In the wake of disruptions caused by the Covid-19 pandemic, Asia’s logistics and supply chains have undergone seismic shifts. Covid-19 lockdowns, and the acceleration of e-commerce drove, home the vulnerabilities of relying too much on a single location and a geographically limited supply chain. 

The world’s manufacturing powerhouse, China, retained some Covid-19 restrictions until as late as December 2022. Meanwhile, growing geopolitical tensions and war in Europe have reinforced the need to diversify, a process that is still ongoing. 

Compelled to build up supply chain resilience, companies have embarked on a strategic recalibration to reduce dependency on any single nation for their supply chains. When feasible, they bring elements of the supply chain closer to home. While some have labor and production costs in mind, others are opting for countries with existing expertise in specific industries. 

The world has grown familiar with terms like “nearshoring” and “China Plus One”, where companies often maintain a presence in China but build capacity in another country or region. As countries engage in omnisourcing, diversifying their supply chains by looking for alternative “plus-one” countries to host manufacturing and production, these concepts have quickly become vital practices governing supply chain resilience. 

As we enter the endemic era, investing in supply chain diversification may seem like a natural progression. However, implementing an omnisourcing strategy comes with new and complex logistics challenges. What does omnisourcing look like in practice? And how should businesses adapt to fit the changing logistical needs of a post-pandemic world? 

Having endured hard lessons during the pandemic, businesses understand that they need to be as flexible and imaginative as possible. The key to effective logistics is getting the product to its destinations as quickly and cost-effectively as possible, even if that means creating bespoke multimodal solutions. 

“The appeal of our region, where we can jump into a multimodal solution, is what will keep the market moving forward. The road is a very important part of the solution,” said Thomas Tieber, CEO, DHL Global Forwarding, Southeast Asia. “Still, while the momentum is in the right direction for Asian road freight, challenges and opportunities remain for rethinking how the region’s freight is moved.”

Saving labor and manufacturing costs

While China’s manufacturing crown will not be replaceable in the short term, several Southeast Asian economies have emerged as powerhouses in different industries. As the cost of labor and rent increase worldwide, Southeast Asian countries such as Vietnam and Malaysia have become new hot spots for electronics manufacturing services.

Skilled labor is an important consideration when searching for alternative locations for production. Hence, companies should opt for countries with proven expertise in specific industries.

Southeast Asia’s labor pool holds a strong demographic advantage, with 155 million individuals aged 25 to 54 having a tertiary education, surpassing China’s 145 million. Furthermore, based on the skills rank data by World Bank Labor stats (February 2022) as shown in the PWC report Global Supply Chains: The Race to Rebalance, Malaysia was placed 30th in terms of skills ranking. Meanwhile, skill levels between China, ranked at 64, and Indonesia, ranked closely behind at 65, were comparable, suggesting that Southeast Asia has become a more prominent alternative for businesses.

Southeast Asian economies have also made their marks in specialized markets. Having spent the past 15 years building its expertise and reputation, Vietnam has attracted many companies to start up manufacturing and assembling hubs for electronics in its market. As outlined in Vietnam’s “National Strategy for the Fourth Industrial Revolution,” launched in 2020, the country is gradually upgrading its expertise as a viable manufacturing and assembly hub to specialize in more complex technologies.

Samsung, for instance, relocated its manufacturing to Vietnam as early as 2008, citing cheaper labor costs and competition from local smartphone manufacturers. The South Korean giant began by starting a mobile phone factory in Vietnam’s Bac Ninh province, located just outside Hanoi. The move to diversify its supply chain early on allowed Samsung to insulate itself more effectively from geopolitical tensions amid the trade war and the pandemic. Samsung now manufactures half of its smartphones in Vietnam, and its experience has also laid the groundwork for its competitors, including Apple, to follow. The latter has since transferred part of its Apple Watch, iPad, Macbook, and Airpods production to Vietnam.

Digitalization and Automation

Beyond having ample capacity available for both the company and its suppliers to store inventory, companies looking to increase their future scale of production should expect to handle increasing volumes and complexity.

Companies should look for high-throughput, high-density warehouse space with digitalized processes and advanced security, as such facilities can be expanded and adapted to their scale of production. 24-hour CCTV security cameras should be installed to ensure the safety of inventory, and scanning technology and robotic process automation should ensure accuracy and speed up processes. Warehouses should also be well-equipped with a suitable level of infrastructure, adequate power supply and charging points to support the mechanical and automated facilities within the warehouse.

Shifting production of less complex components

With adequate infrastructure to support production at cheaper costs, Southeast Asia has attracted technology companies to shift their production of less complex components into the country. Sony, for example, has decided to relocate 92 percent of its camera production to Thailand, while the more complex production of its lenses remains in China.

In the first wave of the omnisourcing trend, more advanced economies have been in optimal positions to reap the benefits of supply chain diversification, as we saw manufacturing move to Vietnam, Thailand, and Malaysia. But as these countries upgrade their manufacturing prowess, a similar dynamic is forming between the more advanced economies and the developing economies in the region. A second wave has seen lighter manufacturing, assembly and finishing of products to Cambodia, and more recently, Laos.

