Tigers of Pacific Rim poised to profit from China growth

China has transformed the global manufacturing landscape. What's less apparent is the role that smaller Pacific Rim countries—specifically Vietnam, Thailand, Indonesia, and Malaysia—have played in that transformation.

While these nations haven't nearly the manufacturing base or export volume as China, they glimmer as attractive alternatives for global manufacturers. And as China's economy matures in terms of constrained production capacity, higher wages, and consumer demand, the so-called Asian tigers are in good shape to reap the benefits.

Certainly the fundamentals look good. The average annual economic growth rate for members of the Association of Southeast Asian Nations (ASEAN) is nearly 6 percent—not quite at the level of India and China, but still impressive. ASEAN includes Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Burma/Myanmar, Philippines, Singapore, Thailand, and Vietnam. Collectively, the ASEAN population is nearly 550 million—about 10 percent larger than the European Union.

As with other sectors, Thailand’s automotive industry has been greatly aided by trade deals, including The Thailand-Australia Free Trade Agreement (TAFTA).

“The manufacturing industry plays a significant role in all the countries covered under ASEAN,” says Adam Jura, an analyst with London-based Datamonitor. “It's often the industry given the most attention by governments due to its high level of employment and the ability to drive economic terms of trade [therefore affecting exchange rates].”

The currency crisis of 1997 is very much in the rearview mirror. There is widespread political and financial stability across the region, even if Thailand's military coup last year clouded outlooks for the “Detroit of Asia.”

Among ASEAN members, more than 40 trade deals were signed in 2006, and additional deals are in the works with China, Japan, and South Korea. The organization has set a goal to potentially eliminate tariffs by 2015 with a regional trade deal.

“The competitiveness between Japan and China seems to be heating up as each country is trying to close strong deals with the smaller Southeast Asian nations,” says Bernie Hart, logistics company product head for JPMorgan Global Trade Services. “Trade agreements not only enhance commerce, but also offer political benefits in terms of stronger relations between states, and increased stability.”

As more global manufacturers source from the region, service providers are ramping up their offerings. APL Logistics, a subsidiary of Singapore-based NOL Group, offers sourcing support and shipping services to global manufacturers in multiple sectors.

“As our customers expand their operations in the region, we grow right along with them,” says Kevin McKelvie, VP of strategic account management for APL Logistics.

Beyond China, APL serves manufacturing clients in 22 Asian countries. One of the world's largest PC makers relies on APL for numerous supply chain management functions within Asia. In addition to transportation management, APL Logistics handles vendor-managed inventory tasks, provides end-to-end shipment visibility, and enables warehouse bypass capabilities. Further, a custom-designed portal delivers EDI capabilities and shipment tracking.

Technology is a growing part of APL Logistics' portfolio. For one athletic shoe company, APL provides origin-management services to establish the export process among global suppliers. Supply chain management applications are linked up to enterprise systems, ensuring visibility based on timely information.

The expanding market in China is likely to open up greater opportunities for the United States, as well as other producers.

APL and its parent, NOL Group, are enabling economic growth in Vietnam. Through another subsidiary, NOL invested in the expansion of the Vietnam International Container Terminals (VICT) in Ho Chi Minh City. Plans call for expanding the size of the berths to handle four container ships at a time and to upgrade dockside equipment. The port, which already handles about 70 percent of container ship traffic today, will double its capacity by 2008.

“VICT is one of the great success stories of this exciting and fast-growing nation,” says Cedric Foo, Deputy Chairman of First Logistics Development Company, the joint venture that owns and operates VICT. “VICT's location on the doorstep of Vietnam's manufacturing heartland, combined with the ongoing program of long-term investment in facilities, means it will continue to play a vital role in facilitating Vietnam's trade with the rest of world.”

APL's shipping unit offers fixed rates for “less than truckload” and “less than container” loads from seven Asian ports, including those in Vietnam, Singapore, Japan, Korea, and Taiwan. Obviously ocean shipping takes longer, but it is more reliable and about 25 percent cheaper. Typically, shipments make it from Asia to final destinations in the U.S. in 16 or 17 days via APL's OceanGuaranteed services, launched in 2006.

Getting a handle on the true timing and cost of such loads is a challenge faced by many early entrants into Asia.

“Transit-time variability drives up shippers' total supply chain costs, and is becoming a major problem,” says a recent report from Arlington, Va.-based MergeGlobal. “The market has produced surprisingly few intermediate options for shippers unhappy with existing ocean service levels.”

Many manufacturers save money on labor by sourcing from Asian countries, but then give those savings back, compromising overall supply chain performance because of the cost, inefficiency, and uncertainty of long-distance shipping. Other companies use “emergency” air-freight shipments to ensure products reach their destinations. “The hidden costs arising from late shipments are large enough to impact profitability,” MergeGlobal's report concludes.

Vietnam is considered by many the “hottest” tiger in terms of near-term growth and buzz in manufacturing circles. Since U.S. trade sanctions were lifted in the 1990s, the economy has grown at a healthy 8-percent clip. The U.S. is now Vietnam's top trading partner. Exports have shot up as much 20 percent annually, according to data from ASEAN.

Vietnam joined the WTO within the last year. Its chief exports include textiles, footwear, and furniture. Vietnam's energy sector also is growing, with crude oil output on the rise. But there's little doubt that Vietnam will be a significant player in high-tech in the near future. In 2006, chipmaker Intel announced a $1-billion investment plan in an industrial park outside Ho Chi Minh City. That's more than the company has invested in China in the last decade.

