The reconfiguration of global supply chains

Global shippers are now implementing a “China plus” strategy that includes more than 40 countries in Asia, the Middle East, and Latin America. Our analyst team takes a look at the contenders that are most relevant to logistics and supply chain managers in the United States.

Logistics and supply chain managers were looking at 2022 as the year that global trade and supply chains would recover. However, ongoing geopolitical shifts, material, and talent shortages—along with an expanding climate crisis—prohibited a return to pre-pandemic normality.

As a result, U.S. logistics managers are witnessing the Asian network of supply chains becoming more diverse, with the greatest shift happening in China, as many companies are looking to shift production to other emerging markets to break through bottlenecks in the supply chain and mitigate other risks.

This “China plus” strategy includes more than 40 countries in Asia, Middle East, and Latin America. Let’s look at the contenders in this strategy that are most relevant to logistics and supply chain managers in the United States.

As the No. 2 after China, India has made significant progress by modernizing its logistics with the Goods and Services Tax (GST) and an electronic waybill for transportation. Its 2022 National Logistics Policy includes a unified digital platform that will provide end-to-end visibility for importers and exporters as part of a bigger strategy to leverage an underutilized rail system.

The country is also striving to offer competitive logistics costs. At the Jawaharlal Nehru Port (JNPT) in Mumbai, 15,000+ twenty-foot equivalent (TEU) vessels connect seamlessly to ports in Europa and North America. With development programs such as Sagarmala and Bharatmala, India seeks to develop and modernize ports along its 7,517 km-long coastline and build 83,677 km of new national highways.

Furthermore, to encourage global suppliers to establish operations in India, the country raised duties on imported intermediate products as part of a broader “Make in India” policy, allowing Indian high-tech companies to better participate in global value chains.

An example of the country’s growing significance as a production hub: In February, a major consumer technology manufacturer announced plans to shift production of their latest mobile technology model to India, diversifying its production base from China due to zero-COVID lockdown policies. The move aims to reduce input costs through Indian suppliers, and depending on the outcome of the move, may also encourage other high-tech manufacturers.

The Gulf region
Next in the emerging markets is the Gulf region, where the United Arab Emirates (UAE), for example, has invested in transport and logistics infrastructure in order to ensure its position in world trade and supply chain. Opting to focus on key modernization efforts as:

digitalization and trade liberalization to address inefficiencies in the international logistics and supply chain sector;
necessary investments in Port Community Systems and disruptive technologies; and
further, the UAE has doubled down on its commitment to free international trade, signing the India-UAE Comprehensive Economic Partnership Agreement, boosting trade volumes in electronics, perishables, retail goods (including textile and apparel) and chemicals.
The Kingdom of Saudi Arabia (KSA) is another relevant enabler for logistics in the region. Its government is investing heavily in the sector as part of its Vision 2030 plan. For example, KSA has already spent more than $100 billion on infrastructure and related projects intended to position it as a global logistics hub at the crossroads of Asia, Europe, and emerging Africa. In addition to oil, KSA is expanding home-grown processing industries such as chemicals, pharmaceuticals, plastics and rubber to drive trade.

Major carriers have announced plans for the Shaheen Express route which will rotate throughout the India-UAE-Saudi Arabia corridor. The first-ever bilateral trade agreement between India and UAE will increase trade from $60 billion to $100 billion over the next five years. It will remove 10,000 tariff lines from goods and commodities including oil and gas, textiles, agricultural products and jewelry.

Additionally, many logistics players are investing heavily in developing high-quality supply chain infrastructure in the Kingdom, with logistics parks in Riyadh, Damam and other cities and regions.

Vietnam has emerged as a natural alternative to China given its proximity. It has modernized and expanded its supply chain industry to attract many prestigious companies, particularly in the high-tech sector.

Consumer Electronics accounted for 42% of exports in 2020, soaring from just 13% in 2010. Several key consumer electronics companies have expanded production in Vietnam recently, building airfreight infrastructure in Hanoi to support their assembly of mobile phone.

