Global supply chain heading to Southeast Asia, India
Rising costs in China were the primary accelerator behind this shift towards diversification.
Manufacturing and production locations are expected to diversify to multiple locations across Southeast Asia and India in the next decade, global commercial real estate and investment management company JLL said.
Southeast Asia and India are expected to be net beneficiaries of companies diversifying manufacturing capabilities to China. But to take advantage of the volatility in the supply chain, companies will have to be flexible.
The matter of relocation of manufacturing outside of China has been explored by firms in the past few years, resulting in the China+1 strategy.
Under the said setup, companies add additional manufacturing bases outside of China to hedge against supply chain disruptions by reducing reliance on a single country.
JLL analysis showed that the effect has been mostly felt in the destination country, especially in Southeast Asia and India.
Consequently, governments are supporting these opportunities and implementing more policies that aim to boost their local manufacturing industries, placing a premium on land availability and access to capital sources.
Michael Ignatiadis, Head of Manufacturing Strategy, Asia Pacific, JLL, stressed that diversification within supply chains is a natural step for companies involved in manufacturing within the wider economic lifecycle of this region.
"We see Southeast Asia and India representing a natural complement to the existing production strength of China but feel that for companies to respond quickly to supply chain shifts, they need to adopt a flexible mindset towards land selection and funding options, he said.
This trend is driven not only for the need for supply chain diversification. It is also done to capitalise on the strong economic fundamentals of this region, including a large population and labour pool, favourable costs, and various incentives.
With a manufacturing investment perspective in mind, these factors position SEA and India as major manufacturing hubs for global markets.
Multiple sources said the increasing costs in China over the past 10 years have served as the primary driving force behind this shift towards diversification.
Land prices in China have also jumped, which can be up to twice higher compared to Southeast Asian countries and India.
This was due to higher demand for industrial land, along with rising wages and material costs.
Per JLL estimates, China holds the lion’s share of manufacturing FDI in the region, but the gap is narrowing. Indonesia raked in $28.7 billion in investment last year, up $4 billion from the year earlier. Vietnam’s FDI in manufacturing climbed over 30% to hit $23.5 billion.
Aside from this, factors such as skilled labour, infrastructure, environmental regulations, proximity to suppliers and customers, and political stability contribute significantly to a factory’s long-term success and sustainability.
JLL recommends carefully evaluating these non-cost or qualitative factors to make an informed decision and lay a strong foundation for future growth.
Peter Guevarra, Director, Research Consultancy, Asia Pacific, JLL., noted that each Southeast Asian economy is at a different level of its manufacturing storey.
He however confidently said that policymakers are extremely keen to rake advantage of diversification initiatives of supply chains.
"Companies need to carefully evaluate various factors such as costs, market access, infrastructure, labour, and governmental support before determining their global manufacturing investment strategies, Guevarra stressed.
