (WMS) in Singapore, Malaysia, Indonesia, and Vietnam. TMS is the umbrella term for software solutions that manage freight transportation operations, and WMS solutions manage the movement and storage of materials in warehouses. Both types of software are important components of supply chain management solution suite. However, the high initial cost of staff training often deters smaller logistics companies from investing in the technology according to the report. Disparities between transportation networks make it difficult to adopt TMS and WMS solutions. Also, in countries such as Indonesia and Vietnam, advanced telecommunication infrastructure is exclusive to the major cities, making cargo tracking difficult in the rural areas, says Frost & Sullivan. Looking ahead, the adoption of TMS will be driven by the need to SOUTHEAST ASIA S SUPPLY CHAIN CHALLENGE: BUILDING A PLATFORM FOR GROWTH 8

9 Talent Pipeline remain competitive and cater to rising business opportunities from a growing manufacturing base in Southeast Asian countries, the firm says. It sees demand for WMS coming from large logistics and manufacturing companies, and logistics park developers. Another weak link in the supply chains that underpin growth in Southeast Asia is a lack of trained and capable human capital. This problem is by no means unique to the region; how to build a supply of desired talent to meet medium- and long-term needs is a major issue for the supply chain profession globally. However, Southeast Asia is starting from a lower base in that it lacks the education and research centers of excellence that are a feature of developed economies. Enterprises that are unable to design, build, and manage world class supply chains are at a serious competitive disadvantage in today s complex business environment. Southeast Asian companies must develop supply chain solutions that are geared to the region s special demands to compete effectively; copying western best practices is not a viable option. As expected, educational standards vary from country to country in the ASEAN region. In most Southeast Asian nations the level of supply chain proficiency is, at best, average says Roger Bloemen, Global Vice President Supply Chain, at international specialty chemical manufacturer Solutia. Headquartered in St Louis, US, the company has manufacturing plants in Malaysia, Japan and China, and is looking to further expand in the region. More specifically, we are struggling to find people with adequate operations management skills, explains Bloemen. In his opinion, students in the region need more exposure to real world applications of the analytical methods they learn at school. Southeast Asia needs more first-rate supply chain/industrial engi- SOUTHEAST ASIA S SUPPLY CHAIN CHALLENGE: BUILDING A PLATFORM FOR GROWTH 9

10 neering schools. Alliances with institutions in the west are particularly effective in raising standards quickly, and enable colleges to fast track the creation of more advanced supply chain programs. Such partnerships exist in Singapore, and have probably boosted their industrial engineering and supply chain management expertise dramatically, notes Bloemen. At long last, initiatives to establish advanced supply chain programs. in the region are underway. A prime example is the creation of the Malaysia Institute for Supply Chain Innovation (MISI). Malaysia, the largest center for international trade and manufacturing in Southeast Asia, is partnering with the Massachusetts Institute of Technology s Center for Transportation & Logistics (MIT CTL) to create a global center for supply chain education and research. The Way Ahead MISI will become a member of MIT s growing international network of centers known as the Global SCALE (Supply Chain and Logistics Excellence) Network. Dedicated to supply chain education and research, the Global SCALE Network now spans North America, Europe, Latin America, and Asia. The other member centers are the MIT Center for Transportation & Logistics (Cambridge, MA, US), the Zaragoza Logistics Center (Zaragoza, Spain), and the Center for Latin- American Logistics Innovation (Bogota, Colombia). As a SCALE member, MISI will draw on the network s collective expertise to develop human resource solutions in the supply chain domain geared to the region s particular demands. Southeast Asia is uniquely positioned to benefit from the global shift in economic power from west to east. But if the region is to realize its full potential, a top priority must be the development of world class supply chain facilities and expertise. The region s inadequate infrastructure and supply chain services add cost and hamper goods flows. A 2008 ASEAN study cited by Pushpanathan estimates the logistics costs associated with the intra- SOUTHEAST ASIA S SUPPLY CHAIN CHALLENGE: BUILDING A PLATFORM FOR GROWTH 10

11 ASEAN movement of freight containers as $2.25 billion a year. Transportation, terminal, and access costs account for about 55% of this total, and 45% are attributed to time costs. Implementing an ASEAN blueprint for improving the efficiency of distribution networks would reduce logistics costs by roughly $140 million per year according to the study. Similar efforts are required to build a supply chain talent pipeline. The skills needed to manage supply chains have changed dramatically over recent decades. Overlay these changes with the specific needs of Southeast Asian businesses, and it becomes apparent that in order to compete effectively in regional and global markets, Southeast Asia must invest in supply chain education and research. Acknowledgments Thanks to Bank Negara Malaysia for providing some of the information used in this paper. ABOUT US The Malaysia Institute for Supply Chain Innovation (MISI), a joint initiative between The Massachusetts Institute of Technology (MIT) and the government of Malaysia, is a world-class center located in the city of Shah Alam. The institute, launched in March of 2011, will leverage Southeast Asia s growing position in world commerce and the experience of the MIT Center for Transportations & Logistics as the pre-eminent center for supply chain education and research. For more information on MISI, please visit: For more information on The MIT Global SCALE Network, please visit: SOUTHEAST ASIA S SUPPLY CHAIN CHALLENGE: BUILDING A PLATFORM FOR GROWTH 11