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Nov 05,2021

Supply Chain: Nearshore compilation becomes a relevant choice

Supply Chain: Nearshore compilation becomes a relevant choice

The ongoing epidemic situation in Southeast Asia and China's energy shortage have severely affected East Asia's manufacturing capacity. At the same time, ongoing supply chain disruptions now make nearshore outsourcing an increasingly important supply diversification option.

 

In recent months, the fight against the ongoing pandemic has caused losses to Southeast Asia, which has so far been one of the most promising options for supply diversification. Since June 2021, Vietnam’s Purchasing Management Index (PMI) has been below 50, indicating that manufacturing activities are shrinking. The manufacturing capacity of some other Southeast Asian countries is also restricted. Thailand’s Purchasing Managers’ Index for five consecutive months showed a contraction in manufacturing activity. The clothing and footwear manufacturing industry is one of the worst-hit industries.

 

The reduction in manufacturing activity in Southeast Asia has forced companies to look for alternative production locations, especially in the coming holidays and expected rebound in retail consumption. One of the most serious choices is undoubtedly China.

Air freight services

Figure 1- Data source: IHS Markit and National Bureau of Statistics of China

However, China’s current energy shortage has created an asymmetry between the reduction in production capacity and export demand. Some particularly severely affected regions are China’s major manufacturing centers, such as Jiangsu and Zhejiang. Although domestic production is temporarily hindered by severe weather conditions, some administrative measures have been taken to expand domestic coal supply. At the same time, China has accelerated international coal procurement. According to Reuters, China's coal imports in September increased by 76%.

 

Therefore, it is first necessary to realize that tight energy supply will increase inflation. However, the limited ability to meet global coal demand may also cause raw material prices to rise. In addition, China's recent policy of liberalizing coal-fired energy prices will also increase China's manufacturing costs. However, due to soaring prices, policy interventions are being planned. Second, we can expect that the industry will continue to be restricted to coordinate energy consumption and environmental regulations, which will put pressure on China's export activities.

 

India's strong recovery

Contrary to the limited manufacturing activities in East Asian countries, India has seen a strong recovery in the industry. According to data from the Ministry of Industry and Commerce of India, exports of non-oil and non-precious stones and jewellery in September 2021 increased by 18.59% year-on-year and 33.14% from September 2019, surpassing the performance before the pandemic. This increase can be attributed to the increase in exports of engineering, chemical, textile and electronic products.

air supply shipping

The strong performance is expected to continue. In the short term, September
The accelerated growth of air supply shipping export orders compared with August indicates that due to restrictions on manufacturing capacity in East Asia, shippers are continuing to look for alternative suppliers.
In a broader time frame, India is the third largest recipient of foreign direct investment (FDI) in 2020, especially in the information and telecommunications industry, after China (US$212 billion) and the United States (US$171 billion), meaning There is hope to flow out of India, especially in the electronic machinery category.

 

Nearshoring: The way forward?
So far, the procurement of diversified strategies has mainly benefited from Southeast Asia, which is consistent with the existing expertise and lower labor costs in the region, as well as the relatively controllable pandemic situation. However, the decline in East Asian manufacturing capacity, record transportation costs, and congestion in various modes of transportation now make nearshore outsourcing truly relevant.

 

In contrast to the government’s emphasis on near-shore/return of strategic industries (such as electric vehicle batteries and pharmaceuticals), current near-shore operations are traditionally concentrated in Asian industries, such as furniture and clothing manufacturing. For example, the Italian fashion group Benetton plans to halve its production in Asia and transfer manufacturing activities to the Balkans and Eastern Europe to get closer to its market. Similarly, IKEA announced the transfer of some manufacturing activities to Turkey.

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