Summer 2023

Asia’s new supply chain equilibrium

Asia’s new supply chain equilibrium

Over the last few years, international manufacturers have been increasingly looking to shift some production away from China, in order to add resilience to their supply chains. Megan Ramsay examines the challenges and opportunities this brings to the region’s air logistics stakeholders

According to freight rate benchmarking and market analysis company Xeneta, the trade war between the US and China, which began in 2018, had little effect on their bilateral air cargo trade in the first three years. Xeneta analysis of data from US Census Bureau indicates that China’s share of Asia-to-US air trade volumes in 2020 grew by 3.3 percentage points, year on year, to 55.5%, driven by demand for personal protective equipment (PPE) amid the pandemic.

However, the situation has evolved in the last two years, as China faced lockdowns due to new Covid-19 variants and the trade war escalated. By 2022, China’s share of air cargo volumes from Asia to the US had dropped by 10.3 percentage points compared to 2020, with China accounting for 45.2% of Asia-US air exports.

Complex decoupling
The latest DHL Global Connectedness Index indicates that the US and China are indeed decoupling in many fields, although the situation is by no means straightforward.
DHL said: “Looking at 11 types of trade, capital, information, and people flows (such as merchandise exports, M&A transactions, and scientific research collaboration), the share of US flows with China declined for eight out of 11 types since 2016. In the same period, the share of China’s flows with the US decreased for seven out of 10 types with data available for China. Several of these were large declines.

“Nonetheless, the US and China are still linked by far greater flows than any other two countries that do not share a border,” DHL went on. “Further, the data shows that, so far, the decoupling between these two countries has not led to a broader fragmentation of global flows between rival blocs of countries.”

The air cargo market between the EU and China, meanwhile, has shown resilience and growth amid the various challenges affecting global trade. According to Xeneta analysis of Eurostat data, China represented more than half of the air trade volume from Asia to the EU in 2022, with a market share of 55.6%. Although it fell 7.3 percentage points from 2020 due to the high demand for PPE, China’s share of the Asia-to-EU market in 2022 showed a slight increase from the pre-trade-war level of 2017 (54.8%).

Slow rise from southeast Asia
In contrast, southeast Asian countries have not gained much market share in air trade with the EU, accounting for only 10% of the total Asia-to-EU volumes in 2022, as flows from China remained robust.

Vietnam, Malaysia and Thailand are among the countries that have seen the most manufacturers set up their additional Asian locations – the so-called ‘China+1’ model – and as such may be described as the main beneficiaries of the China–US trade war. Vietnam’s volume share of the Asia-to-US market, for instance, has risen 3.2 percentage points compared to pre-trade-war 2017 level.

Sharing a border with China, Vietnam has been a key part of the China+1 strategy for both Western and Chinese firms, freight forwarder Dimerco says, noting that some Chinese companies have relocated there to avoid US tariffs.

Foreign direct investment (FDI) in Malaysia has increased substantially in recent years. Its high-tech manufacturing sector is benefitting from this and is expected to continue to do so as the country pursues its Digital Blueprint Program.

And Thailand is rapidly building out its supply chain and manufacturing infrastructure. As a result, in the last several years FDI applications there have risen by as much as 80%, Dimerco says. The country’s medical, metals and machinery sectors have all seen increased FDI.

Bangladesh, the Philippines, Singapore and Indonesia are also now home to more international manufacturers than previously.

India’s potential
Xeneta says that India is lagging behind some of these East Asian countries, with its volume share on both the Asia-to-US and Asia-to-Europe markets falling by 0.8 percentage points and 1.9 percentage points, respectively, from 2017 to 2022.

But not everyone agrees with that assessment. Adrien Thominet, executive chairman of Paris-headquartered GSSA ECS Group, says: “India is super dynamic and pharmaceuticals are a big market there. India benefited from China’s shutdown and gained a lot of market share because its manufacturing sector could replace what was no longer coming out of China.”

Thominet says that Japan and Korea are also “very dynamic” and have high expectations of recovering any market share they lost during the pandemic.

On the back of this, ECS is investing in northeast Asia. It opened Global Air Cargo branches in Tokyo and Seoul in 2022 and is seeing good activity there so far.