While the Thai government pushes to expand its electronics and computer manufacturing from components to integrated circuits, devices, Internet-of-Things micro-electronics and embedded systems, the country is slowly outsourcing its labor-intensive parts to Cambodia. As part of a “Country Plus One” strategy, labor-intensive parts are made in Cambodia and transported to Thailand or Vietnam for final assembly. 

As a result, according to the latest figures available, automotive component exports from Cambodia tripled between 2015 and 2019 to US$200 million (€187.78 million), while electronic exports doubled, to US$900 million (€845 million).

Suppliers moving where customers go

Moving production is not just about moving factory locations to a different country. It also means that businesses will lose their ecosystem of local suppliers. While it is possible to recreate an inbound supply chain with the same or new suppliers, developing a functional inbound supply chain takes time. Companies may even incur additional costs while trying to keep up with production rates.

Companies tend to hit roadblocks due to difficulties in securing all the components needed within their supply chain. While many companies are moving production to countries such as Vietnam and Malaysia, these countries still depend heavily on China for raw materials and sub-components.

However, as major companies are paying more attention to diversifying their resources and supply chains, their component manufacturers and suppliers are also moving to where their customers are. Following Samsung’s diversification of its supply chain to Vietnam, one of its suppliers, Chinese electronics component producer BOE Technology, plans to invest in new factories in Vietnam, to cater to the South Korean technology giant’s demand for smartphone displays there.

Tailoring infrastructure to support industries of focus

For decades, ASEAN countries have been laying the groundwork for a more connected region by building its infrastructure and focusing on strong regional trade policies. The region’s strategic location offers proximity to major markets, including China and India.

Apart from having multiple entry points into China via road, rail, air, or ocean, Southeast Asian countries are also the region most tightly connected via road freight, making it an ideal “Plus-One” region. The Asian Highway now spans 32 countries and has more than 145,000 kilometers of road.

Road freight proved to be a cost-effective and reliable intra-Asia freight solution during the pandemic. The e-commerce boom and a rebound in manufacturing prompted cross-border road transportation in Southeast Asia to play a more significant role in international long-haul solutions across Asia.

“If you take a shipment from Singapore to Malaysia or  Thailand, it can be faster and more cost-efficient to go on the road. You can get goods delivered door-to-door instead of multiple transitions with air or ocean freight,” said Bruno Selmoni, Head of Road Freight & Multimodal, Southeast Asia, DHL Global Forwarding. 

Furthermore, ASEAN countries have also tailored their infrastructure to support the industries each country is focused on. And some of their investments are already paying off. 

The country has also been investing in its infrastructure. The Thai government has committed to expanding 5G networks to cover 98 percent of the population by 2027. A high-speed train project to connect Bangkok to key regions within the country and its southern neighbor, Malaysia, will be completed in 2026. 

Having specialized in automotive assembly since the 1960s, Thailand is Asia's fifth-largest manufacturer of internal combustion engine vehicles. Leveraging its domestic design potential and natural position as an exporter to the Southeast Asian region, the country plans to be ASEAN’s key Electric Vehicles (EV) hub by 2025. 

To facilitate their journey to this goal, in 2017, Thailand set up the Eastern Economic Corridor to promote economic integration among three provinces on its eastern seaboard. This has shaped an ecosystem for components-makers and other companies providing services and products to the industry.

Similarly, Cambodia has announced ambitious plans to transform its infrastructure, including high-speed rail links between the capital, Phnom Penh and the Thai border to the west, Vietnam to the east, and to its southern port, Sihanoukville. In November 2023, the Siem Reap Angkor International Airport (SAI) was opened, and a new airport, Techo International Airport, located 20 kilometers South of Phnom Penh, is expected to open in mid-2025. The Cambodian government also approved five vehicle investment projects in early 2023. When finished, they will bring the number of car assembly plants to nine in the kingdom.

In July 2023, Thai and Cambodian railway authorities successfully reinstated rail links for the first time in the last half-century. Track capacity on both sides of the border is currently adequate for up to 26 return pairs of trains per day between Central Thailand and Phnom Penh and is already linked to commercial users through private sidings.

With the rail connection, both the Thai and Cambodian government hope to facilitate smoother transactions in manufacturing trade between the two countries.

Trade cooperation for a more connected ASEAN

As the region continues to invest in its road infrastructure, key regulatory initiatives, such as the ASEAN Customs Transit System (ACTS) and the Regional Comprehensive Economic Partnership (RCEP), will only smooth the road ahead. 

“With these regional trade policies in mind, road freight will play an increasingly significant role in international long-haul solutions across Asia, especially when combined with other freight modes,” noted Tieber.  

ASEAN has also recently upgraded the ASEAN Trade in Goods Agreement (ATIGA) to deepen economic integration within the region, and further propel ASEAN’s goal of doubling intra-ASEAN trade between 2017 and 2025. Through ATIGA, Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand have eliminated intra-ASEAN import duties on 99.65 percent of their tariff lines, while Cambodia, Laos, Myanmar, and Vietnam have reduced import duties to zero to five percent on 98.86 percent of their tariff lines. 

All these agreements and initiatives aim to reduce barriers to trade, bolstering intra-regional trade and economic growth in ASEAN. 

As businesses navigate the complexities of an endemic world, Southeast Asia’s strategic embrace of omnisourcing signals a promising future for the region’s growing role in interconnected global trade.