Throughout 2020, businesses have been re-evaluating their supply chain needs. The global pandemic, government lockdowns, and the shifts in global trade patterns that followed, acted as a catalyst.

Covid-19 highlighted the vulnerability of logistical chains, and how a reliance on one region’s manufacturing and distribution systems could have negative consequences on an organisation’s ability to trade efficiently during a crisis.

Unsurprisingly, analysts have since started considering what the future may hold for Asia-Pacific supply chains. Specifically, whether the global pandemic will bring about long-term change, and how businesses can best adapt and capitalise on an evolving global trade landscape.

For some businesses, Covid-19 revealed the deep dependency on China’s manufacturing and distribution capacity and exposed the subsequent fragility a crisis can cause. As such, an effort to diversify supply chains away from China is increasingly important for businesses who hope to eliminate short-term issues whilst capitalising on long-term global trends.

Diversifying elsewhere

As businesses and economies reopen, and demand begins to restore to pre-pandemic levels, attention is now shifting towards seeking recovery of global supply chains in Asia Pacific, offering opportunities for businesses to diversify their supply chains beyond China and into emerging market hotspots.

Economists believe that the number of companies relocating parts of their supply chain to countries such as Vietnam is significant and will likely accelerate over the coming years. Prior to the pandemic, Vietnam had already become more appealing to those wanting to diversify their supply chains, owing to the country’s proximity to China. It also boasts export-friendly trade arrangements such as the Vietnam-EU FTA and a healthy component supply eco-system. However, it still could not compete with the established production and distribution powerhouse of China.

But the pandemic has led many companies to think again. GLP, Asia’s largest warehousing company, is developing projects in Hanoi and Ho Chi Minh City and plans to invest $1.5 billion over three years to reflect the business’ growing prominence in the country, an indication of Vietnam’s growing prominence in the global logistics chain.

Alongside Vietnam, Bangladesh and Mexico now account for most of the gains in global market share among low-cost consumer goods exporters, according to Baker McKenzie. Likewise, Volkswagen is reporting success at its parts distribution centre at Malaysia’s Tanjung Pelepas port, benefitting from tax incentives and through Malaysia’s Global Trading Centre scheme. The initiative was part of the country’s 2021 budget, designed to help build Malaysia’s position as a global supply chain hub.

Tread carefully

Yet, despite the growing precedent for companies to look further afield, exiting the existing Chinese trade ecosystem is not a decision lightly taken, neither is it simple to implement. For businesses looking to adjust their supply chain logistics and operations, there are significant risks that must be considered, even if there is the potential for significant rewards.

In July 2019, Nintendo announced plans to shift where it manufactured its Switch console, moving production from China to Vietnam. As part of a plan to diversify supply chain risks and to avoid tariff increases between the U.S. and China, Nintendo had hoped that Vietnam would provide a degree of redundancy. But Nintendo struggled to meet demand during the pandemic, owing to the lack of components immediately available at its Vietnam factories, which were still dependent on Chinese parts. This example highlights the need for competing South East Asian nations to reproduce the scale of China’s manufacturing capacity if they hope to develop comparable supply chain systems.

Prior to the inauguration of Joe Biden as president of the United States, trade tensions between China and the U.S. had already pushed many companies to look at alternatives to China. Whether they continue to do so under the new regime remains to be seen. However, a 2019 survey of US fashion brands found that over 80% of them were looking to reduce their dependency on Chinese product sourcing.

Yet for businesses looking to diversify their supply chains, one primary issue exists: can the manufacturing might of China be matched elsewhere? For the 80% of apparel companies who intend to branch out from China, it may be possible, as seen in the growing low-cost market share of Mexico and South East Asia.

However, for technology businesses, this remains a difficult challenge given the specialisation and continuity offered by China’s production and distribution prowess. Replicating this will take time, and significant investment, to achieve.