Thominet observes: “Japan and Korea are less affected by the economic crisis and they are more stable. Their industries seem to be more solid and robust; both countries export mainly electronic goods. We are seeing a lot of capacity deployed in northeast Asia. The yields are better, driven by the Russia-Ukraine war that prevents European carriers overflying Russia.”

Pressure to adapt
As already noted, tensions with the US are not the only factor in the equation. China+1 was already in place before the pandemic, but Covid restrictions encouraged more foreign companies to adapt in order to keep their supply chain moving.

In the short term, this trend put some pressure on air operations and airports – but the overall pressure is moderate now, according to Jason Ru, senior director for air freight at freight forwarder Flexport Asia.

Freight specialists say the main reasons for the current slower pace of adoption of the China+1 approach include the Chinese government’s lifting of Covid restrictions and the fact that it takes time to build up or move production lines to other countries. Plus, alternative locations may well have relatively limited freight capacity and infrastructure, especially in emerging countries like Vietnam, India, Thailand, Malaysia, Bangladesh, the Philippines and Indonesia that have so far proved most popular among manufacturers.

Still, it is expected that the trend will continue, and that volumes of goods flying out of southeast Asian countries will continue to grow as a result.

Local operational limitations
Ravishankar Mirle, VP cargo commercial for Far East and Australasia at Emirates, comments: “As manufacturers across Asia ramp up production and search for alternative export routes to reach their buyers across the US and Europe … [t]here are some challenges that need to be met, such as airports’ ability to handle the increase in cargo volume and coping with prevailing local operational procedures and requirements.”

Investments may be necessary in items such as cool dollies for pharmaceuticals, warehouses for general cargo storage, special storage and training of additional ground handling staff as well as specialised cargo handling staff. Airports also need to implement structural changes to accommodate increased demand.

“Such investments would require significant funding from the airport and local authorities, and even at the federal level,” Mirle remarks. “However, such investments would ultimately benefit the local economy.”

New facilities
Indeed, southeast Asian countries are gearing up not just with improvements to existing infrastructure but also with entirely new facilities.

“For the emerging demand down the road, some countries have plans to expand air infrastructure,” Flexport’s Ru explains. “For example, the Malaysian government has announced that the Penang International Airport (PIA) expansion project will begin this year.”

Vietnam is investing in its transport links, too. Its 2030 master plan includes plans to construct 5,000km of expressways, a deepwater port and high-speed rail links.

As for air operations at Noi Bai and Ho Chi Minh airports, the existing cargo terminal capacity can still cope with demand, but congestion can occur during peak hours.

In addition to Noi Bai Airport, two other airports in Hai Phong and Van Don are options for international air cargo traffic in northern Vietnam, while in southern Vietnam, the new Long Thanh International airport is expected to open by the end of 2025 and will further increase Vietnam’s capacity for air cargo.

Collaboration benefits
Airports are not working in isolation, Mirle points out. “We have observed that airports with fast turnaround times have collaborated with local stakeholders to accommodate the growing demand, reduce congestion, streamline processes, and decrease the overall air transport time.”

In the last year or so, Emirates SkyCargo has ordered five more B777 freighters, and set aside 10 passenger B777s for conversion into freighters, as part of its “commitment to bridging East and West”. Mirle says the B777 is well suited for the Asian market as it can transport over 100 tonnes per flight, with Emirates transporting a variety of cargo on its flights from Asia including electronics, perishables, valuables and pharmaceuticals.

Thominet points out that “the transfer of activities from China to other countries in southeast Asia, especially Vietnam and India, through the China+1 concept has been gradual rather than sudden. China has remained dynamic over the last three years even though it has been closed until recently.

Gradual transition
“So, airports in the region have not found themselves suddenly overloaded. It’s true that China was pretty saturated in terms of cargo handling capacity, but … alternative airports have the capacity to absorb the extra volumes, so we have not seen any operational issues and no major disruption.”

