The rise of Asean manufacturing

This photograph taken on May 24, 2019 shows garment factory stitching apparel in a factory in Hanoi
AUGUST 17, 2020 - 12:42 PM

As the markets navigate the COVID-19 pandemic, it can be tempting to take our eyes off the longer-term fundamentals of ASEAN’s manufacturing bloc. Despite disruptions in global supply chains during Covid-19, Cushman & Wakefield’s latest Global Manufacturing Risk Index has assessed that Asean and the markets of Vietnam, Thailand, Singapore and Indonesia have a high bounce-back-ability. We look at some of these drivers of Asean manufacturing.

Economics and population

The Asean bloc is a significant economic powerhouse. It has the sixth largest global economy in 2019 at around US$3.0 trillion, which equates to about 11 per cent of the Asia Pacific total. China contributes 49 per cent, Japan around 16 per cent and India at 9.5 per cent. Over the next decade, Asean is forecast to grow at an average annual rate of 4.9 per cent per annum to reach US$4.9 trillion.

From a demographic perspective, the region’s credentials are equally impressive. Asean is currently home to over 660 million people – equivalent to a little under half the population of China – of whom 450 million are of working age (15 – 64 years). Over this decade to 2030 these numbers will swell to 725 million and 488 million respectively. It is this demographic windfall, combined with economic expansion that will power the region forward in the decade ahead.

Reshoring now a real possibility

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The current China-US trade war and the Covid-19 pandemic may be catalyst for change but they are not the underlying drivers for the growth of ASEAN manufacturing. The manufacturing shift towards Southeast Asia has been a long time in the making.

As minimum wages in China grew, more orders for labour intensive products, such as clothes, toys and shoes, shifted to less expensive locations in India, Bangladesh, Myanmar and Vietnam. However, despite government initiatives to attract manufacturers by Southeast Asian countries, China retains a clear infrastructure advantage with the ability to efficiently move goods via road, rail or sea transport.

Nevertheless, costs for industrial land rent and labour in Shenzhen have increased in recent years to such an extent that they both are among the top echelon in the region. For Tier 1 Chinese cities such as Beijing and Shanghai, increasing rents have pushed them to be amongst the most expensive in the region, notwithstanding lower labour costs. In contrast, Suzhou and Guangzhou are relatively cheap
on industrial rent but more expensive for labour.

In Southeast Asia, on the other hand, Ho Chi Minh City, Hanoi and Manila enjoy a cost differential over all Chinese markets – offering cheaper land and labour. In fact, Vietnam jumped a few notches in C&W’s global ranking of the most cost competitive manufacturing hubs to number two after China.

Beyond this, Jakarta and Bangkok act as alternative locations for higher order manufacturing due to higher costs in rent and labour respectively.

Covid-19 and the resultant disruption in economic activity across the world has re-ignited the debate about the benefits of re-shoring. However feasible and desirable, reshoring on a mass scale is not realistic and will not happen in the immediate term.

Instead, to build resilience in the event of a second pandemic wave or second lockdown period, manufacturers are more likely to address the two most pressing vulnerabilities: materials and component sourcing and supply chain disruptions. The most likely immediate response from manufacturers will be to revert to holding more inventory.

Moving away from “just-in-time” inventory management until supply chains and productions lines can be restructured will provide more flexibility and less vulnerability to disruptions in the event of a second pandemic wave or extended lockdown periods. Leading into the current challenge, new trade agreements (e.g., BREXIT, NAFTA) and trade wars were already increasing trade tariffs for both finished goods and raw materials, stripping away some cost advantages of offshoring. 

With global manufacturing significantly disrupted by the current pandemic, conditions are now ripe for global manufacturers of finished goods and parts to move forward with ongoing pre-COVID-19 reshoring discussions and plans. Reshoring would shorten supply chains, effectively reducing long lead times, thereby giving manufacturers more control over production quantities to allow for greater flexibility in response to demand.

Furthermore, automation, robotics and 3D printing make reshoring a viable solution for advanced manufacturing markets such as Singapore and Thailand in mitigating cost, a pre-pandemic concern for manufacturers in response to rising wages in China and other Asian countries.

Quality industrial supply across Asean

It is clear that there are strong prospects for in the industrial sector for both owners and occupiers alike. For example, Jakarta now boasts nearly 150 million square metres of industrial land. 

Furthermore, industrial stock continues to increase across the region. While current inventory levels in Ho Chi Minh City and Hanoi are significantly lower, at 25 million square metres and 13 million square metres respectively, nationally, Vietnam is experiencing a rapid increase in industrial parks. 

Currently there are 260 operating industrial parks across Vietnam, with a further 75 under planning. In total these 335 industrial parks cover almost 97,800 hectares, or over 10.5 billion square feet of land. Clearly this highlights the level of development happening in both the southern and northern economic key regions, presenting opportunities for occupiers to take-up space at competitive land rates. Dong Nai and Binh Duong especially have significant upcoming supply in the southern corridor, while the tech and automotive industries are also undertaking substantial development in the north of the country.

Since the COVID-19 pandemic, the global supply chain disruption story has served as a wake-up call for Chinese manufacturers and business owners. The current events highlight the ongoing need to diversify risk, which creates opportunities for investors and developers to take advantage of such movements.

Christine Li is head of research, Singapore and Southeast Asia; and Dominic Brown is head of insights & analysis, Asia Pacific, at Cushman & Wakefield.