For the past decade, talk about sourcing in Asia largely meant sourcing in China. The giant nation opened its doors, invited investment and developed the wherewithal to become the world's workshop—the place to go for low-cost labor and high-quality workmanship. It has prospered as a result.
Withthe spotlight on China, it is easy to forget that until an economic collapse in 1997, the fastest-growing economies in the region were China's neighbors in Southeast Asia. And now those nations are gearing up to go after a bigger share of trade with the West (as well as the rapidly growing intra-Asia trade).
Thailand, Cambodia and Vietnam, along with nations with long-standing economic ties to the United States like India, Malaysia and the Philippines, are looking to get in on the offshoring action. And they're investing in both manufacturing capabilities and trade and logistics infrastructure to make it happen.
China, in the meantime, is scrambling to maintain its advantage over its regional competitors. It is pouring enormous sums into its road, rail and water networks to support its growth—and to spread some of the wealth beyond the coast and into the hinterland. While it is true that its fast-growing coastal cities have lost some cost advantages as wages have climbed, China is still a relatively low-cost place to do business. And it has vast numbers of workers yet available—assuming the country is able to extend its logistics infrastructure to reach them.
That adds up to both complexity and opportunity for U.S.-based procurement and logistics professionals. Economic development in the Pacific Rim is confusing, complex and subject to sudden shifts in political or economic winds, making it tough for even seasoned Asia hands to stay abreast of changes.
Multi-country sourcing adds layers of complexity in the already specialized world of international trade. In many countries, infrastructure development hasn't kept pace with demand. And too often, structural or regulatory barriers create as many headaches as inadequate rail or trucking service.
Spread the risks
Yet for all the difficulties, the potential is too attractive— and too much a competitive necessity—to ignore. Today's cut-throat market environment—particularly in the consumer goods and electronics sectors—essentially requires looking to low-cost Asian sources.
That's true of companies that trade in industrial products as well, says Paul Loftus, a managing partner at consulting firm Accenture. "For a typical industrial products company, the impact of global sourcing on profitability can be substantial: US$100 to US$200 million in annual savings (for a US$5 billion company spending 50 cents out of every sales dollar on direct materials)," Loftus wrote in a recent article, "Procurement for high performance: Global sourcing in the industrial products industry."
Logistics service providers in the region say they're seeing a surge in offshore production. "The trend toward offshore low-cost sourcing is increasing," says Mark Millar, Hong Kong-based director of strategic accounts for UPS Supply Chain Solutions, Asia Pacific, which provides logistics services. "A significant proportion is in China, but other countries in the Asia/Pacific are growing."
Paul Bingham, an economist for the research firm Global Insight, says the efforts by nations in the region to invest in manufacturing and infrastructure create opportunities for U.S. businesses to look beyond China for sources. The challenge will be to persuade potential clients to consider these alternate sources, says Humberto Florez, CEO of third-party service provider DHL Exel Supply Chain Asia Pacific. "The perception is that China is easier than other countries," he says. "But you could be missing an opportunity for doing business [with suppliers] in India, Cambodia or Malaysia that provide good-quality products."
John Langley, professor of supply chain management at the Georgia Institute of Technology, visits China frequently. He says that among companies he talks to, China remains the major attraction, but that many are looking at other nations as part of a "portfolio management" strategy, dividing their business among several nations. "Rather than have 100 percent of their activity in China, they are spreading out the risk," he says. (Langley added that potential outsourcers need not limit their search to the Pacific Rim. He said that when asked what country would be the next hot area for development, most of the respondents to his most recent third-party logistics survey named Russia.)
"I think the idea is to spread the manufacturing base so as not to have all the eggs in one basket," says Millar of UPS. He adds that different regions are developing strengths in particular industries: Thailand in automotive, for instance; Taiwan in high tech; Singapore in health care and pharmaceuticals. And in the case of the apparel and footwear industries, he notes, quotas on garments and shoes are pushing importers to diversify their buys.
Bingham points out that multi-sourcing is only an option for fairly sizable businesses—those with enough scale to spread their production across several countries. "It still depends on having the critical mass," he says. "If you have limited production, the loss of scale overwhelms the advantages. But more and more companies are getting to that critical mass."
Keeping it moving
As nationslike Thailand and Vietnam capture more business, logistics services are likely to follow. For instance, A.P. Moller Maersk Group, owner of one of the world's largest ocean shipping fleets, says it plans to build a major terminal on the Vietnam coast southeast of Ho Chi Minh City. Other shipping lines are following suit. "We are seeing ship lines revisit their rotations," reports Florez. He says once one carrier adds service to a port, others are likely to follow. That could mean more direct service to U.S. ports from more locations, which would accelerate cycle times. Now, many shipments from countries outside China are shipped to ports like Hong Kong for transloading to trans-Pacific vessels.