Nonetheless, forwarders are finding it necessary to adapt their services in order to offer shippers alternative supply chains that enable them to meet their delivery schedules in some cases where available capacity is inadequate.
“Take India and Vietnam for example,” says Dimerco’s Global Sales & Marketing, Central Service Center (CSCGSM) team. “India has risen to be the next global manufacturing hub and holds great market potential, and those who are interested in entering the Indian market can start doing business in the free trade warehousing zone (FTWZ) there to avoid making heavy investments in the first place. Besides, due to the limited capacity, Customs clearance has to be finished within 48 hours after a flight lands in India.”

As a forwarder, Dimerco’s mission in an emerging market such as India is to help companies comply with local laws and ensure they are aware of tax regulations, for instance.

Vietnamese shoes and apparel
Vietnam, meanwhile, is the second-largest supplier of shoes and apparel to the US; it is home to more than 200 manufacturing plants for Nike and Adidas alone. Big tech companies such as Apple have also relocated some production to Vietnam. Given the tight freight capacity at some airports and on some carriers, forwarders must offer flexible, multimodal options so that customers can successfully expand their operations.
Ru says: “Air cargo operations in Vietnam have room to improve service quality as export and import operations are still controlled by cargo terminals. In addition, technology has not yet been widely implemented from shipper to cargo agent, airlines, and cargo terminal. For example, only a few carriers have adopted e-AWB; it is not popular among all carriers yet.”

Mirle agrees, adding that many cargo terminals, too, still rely on paper documentation and multiple manual approvals, which can be time-consuming.

In contrast: “From our end [in Dubai], due to the digitisation of local police and Customs procedures, the cargo can be unloaded, reloaded, and ready for departure to Europe or the US within four hours,” he says.

Regional outlook
Dimerco’s CSCGSM team believes that US and other non-China-based original equipment manufacturers and original design manufacturers will sooner or later “split their production and move out with their equipment and facilities internationally” to supply different locations.

“However, as long as China can maintain low-end manufacturing and also grow higher-value sectors, the China+1 strategy will not reduce the number of manufacturers in China. But it could help developing countries grow through the expansion of multinational corporations’ business.”
With manufacturers and logistics providers investing time, money and effort in alternative supply chains, it is worth asking whether they will withdraw from their ‘+1’ locations now that China has reopened, or whether geopolitical tensions will encourage them to adhere to their new setup. Nor should the changing relationships between southeast Asian nations be ignored.

For instance, Vietnam has signed a number of free trade agreements, such as the EU-Vietnam Free Trade Agreement (EVFTA), the UK-Vietnam Free Trade Agreement (UKVFTA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP).

“Some feel Vietnam may be one of the biggest beneficiaries of the RCEP, the world’s largest trade agreement,” the team at Dimerco observes.

RCEP trading bloc
The RCEP is expected to result in an EU-type trading bloc with harmonised rates and standards as well as reduced tariffs on the majority of goods traded between members.
What this could mean for global trade flows remains to be seen, but Dimerco says: “The trade agreement is likely to be a boon to the China+1 trend over time, depending on how quickly countries can upgrade their logistics and information infrastructures,” as companies with supply chains located within the RCEP will be able to take advantage of its common rules of origin.
All in all, it appears that production and distribution flows are finding a new equilibrium in southeast Asia.

And China’s recovery – even if it does not reach the same level of growth as it had before Covid-19 – is welcomed by other countries in the region, Thominet says; they believe that China’s growth will be good for them, too.

“The fact that manufacturers are adopting a China+1 policy is healthy,” he concludes.


Positive momentum

Tokyo-headquartered freight forwarder Nippon Express said in February that shippers’ business continuity strategies have changed the way shippers manage inventory since Covid hit, while geopolitical risks are also causing customers to re-evaluate how they hold inventory.

“We see these trends as positive momentum for our company,” the forwarder said. “In addition to our global network, we have warehouses and other facilities in every region, allowing us to respond to a wide range of customer needs. And we believe that the ongoing changes will be a positive for us as business opportunities.”

Nippon Express expects normalisation in the supply chain to have a positive impact in the current fiscal year. Plus, while inventory adjustments will have an impact on business, there is also an order backlog for some goods due to the shortage of semiconductors (the top five producers of which are Taiwan, South Korea, Japan, the US and China). As production recovers, it is likely that cargo volumes will follow.