BUILDING REGIONAL CAPABILITIES

Logistics Asia, 1/3/2008

Against a backdrop of deepening economic integration in Southeast Asia, 3PLs can play a vital role in facilitating the growth of regional production networks.

By Dr ROBERT YAP.

The 13th Association of Southeast Asian Nations (Asean) Summit held in Singapore in November 2007 saw the landmark signing of the Declaration on the Blueprint for the Asean Economic Community (AEC). With the signing of this declaration by the region’s leaders, a roadmap has been put in place to create a single market and production base in the region with a free flow of goods, services, investments, skilled labour andcapital by 2015.

The bold vision will eliminate non-tariff barriers by increasing the efficiency of customs clearance and harmonising product as well as technical standards, while reforming the tariff structure by removing internal tariffs and aligning external duties. Restrictions on cross-border investments within Asean will be lifted, and an Asean-wide competition policy will be introduced.

The blueprint reassures businesses of political leaders’ commitment to economic integration in the region and it easier for companies to explore opportunities by providing a useful timeline for economic integration that they can refer to when mapping their business plans.

There are enormous benefits to be reaped from the deeper economic integration envisioned in the AEC blueprint. According to McKinsey, it will bring about economic benefits of at least 10 percent of Asean’s Gross Domestic Product (GDP).

In value terms, this translates to over US$100 billion, based on estimated Asean GDP in 2006. Production cost in the region is also estimated to go down by 20 percent, greatly enhancing Southeast Asia’s attractiveness as a global production base, bringing about opportunities in many sectors, especially in logistics and supply chain management.

DEVELOPING NETWORKS
One way that companies can capitalise on the distinctive strengths of each Asean member country is to explore the development of robust regional production networks. However, this will poses challenges of its own, such as increasing complexities in the supply chain, with an expanded number of suppliers of different levels.

A common grouse within the regional business community is with regards to customs clearance. With 10 countries in Asean, and therefore 10 borders and 10 different custom authorities, there are huge transactional costs for the movement of goods within the region, which has placed Asean at a huge disadvantage as compared to China and India, where goods only have to clear one customs checkpoint.

The Asean Business Advisory Council has therefore been actively championing the creation of an Asean Green Lane, to move goods produced in the region seamlessly across the borders of member countries. The initiative will provide a single window for customs clearance, hence increasing producers’ speed-tomarket, bringing about higher efficiency and reducing process redundancies. A pilot project has just been started between Singapore and Malaysia, and three more countries are expected to join the project next year.

Another problem hindering the free flow of goods in the region is the state of regional infrastructure, a problem that is not unique to Southeast Asia. In fact the Asian Development Bank estimates that Asia will need a total of US$3 trillion for infrastructure development over the next ten years, or US$300 billion per annum. Inadequate transport and communication infrastructure and uncompetitive transport and logistics services has pushed up the cost of cross country production.

However, companies in the region can be assured that this fundamental issue has already attracted the attention of regional leaders, and finance ministers from Asean member countries have agreed to set up a task force to consider building an Asean infrastructure fund to support infrastructure developments in the region.

EXPANDING FOOTPRINT
Beyond putting a regional production network in place, companies can also take advantage of the increasingly free flow of goods, services, investments, skilled labour and capital to expand their regional footprint.

The challenge in doing so is that companies must be able to compete effectively against both global giants with deep resources, as well as local players that are well-entrenched and have strong in-market knowledge.

Capabilities wise, Singapore companies are a match for global players in many sectors including the logistics industry. There is potential for regional companies to thrive as long as they have a clear strategy to differentiate their services from those of multinational powerhouses.

YCH has done this effectively through a commitment and investment in research and development to come up with a suite of end-to-end supply chain management solutions.

The proprietary virtual hub, or V-Hub, solution, for example, allows virtual sourcing of raw materials based on optimised requirements, to feed to global manufacturing plants, enabling manufacturers and brand owners to Buy Anywhere, Make Anywhere, Sell Anywhere.

MNCs like Motorola and Dell are optimizing their supply chain through the V-Hub solution, making significant savings in inventories and freight costs. Most importantly, it allows a highly flexible and agile supply chain that is extremely important in the electronics industry due to rapid obsolescence and changing consumer demands.

YCH differentiates by complementing world class standards and technologies with deep, in-market knowledge through partnerships with local players. In Indonesia, for example, YCH works with more than a dozen different local partners across the whole country to fulfill more than 350 trucks distribution daily.

These local partners accomplish the “last mile” service for the industry while YCH does the niche supply chain management and optimization.

This business model is welcomed by governments and relevant authorities in different markets in the region, as our operations in-market do not threaten the local players. Instead, YCH’s operations effectively complement and contribute to the growth of the logistics industry as a whole. With this strategy, the company has expanded to more than 15 markets in the region via purely organic growth.

LOGISTICS NERVE CENTRE
As economic integration accelerates in the region, fueling intraregional trade and bringing to reality a truly single market and production base, demand for logistics services will grow simultaneously.

Singapore, already a major aviation and shipping hub, has the potential to become a world class regional logistics nerve centre by making efforts to standardize communication flows and processes between suppliers, manufacturers, logistics providers, ports and other players in the logistics supply chain. The Singapore government has initiatives in place to make this a reality. The Infocomm Development Authority of Singapore (IDA) plans to make Singapore the place from which companies monitor and control their global supply chains using advanced infocomm technologies complementing a high-level logistics infrastructure.

These include TradeXchange, a neutral and secure platform to enable exchange of information between shippers, freight forwarders, carriers and government agencies, and InfoComm@Seaport, a multimillion dollar initiative that aims to catalyze business transformation and operational excellence in the port community through innovative infocomm technologies. Another key enabling technology which will help Singapore move towards this aim is radio frequency identification. RFID automates many manual intensive logistics processes and creates real-time adaptable demand and supply networks.

Ultimately, opportunities abound for both countries and companies in the region to tap onto opportunities presented by regional economic integration. Whether a country or a company manages to do so will depend on whether it realizes where its value lies and the strategy it has to differentiate and carve up a niche for itself.

Dr Robert Yap

The Asean single market

YCH