The country has invested heavily in its port infrastructure, expanding transshipment terminals in the Cai Mep Thi Vai region and developing another transshipment hub at Haiphong. Compared to China, Vietnam also offers shorter vessel transit time to Europe—27 days to 33 days versus 35+ days. Wan Hai (AA3 direct service) and Zim Integrated (USCW service) shipping services have reduced the transit time to the U.S. West Coast from 35 days-49 days to 15 days-21 days.

Other ASEAN countries for alternative sourcing are Malaysia, Indonesia, and Thailand. Malaysia has placed resilience at the heart of its next five-year supply chain plan, focusing on “buy local” policy and an “Industry 4.0” policy to increase productivity and improve ecological integrity with digital technologies.

This includes equipping the workforce with Industry 4.0 skills, developing enhanced logistics systems, improving mobility, supporting technology R&D, and improving cyber security management.

In Indonesia, logistics costs account for 24% of the gross domestic product GDP—a high proportion that the government intends to reduce to 17% by 2024 with its “Making Indonesia 4.0.” The program aims to drive innovation and development in five key sectors—electronics, chemicals, automotive, food and beverage, and textiles—with enhanced logistics and supply chain processes.

Indonesia has adopted a digital National Logistics Ecosystem (NLE) plan to improve the flow of logistics data and goods. The goal is to simplify business and government processes, enhance public and private collaboration, and
create a digital payment service.

Thailand’s economy integrates into global value chains, but faces rising costs and supply chain disruptions as much of the world post-pandemic. The region is technologically advanced in the green economy, for example, electric vehicle manufacturing. The government’s “Thailand 4.0” strategy aims to create a high-income country by 2036, prioritizing 12 sectors and investing in infrastructure.

Internationally, Thailand’s ASEAN group membership and RCEP Agreement expand market access, encouraging global manufacturers to source from the region. Malaysia is expanding its shipping terminal capacity by a million TEUs through joint investment from MMC group and APM Terminals.

Europe and ASEAN have signed the world’s first bloc to bloc air transport agreement replacing 140 bilateral air services agreements. Under the open sky policy, airline companies from Europe and ASEAN can fly any number of services between the regions including 4th and 5th freedom traffic rights for cargo.

This is expected to boost air cargo movement between the countries and lower the cost of airfreight, making trade more competitive. An ASEAN network functioning as a sourcing location that democratizes access to airfreight and air traffic facilitates better trade practices between countries and within regions.

Mexico’s main advantages are location, scale and proximity to the United States with an existing and modern manufacturing and logistics base. The pandemic has encouraged a new wave of investment in cross-border factories, or Maquiladoras.

Mexico has long been a near-sourcing location for manufacturers looking to supply the U.S. market at low cost, quickly, and with easier oversight of production processes and quality control. Recent duty increases on goods imported to the United States from China have strengthened Mexico’s position as an attractive alternative.

The low cost of labor in Mexico is one of the main reasons that foreign manufacturers have chosen to base their production operations in the country. Because of the U.S.-Mexico-Canada Agreement (USMCA) and Mexico’s IMMEX/Maquiladora Program, U.S. companies’ logistics managers can also save on duty rates when importing and exporting goods to and from Mexico. The IMMEX Program allows for goods and raw materials to be imported into Mexico.

These key changes in emerging markets should give a clear indication for sourcing managers to look at alternatives, and right sourcing locations to de-risk their supply chain. Volatility is here to stay, and logistics managers need end-to-end visibility to manage this while optimizing between agility, resiliency, and sustainability as global supply chain networks evolve to the new reality within emerging markets.

Shippers are struggling to keep logistics costs down due to higher costs, a shortage of containers, congested ports, increased labor costs, and carriers still having an upper hand in rate negotiations. Absorbing the increased costs or passing them along to customers are the main options, but increasing signs of a weakening demand and normalcy on capacities suggest that the pricing pendulum may be swinging back in shippers’ favor.

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