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Southeast Asia Moves up the Global Production Value Chain

Kawal Preet, President, Asia Pacific, Middle East and Africa (AMEA) FedEx Express

ASEAN Tiger Economies are boosting interconnectivity for intra-Asia and Asia-Europe trade

By Kawal Preet, President Asia Pacific, Middle East, and Africa, FedEx Express

For decades, export manufacturing has played a critical role in powering socioeconomic development across Southeast Asia. The region has continued to show remarkable and sustained growth in recent years despite numerous headwinds. This is creating robust demand for logistics to support the needs of the region’s increasingly diversified economies.

Rise of Southeast Asia in the global supply chain

Southeast Asia is fast becoming the world’s 5th largest economy[1]. ASEAN has a range of well-established manufacturing clusters, including electronics in Malaysia and Vietnam, automobiles and packaged foods in Thailand, machinery and petrochemicals in Indonesia, apparel and processed foods in the Philippines, and semiconductors, biopharmaceuticals, and aerospace components in Singapore.

The emerging economies of Southeast Asia have long been destinations for manufacturers seeking abundant cost-effective labor, while Singapore has served as a hub for high-value R&D-intensive industries and trade-supporting services such as finance and logistics.

But now the region’s manufacturing sector is even more globally competitive creating opportunities to move up the value chain. Singapore, Malaysia, and Vietnam are among the countries that have made advanced manufacturing a priority harnessing Industry 4.0 technology and systems.[2]

Southeast Asia holds expansive potential and plays a key role in bolstering interconnectivity for intra-Asia and Asia-Europe trade. Major trade deals like the ASEAN Free Trade Agreement (AFTA)[3], Regional Comprehensive Economic Partnership (RCEP) and the EU – Vietnam Free Trade Agreement (EVFTA), have already been improving access to trade in Asia as well as intercontinental trade.

Diversified economy in Vietnam presents new opportunities

Vietnam is a good example of the changes being seen across the region. The country’s economic diversification has made it a hothouse for growth. Textiles and apparel remain a strength and there has been a notable shift in production activities toward heavy manufacturing, which includes industries like electrical, machinery, and transport equipment.[4] But it is the rapidly developing semiconductor ecosystem encompassing design, foundry, and packaging that is elevating its standing in the global supply chain. This has been driven by strong government support and policies, and a dynamic workforce of more than 30,000 highly skilled engineers and technicians.

The country has recorded technology export growth that no substantial Asian rival has matched. High-tech goods as a share of exports hit 42% in 2020, up from 13% in 2010.[5] With strong economic expansion projected over the next decade, Vietnam’s GDP is forecast to rise from USD 327 billion in 2022 to USD 760 billion by 2030.

One outcome has been an increased demand for air cargo transportation to serve the tech industry’s need for greater shipping capacity and faster transit times.

Enhance manufacturing efficiency with improved logistic network integration

For high-end manufacturers in Southeast Asia, logistics has become a business challenge impacting profit margins. In Vietnam, logistics costs were estimated to be equivalent to 20% of its GDP in 2021. That is a higher number than an average 12.9% in Asia and 10.8% globally, according to a 2021 report from Vietnam Industry Research and Consultancy. Investment in hard infrastructure such as highways, airports and seaports will lower these costs, and there are many major projects in progress. For businesses, lower logistics costs can be gained by working with smart logistics partners who have the network to support cross-border trade and help capture new growth opportunities.[6]

As the pace of business accelerates faster delivery is critical for the region’s exporters. Leading logistics players like FedEx are working to speed up intercontinental services between markets in Southeast Asia to the rest of the world. For example, FedEx recently introduced a new evening flight flying four times a week from Ho Chi Minh City connecting Asia and Europe through their Asia Pacific Hub in Guangzhou, China. Exporters shipping from Southern Vietnam will benefit from faster transit times for shipments to major Asian markets in just one business day, and two business days to Europe. These new flights offer additional capacity on top of the current five flights to Asia, Europe, and the US bringing the total to nine weekly flights departing from Ho Chi Minh City.

In addition to new flights, FedEx is also investing in infrastructure to meet customer needs. This includes the opening of its new bonded warehouse in Batam, Indonesia which will enable faster clearance of free trade zone shipments and enhance transit times, as well as its new gateway facility at Clark in the Philippines.

As the workforce becomes increasingly highly skilled and manufacturing capabilities develop further, Southeast Asia’s logistics network also needs to continue to evolve to sustain it. Increased capacity and connectivity is critical to support the growth momentum the region has already achieved as its exporters move further up the value chain. Only then can the region reach its full potential.

[1] https://www.business-sweden.com/contentassets/c5d9f4d114f14219a3f0be9c3ac80145/the-rise-of-the-southeast-asian-tigers.pdf

[2] https://www.bcg.com/publications/2021/asean-manufacturing

[3] S&P Vietnam Economy Commentary October 2023

[4] https://blogs.worldbank.org/developmenttalk/beyond-products-role-export-activities-driving-development

[5] https://asia.nikkei.com/Spotlight/The-Big-Story/Vietnam-s-battle-to-climb-the-global-value-chain

[6] https://asia.nikkei.com/Spotlight/The-Big-Story/Vietnam-s-battle-to-climb-the-global-value-chain


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