Overall, capital investment in the manufacturing of electronics and computer products is expected to reach U.S.$3 billion in 2007, representing a big chunk of total foreign direct investment in the country.

Jabil, a St. Petersburg, Fla.-based contract manufacturer and supply chain services provider, opened a 55,000-square-foot facility in Ho Chi Minh City's Saigon Hi-Tech Park to serve Hewlett-Packard's imaging and printing business. “We are developing Vietnam as a production-for-export location,” says Bill Muir, Jabil's regional president for Asia. “Vietnam offers a globally competitive cost base, a strong workforce, and good balance to our Asia footprint.”

According to Kok Chwee Lui, VP, HP Imaging & Printing manufacturing operations, “On our own, HP probably would not be investing in an HP factory in Vietnam, but Jabil can start small and then bring in other customers. Also, Jabil can drive material costs down by pooling the spending power of its many customers, which helps us bring new supply bases or new ecosystems into the equation. If we were on our own, we would just have our own suppliers, but working with Jabil gives us the benefit of their combined supply base.”

According to a recent report from East-West Associates, a Charlotte, N.C.-based consultancy, “Vietnam is a more favored low-cost locale compared to China,” adding that Vietnamese workers make about $60 per month—i.e., less than their counterparts on the highly developed south coast of China. Plus, they work a longer work week.

In response, the Chinese government encourages investment in the less-developed Western and interior regions of China. The problem is workers in the Chinese hinterland are less skilled, and transport costs are necessarily higher. Instead, many manufacturers apply a “China plus one” strategy, whereby they open plants in a second Asian nation to complement their Chinese production.

To some degree, China is a victim of its success, while Vietnam feeds off its own. With large players like Intel and Jabil moving into Vietnam, many smaller suppliers will follow.

Of course, global manufacturers share the same concerns about Vietnam's infrastructure as they do about China's. Vietnamese commerce officials appear to have learned some lessons from China and are investing heavily in ports, power plants, and telecom systems. There are multibillion-dollar energy projects in both southern and northern provinces.

Technology will likely play a big role in solving what might be called the high cost of sourcing in low-cost countries. For instance, recognizing that fast, efficient customs processing is very attractive to exporters, the Vietnam customs bureau is working with American companies—including FedEx and Unisys Corp.—on an e-manifest project to streamline clearance at major seaports and airports.

The system allows Customs agents to screen and review cargo manifests in advance of shipment arrival. E-manifest also improves risk management and profiling. It appears that Vietnam believes stronger supply chain security, achieved through government-industry collaboration, could provide a competitive edge against China.

”For manufacturers looking to partner with, source from, or establish a presence with a manufacturer in these developing nations, supply chain risk management is a key requirement,” says Datamonitor's Jura.

A few decades ago, Thailand embraced foreign car manufacturers, and now stands as the automotive hub of the region. The national specialty is pick-up trucks. Thai plants produce vehicles for Toyota, Isuzu, General Motors, Mitsubishi, Ford, Mazda, and Nissan; and export them to the U.S., U.K, Australia, the Middle East, and Africa.

Thailand produces upwards of 1.1 million vehicles per years—about two-thirds of them trucks. More than 700 suppliers provide 75 percent of parts and components, according to the Thailand Automotive Institute.

Interestingly, Malaysia took a different approach, starting a “National Car” program that has yet to meet the scale of Thailand's success. An ongoing tiff about import duties continues to limit automotive trade between the two nations. As a result, economic leaders in Malaysia are looking for ways to move up the value chain in other manufacturing sectors, including in high-tech and electronics, as well as diversifying the economy by expanding the services sector.

Thailand's automotive industry has been greatly aided by trade deals. The Thailand-Australia Free Trade Agreement (TAFTA) allowed Dobinsons Spring & Suspension, a small Queensland-based manufacturer of leaf springs, to break into the Thai market for the first time.

“We tried for a long time to enter Thailand with our 4x4 aftermarket products, but we were too expensive to import,” says Managing Director Glen Dobinson. “The import duty was about 30 percent before TAFTA; now it's significantly lower and is dropping to zero.” The company ships a container of parts and accessories every two weeks to Thailand, one of 23 countries to which it exports.

The military coup of 2006 has caused some analysts to make gloomy predictions about the Thai automotive sector, but global auto giants continue to invest. Ford upped its production capacity in the last few years and has set a target to produce 200,000 units per year by 2008 from its joint-venture with Mazda, AutoAlliance Thailand. Honda recently announced plans to build a second plant in the country.

Indonesia is another fast-growing player in the region, with projected GDP growth of 6.3 percent in 2008, according to the International Monetary Fund (IMF), a member organization with representations from 185 countries. There is speculation that as Vietnam and other countries focus on high-tech, Indonesia will see further investment in textiles, apparel, and footwear. For Yue Yuen of Taiwan, a large contract manufacturer of athletic shoes, output at its Indonesian plants is growing faster than those in Vietnam and China.

Finally, corruption is still a concern for potential investors in Indonesia, but since the currency crisis a decade ago, there has been some liberalization of investment and foreign ownership policies, and a general shift to more transparent and democratic government.

“If political stability is maintained, Indonesia could be about to experience an investment boom that finally breathes life into the economy again,” concludes a recent report from The Economist.