The truth of the matter is that the COVID-19 pandemic and the trade tensions, especially between the United States and China, have highlighted the risks associated with having a supply chain that is too focused.
The unprecedented change in the global manufacturing sector in the twenty-first century has led to fervent speculations about the future of supply chains. For several decades, China has been the pivotal player in the global manufacturing chain. The sheer size of its manufacturing sector, logistics, and economies of scale made it the undisputed leader in the production of everything from electronics to textiles and machinery. However, today, a paradigm shift is in progress. The Southeast Asian region, especially Vietnam and Indonesia, is on its way to becoming an attractive successor to China’s manufacturing legacy. This is due to foreign direct investment (FDI) and policy changes. This paradigm shift has far-reaching implications for how corporations will structure their supply chains in the future.
However, at the forefront of this paradigm shift is the concept of resilience. The truth of the matter is that the COVID-19 pandemic and the trade tensions, especially between the United States and China, have highlighted the risks associated with having a supply chain that is too focused. Companies have realised that by putting all their eggs in one basket, if you will, by having one manufacturing plant, it makes their supply chain vulnerable. This has resulted in a “China plus one” strategy, where companies continue to operate in China but have also established manufacturing facilities around the world. The Southeast Asian region has been one of the biggest beneficiaries of this.
The Vietnam case is one such example that has proved the existence of a substantial increase in export-oriented activities and FDI in the manufacturing sector. The exports from Vietnam have increased from approximately $320 billion in 2019 to about $440 billion in 2023, mainly because of the production of electronics and consumer goods. This is the result of the commitment of MNCs to set up manufacturing units in the country because of low labour costs, improved infrastructure, and a stable policy framework. The investment environment in Vietnam has improved to such an extent that large companies across the world have moved their manufacturing hub in favour of Vietnam, from consumer electronics to the production of apparel.
Foreign companies regard the geographical location of Vietnam as a huge plus. Vietnam is geographically close to big markets in Asia and has free trade agreements with many countries, making Vietnam an attractive location for the benefits of tariff reduction and market access for producers. The fact that Vietnam is a member of big free trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP) makes Vietnam an attractive location for export-oriented manufacturers who want easy access to markets with minimal trade barriers.
Nonetheless, the emergence of Vietnam is not without its nuances. Even as it is growing at a very rapid rate, its manufacturing industry is still in the process of developing the same level of local suppliers that the manufacturing giant of China has in place. The fact that its factories are still relying on imported components, some of which come from China, is a very telling sign that the problem of supply chain diversification is not simply a matter of location but also of having a robust local environment.
Indonesia, the giant of Southeast Asia and the largest economy in the region, is also simultaneously carving out its own niche in the global manufacturing landscape. While Indonesia is famous for its natural resources, such as nickel, which is an important ingredient in the manufacturing of batteries for electric vehicles, the country is now on the brink of acquiring more sophisticated manufacturing expertise. The export performance of Indonesia has been nothing short of spectacular, with exports increasing from around $180 billion in 2019 to close to $290 billion in 2023. This is especially true in the wake of the explosive growth of the electric vehicle industry, in which Indonesia’s nickel reserves make it an indispensable part of the battery supply chain.
The attractiveness of Indonesia as a destination for foreign investment is not simple. Besides the availability of natural resources, the large domestic market of Indonesia provides a good foundation for producers who target the domestic and regional markets. The incentives of the government to enhance the competitiveness of manufacturing activities, such as tax incentives and infrastructure development, have also enhanced the investment environment of Indonesia. The recent commitments of MNCs to invest in or expand operations in Indonesia indicate the current momentum of the industrial development of Indonesia.
However, the change in Indonesia’s industrial sector is also fueled by local policies and agendas. For example, the current increase in government control over strategic mineral resources such as nickel is a step towards improving value addition. However, these policies must be managed in a way that does not act as a deterrent to investment. Political stability, clarity, and development will therefore continue to be important in Indonesia’s bid to compete with China’s well-established manufacturing infrastructure.
The larger picture is that the entire ASEAN is benefiting from the diversification of global supply chains. During the period 2022-2023, more than $124 billion of greenfield manufacturing investments were committed to the economies of ASEAN, with the majority being invested in Indonesia, Vietnam, Thailand, Singapore, and Malaysia. The investment not only spurred the creation of new manufacturing capacity but also showed that there is a shift in the global investment trend, where ASEAN is no longer an alternative location to China but a hub in the global manufacturing trend.
Geopolitical issues are also involved in this process. With the current redefinition of China’s role in the global trade system, due to geopolitical issues and an increase in labour costs, the ASEAN economies are taking advantage of market diversification and integration into the global supply chain. China remains a major investor in the Southeast Asian region, and it’s exports to the ASEAN markets remain an important factor in the local industries. However, the withdrawal of some production lines, such as the assembly of electronic goods and light manufacturing, is a sign of the shift away from the China-centric model.