What helps make investments like A.P. Moller Maersk's possible is that governments are slowly becoming more open to foreign investment. That's crucial to these nations' ability to compete with China. "It's not just about manufacturing costs and utilities, but the ability to get finished goods in and out," Bingham says. Without good logistics infrastructure, total landed costs can still be excessive, no matter how low the manufacturing costs.
India is a case in point. While India has made great strides in capturing service-industry jobs, its attempts to capture manufacturing business often founder over infrastructure issues. Bingham points out that while India has begun some big investments, its spending on infrastructure still pales in comparison to China's.
And China is spending a lot. In his article, Loftus wrote, "China is an infrastructure giant in terms of both supply and demand. China's current five year plan calls for the construction of an additional 6,000 km of rail track, 200,000 km of road, 141 deepwater ports and 57 airports. Its projected energy requirements will necessitate an additional 500 gigawatts of capacity—80 percent of Great Britain's total capacity—every year for the next 10 to 15 years."
But rail lines and highways can be built only so fast, even with a powerful centralized government and few regulatory impediments. And in the meantime, logistics infrastructure development hasn't kept pace with China's ambition.
Langley says that's particularly true of the Yangtze River region, which he says has air, highway and rail issues.
China has other problems, too, Langley says. For instance, moving goods between provinces can result in inventory taxes, even if goods were taxed previously. Other issues are as simple as warehouse technology. Langley cites the case of warehouses in which workers unpack a pallet on a truck, place the goods on the dock and re-palletize the freight—all for the want of dock levelers at the warehouse.
Even something as simple as a truck movement can present challenges. Kris Knutsen, a manager for consultant Deloitte & Touche, reports that long-distance hauling is difficult in China, whose trucking industry is overpopulated by small regional firms. But he notes that the central government in Beijing is pressing provinces hard to reduce protectionist policies that impede logistics efficiency. In a recent company Webcast, Knutsen said that reducing logistics costs is a national goal and part of China's current five year plan. In 2004, logistics expenses represented about 21 percent of China's gross domestic product (GDP), according to numbers compiled for the Council of Supply Chain Management Professionals by Charles Wang, Ph.D., of the China Development Institute in Shenzhen, China. (The comparable number in the United States that year was 8.8 percent.) China's goal, Knutsen says, is to reduce logistics costs to 10 percent of GDP by the year 2020.
Bringing it all together
Supply chain woes are hardly unique to China. UPS's most recent Asia Business Monitor survey showed that although about 80 percent of the respondents said they considered supply chain efficiency to be an important factor in small and mid-sized enterprises' ability to compete, more than 50 percent believed it needed improvement in Asia. More than 60 percent of the respondents in China, India, Indonesia, Korea, the Philippines and Taiwan said supply chain efficiency was lacking in their countries.
Logistics service providers intend to fill at least part of that gap. Like the carriers, they're currently investing heavily across Asia. That's good news for shippers, says Bingham. Not only can carriers and third-party logistics service providers (3PLs) ease some of the trade and transportation complexities in sourcing from multiple countries, but they're also bringing services like consolidation and assembly to the region. "As the 3PLs are opening up shop, they are bringing in best practices," adds Langley.
One of those 3PLs is DHL. "We are setting ourselves up and have [had] good success ... with customers," says Florez. "We have taken the next steps by facilitating infrastructure needed at origin for merge in transit, postponement and handling documentation, so even the smaller retailer can benefit from the existing supply chain."
As an example, Florez points to a kitchen appliance firm (which he is not allowed to name) that imports goods from China, Malaysia and Indonesia into the Americas, as far south as Chile. DHL consolidates all of its Asia purchases at a consolidation center near Hong Kong; configures equipment with appropriate motors and power cords, manuals and cartons for the final destination; and then manages the shipments' movement to destination country DCs.
Millar reports that UPS is seeing similar demand for end-to-end service."Low-cost production is only advantageous for the destination market if you have an efficient supply chain," he says. "What customers are looking for is consolidation from multiple sourcing countries, destined for the same channel, and for those to be consolidated and shipped into the destination market as part of a seamless, integrated supply chain."
At the same time, he says, UPS is also seeing increased demand for value-added services at origin and destination. "If you can move activities up the supply chain, which by nature means lower cost—things like bundling, packaging, labeling, garment on hanger—and have those done at the origin center, then in the destination market you can do deconsolidation and have efficient ground distribution to the destination point."