Supply Chain Frontiers issue #41
The stage is set for Southeast Asia to take its place as a world-leading trading power. In addition to benefiting from the growth of China and India, domestic markets are expanding and the region is forging stronger links with other developing economies. However, in order to fulfill its regional and global ambitions, Southeast Asia needs to build world-class supply chains.
Located in the heart of a vibrant economic zone, ASEAN countries (Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam) have a combined population of 600 million people and a GDP of $1.5 trillion. They generate $1.7 trillion worth of trade annually, and are expected to maintain growth rates of 5% to 6% over the next few years.
ASEAN aims to establish a single market, the ASEAN Economic Community (AEC), by 2015. Regardless of whether this target date is met, the goal is indicative of the region’s economic ambitions.
Another reason to believe that Southeast Asia is on the cusp of a new era of prosperity is that its expansion is fueled by several sources that reinforce its links with regional and global economies.
Exports from ASEAN countries to China and India have almost tripled over the last decade. Trade volumes are projected to climb even higher as Chinese and Indian consumers gain more purchasing power.
In addition, Southeast Asia benefits from closer ties with other emerging economies. While world trade has, on average, expanded by 16% over the period 2004–2008, Asia’s trade with the Middle East and Latin America has increased by an average of 30% during this time, for example.
But there are some speed bumps on the region’s path to prosperity. One of the most difficult challenges is poor supply chain infrastructure, which, if not addressed, could seriously impede future growth in Southeast Asia.
The issues were laid out by ASEAN Deputy Secretary-General, S. Pushpanathan, in a paper presented at the 24th Asia-Pacific Roundtable, Kuala Lumpur, Malaysia, June 2010.
Fragmented roads. Over the last decade, the number of vehicles has doubled in countries such as Cambodia, Indonesia, Myanmar, and Vietnam, but the development of respective highway systems has lagged behind. The quality and capacity of roads vary greatly from country to country. Singapore boasts fully paved networks, while in Cambodia and Lao PDR less than 10% of the highway networks are paved.
Gaps in rail transportation. The development of new rail links “has not been substantial” over recent years in any of the ASEAN countries except Vietnam, notes Pushpanathan. A flagship project is the Singapore-Kunming Rail Link (SKRL). Scheduled for completion by 2015, the SKRL line is built on existing national networks and will span seven ASEAN countries. However, completing key links in the route will require substantial resources.
Uneven port development. Forty-seven designated ports in nine countries form the backbone of the trans-ASEAN port network. Singapore and Malaysia’s Port Klang are leading facilities; the remaining gateway ports vary greatly in terms of their cargo-handling capabilities.
Air shortfalls. A number of ASEAN member states have invested in airport improvements, and facilities are generally regarded as adequate for current traffic levels in capital cities. However, freight-handling terminals in some airports do not meet the required standards.
The region’s inadequate transportation networks add logistics costs and hamper the flow of goods. A 2008 ASEAN study estimates the logistics costs associated with the intra-ASEAN movement of freight containers as $2.25 billion a year. According to the study, an ASEAN blueprint for improving the efficiency of distribution networks could reduce these costs by roughly $140 million per year.
Another weak link in the supply chains that underpin growth in Southeast Asia is a lack of human capital. Enterprises that are unable to design, build, and manage world-class supply chains are at a serious competitive disadvantage in today’s complex business environment. Moreover, Southeast Asian companies must develop supply chain solutions that are geared to the region’s special demands; copying western best practices is not a viable option.
Educational standards vary from country to country in the ASEAN region. In most Southeast Asian nations, the level of supply chain proficiency is “average” says Roger Bloemen, Vice President Global Supply Chain, at international specialty chemical manufacturer Solutia. Headquartered in St. Louis, Missouri, US, the company has manufacturing plants in Malaysia, Japan, and China, and is looking to expand in the region. More specifically, “we are struggling to find people with adequate operations management skills,” explains Bloemen. In his opinion, “students in the region need more exposure to real-world applications of the analytical methods they learn at school.”
Alliances with institutions in the West are particularly effective in raising educational standards, and enable colleges to fast-track the creation of more advanced supply chain programs. Such partnerships exist in Singapore, and “have probably boosted their industrial engineering and supply chain management expertise dramatically,” notes Bloemen.
This is the goal of a new educational alliance between Malaysia and the Massachusetts Institute of Technology’s Center for Transportation & Logistics (MIT CTL). The partnership has created the Malaysia Institute for Supply Chain Innovation (MISI), a center for supply chain education and research. As a member of MIT’s Global SCALE (Supply Chain and Logistics Excellence) Network, MISI will draw on the network’s collective expertise to develop human resource solutions in the supply chain domain.
Southeast Asia’s supply chain challenges will be discussed at the Global Supply Chain SumMIT, in Shah Alam, Malaysia, near Kuala Lumpur, July 19, 2011. This article is based on a new MISI white paper titled, Southeast Asia’s Supply Chain Challenge: Building a Platform for Growth. For more information on the SumMIT and the white paper, contact Tara Faulkner, Director of Communications, MIT Center for Transportation & Logistics, email: taraf@mit.edu, tel: +1 617.253.4592.