The global supply chains were severely disrupted during China’s lockdown from January to March in 2020. Orders which used to take 1 to 2 weeks to fulfill became months or even cancelled as there was no way to transport the goods out of China.
For instance, car manufacturers across the globe were impacted due to delays in the supply chains which halted production of certain car models due to a lack of car parts from China. From the chart below, we can observe that China’s Manufacturing PMI dropped from 50% in Dec 2019 to 35.7% in Feb 2020.
The disruptions in the supply chains have led to Fortune 500 manufacturers reconsidering their global supply chain strategy. Historically, manufacturers have positioned their production lines in the most cost-effective locations since logistics costs have decreased significantly in recent decades. Furthermore, “Just-In-Time” delivery method has helped to reduce inventory holding costs for many companies. However, the existing supply chain strategy is being re-tested during the Covid-19 outbreak which presents new problems i.e. insufficient safety stock in times of crisis.
Table of Contents
Key Changes to Supply Chains Envisioned to Counter the ‘China Factor’
1. Relocation of Production Lines Back to Home Country
Governments from major economies such as France and Japan have already launched incentive schemes by giving out aid and grants for companies to relocate their production lines back to their home country.
However, some companies may not be willing to move their production lines back to their home country due to several concerns. For example, unionised workforce in France has always been a headache for French companies. For Japanese companies, even though they have highly automated production lines, moving production lines back could present operational risks as the country is prone to natural disasters such as typhoons and earthquakes.
2. Regionalisation/Localization of Supply Chains
This is a strategy where the manufacturers source supplies from suppliers in nearby locations. An example of a well-known company that has adopted this strategy is Toyota. In fact, for its Georgetown factory, more than 350 suppliers are located within the United States and more than 100 are inside the Kentucky State.
However, this method presents its own set of issues when it comes to relying on suppliers with unique capabilities. For instance, Taiwan holds around 22% of the world’s semiconductor wafer fabrication capacity and more than 50% of the foundry capacity. Taiwan Semiconductor Manufacturing Company (TSMC), a leading semiconductor company in Taiwan and the world’s largest producer, accounts for approximately 67% of Taiwan’s capacity. TSMC has diversified its production lines into three different locations but some of its supplies come from a single supplier. For example, it only sources its advanced lithography systems from ASML, which is dependent on a single factory in Germany for its optical engine.
3. Diversification of Production Lines
Very often, manufacturers will think of having a second or alternative production line as a mitigation plan. However, the traditional theory of economies of scale can be used to argue against this arrangement, as the costs of setting up a production line and keeping it running require a certain volume to break even.
However, in this digital age, technology has the potential to resolve the issue of scale if the production lines are designed to be agile and dynamic. For example, the production lines can be tweaked in a short notice to produce different product types or product models.
What is in it for Malaysia?
Few countries in ASEAN have traditionally been the favoured destination for manufacturers such as Malaysia, Singapore, Thailand, and Vietnam. Out of the four, Malaysia is arguably the country that can benefit the most from this switch for the following reasons:
Educated and young workforce
More than 80% of the workforce is in semi to high-skilled category and more than 25% has a minimum of tertiary education. Many MNCs have established their Centre of Excellence in the country due to the availability of talents.
Key infrastructures such as reliable power supply, road and ports are ready for various types of manufacturing activities.
Strong support from the Government
Government support is prevalent especially in the manufacturing sector and e-commerce sector. For instance, it has the only Alibaba Fulfilment Centre in the region located in a dedicated Digital Free Trade Zone (DFTZ) near the international airport and sea port of Malaysia.
Financial and tax incentives from the Government
Such incentives help to promote Industrial 4.0 transformation for manufacturers and tax exemption for foreign manufacturers who bring in technology driven manufacturing processes.
In conclusion, Malaysia has been an ideal location in the ASEAN region and is growing in popularity among manufacturers. The future of supply chains is yet to be known but there are many benefits to reap in Malaysia. At WeCorporate, we assist manufacturers from market research to establishing company presence in Malaysia. So what are you waiting for? Engage us to revamp your supply chains and create your own future right now!
- The key changes to supply chains to counter the ‘China Factor’ are:
- Relocation of production lines back to home country
- Regionalisation/Localization of supply chains
- Diversification of production lines
- Malaysia is deemed to be an attractive location in the ASEAN region for manufacturers to reap maximum benefits when setting up their supply chains. Below are some key reasons on why Malaysia is an ideal location:
- Educated and young workforce
- Ready infrastructure
- Strong support from the government
- Financial and tax incentives from the government
- The Malaysian workforce comprises over 80% semi to high-skilled workers, with more than 25% having a minimum of tertiary education.
- The following below outlines the key government initiatives that help the supply chain management in Malaysia:
- Has the only Alibaba Fulfilment Centre in the region
- Financial and tax incentives to promote Industrial 4.0 transformation
- Tax exemption for foreign manufacturers
WeCorporate content team comprises experienced in-house and freelance writers who share trending and insightful content to empower and aspire entrepreneurs to change their gameplay in their business in Asia.
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