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The future of supply chain and how Malaysia can be part of the solution

When China was on a lock-down between January to March 2020, the global supply chain was greatly disrupted. 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 supply chain delays which halted production of certain car models due to lack of car parts coming from China. From the chart below, it was observed that China’s Manufacturing PMI dropped from 50% in Dec 2019 to 35.7% in Feb 2020.

The supply-chain disruptions have led to Fortune 500 manufacturers reconsidering their global supply chain strategy. Historically, manufacturers positioned their production lines at the most cost-effective locations since logistics costs have reduced significantly over the past 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 during the Covid-19 outbreak.

So, what are the key changes to supply chains that we envision would take place to counter the “China Factor”?

1. Relocate the production lines back to home country

Governments from major economies such as France and Japan have already launched incentive schemes by giving out aids and grants for companies to relocate their production lines back to the home country.

However, some companies may not willing to move their production lines back to the home country due to several concerns. For example, unionised workforce in France have always been a headache for French companies. For Japanese companies, even though it has a highly automated production lines, moving production lines back could present other operational risks as the country is prone to natural disaster such as typhoon and earthquakes.

2. Regionalisation/localization of supply chain

This is a strategy where the manufacturer source supplies from suppliers from nearby locations. This is a strategy being adopted by 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 accounts for approximately 67% of Taiwan’s capacity and is the World’s largest producer. TSMC has diversified its production lines into three different location but some of its supplies comes from a single supplier. For example, for its advanced lithography systems it only sources from ASML which is in turn dependent is 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 lines as mitigation plan. However, the traditional theory of economies of scale will usually be used as arguments against this arrangement, as the costs of setting up a production lines and keeping it running require certain volume to break even.

However, in this digital age, technology may be able 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 type or product model.

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:

1. Educated and young workforce – More than 80% of the workforce are in semi to high-skilled category and more than 25% have a minimum of tertiary education. Many MNCs have established their Centre of Excellence in the country as the talents are readily available.
2. Ready infrastructure – Such as reliable power supply, road and ports are ready for various type of manufacturing activities.
3. Strong support from the Government – Especially in manufacturing sector and e-commerce sector. For instance, it has the only Alibaba Fulfilment Centre in the region which is in a dedicated Digital Free Trade Zone (DFTZ) located near both the international airport and sea port of Malaysia.
4. Financial and tax incentives from the Government – To promote Industrial 4.0 transformation for manufacturers and tax exemption for foreign manufacturers who bring in technology driven manufacturing process.

In summary, if you are a manufacturer looking to re-design your supply chain – Malaysia can be an ideal location and WeCorporate is ready to assist you from market research to establishing your company presence in Malaysia. Contact us through this link 

If you require further assistance, simply contact us here.