ASEAN is Refining Supply Chain Networks

The geographical profile of ASEAN means that ocean shipping lanes are vital to achieving an effective supply chain network.

By Patrick Burnson, Executive Editor

February 22, 2016

Increasing wealth and an emerging middle class will present new opportunities for U.S. shippers in the ASEAN marketplace comprising the nations of Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. But as recent research indicates, significant logistics challenges remain in getting the entire bloc fully integrated.

Once that is achieved, however, the market would represent $2.6 trillion and more than 622 million people. In 2015, the so-called ASEAN Economic Community (AEC) was collectively the third largest economy in Asia and the seventh largest in the world.

In the same year, intra-ASEAN trade reached $608.3 billion or 24.1 percent of the total trade for the region. At $24.4 billion, intra-ASEAN investment accounted for 17.9 percent of the total foreign direct investment there.

AEC leaders expect that the trade and investment that took place last year will maintain its momentum as we rolling through 2016. The combined GDP of the region reached $2.57 trillion in 2015, and average GDP per capita $4,135—nearly doubling the 2010 figures.

But all of Southeast Asia – including the countries in the AEC – is also at a logistical tipping point, with modernization and economic factors driving the need for sophisticated and efficient real estate facilities to aid an increasingly complex supply chain. According to analysts for the industrial real estate firm Jones Lang LaSalle [JLL], inventories in many emerging markets are old and don’t meet current investment grade standards. This could be “good news and bad news” for potential developers.

“Yields in the industrial markets of ASEAN remain strong and the increasingly stable economic and political climate of these countries continues to position them further down the risk curve,” says Stuart Crow, head
of JLL’s Asia Pacific Capital Market in Singapore.

Furthermore, as countries continue to witness more consumption and a strong rise in e-commerce, the current trend for modernization and development of industrial inventories is set to accelerate. “Real estate facilities that cater to all forms of supply chain activities, from trans-shipment to domestic distribution facilities, will have a key role to play in the industrial landscape of the future,” adds Crow.

Maritime Outlook

The geographical profile of ASEAN means that ocean shipping lanes are vital to achieving an effective supply chain network. Moreover, the region remains an important hub for cargo flows, given its prominent location and advanced port infrastructure.

“The major shipping routes through the region exemplify the ASEAN nations prominent position within the global trade network,” says Crow. “This explains their large trading volumes. The Straits of Malacca, for example, carries over one fourth of the world’s trade. It’s one of the most important lanes in the world and is the main shipping channel between the Indian Ocean and the Pacific.”

Mega ports in Singapore and Malaysia can also handle the new generation of supersized container vessels, note analysts. This also puts the region in a strong position looking forward.

The recently-formed “ASEAN Single Shipping Market” lays out a strategy to create an efficient ocean shipping network to facilitate the movements of goods throughout the ASEAN community and around the world. The Single Shipping Market will aim to achieve the following:

-Harmonize regulatory requirements and commercial practices. 

-Improve the capacity and technologies required to manage shipping and port operations. -Develop guiding principles for the pricing of port services. 

-Intensify infrastructure development to support the effective and efficient operation of intra-ASEAN shipping services. 
-Carry out liberalization of services that support the maritime trade, including maritime cargo handling services, storage and warehouse services, and freight transport agency services.

Ports in Thailand are also good, while the port quality in Indonesia, Philippines and Vietnam falls behind considerably. Shipping analysts expect this to change, however, with the advent of more trans-shipments in the region. Mega-vessels plying the transpacific trade lanes will create a cascading effect and demand of smaller ships will drive ports toward more development initiatives.

Air Cargo Outlook

The ASEAN aviation industry fills a crucial role in connecting the community and has a current combined investment schedule value of $34 billion. The proposed development value is at varying stages of construction, with some already nearing completion and others at the planning stage and not due to be completed until 2020.

Vietnam is clearly the most proactive country in terms of investment in air transport, pouring close to $12 billion into seven projects. Indonesia’s air cargo industry, meanwhile, is expected to benefit from the multilateral agreement on the opening of freight services between ASEAN countries—a move that promises to help increase air cargo volume by 50 percent this year.

Boyke Soebroto, president of the Indonesia National Air Carriers Association (INACA), notes that prior to ASEAN Open Skies, also known as the ASEAN Single Aviation Market (ASEAN-SAM), Indonesian cargo planes were required to stop over in countries like Singapore, as a hub, en route to a final destination.

“For example, there wasn’t a direct air cargo flight from Jakarta to Hanoi,” says Soebroto. “However, with the liberalization, we can fly directly from Surabaya to Hanoi. This is a chance for Indonesian air cargo service providers to get into ASEAN industrial centers, both for imports and exports.”

Citing recent data, Boyke observes that the country’s international air cargo shipping volume stood at around 80,000 tons in 2014, just one-fifth of domestic air cargo shipping which booked 400,000 tons during the same year. While air cargo volume decreased by 5 percent in 2015 due to the slowing economy, INACA forecasts a substantial volume increase now that more direct flights are possible. 

Logistics Hub

Despite its history of political unrest and military juntas, the nation of Thailand is emerging as a major ASEAN logistics hub that could be worth nearly $100 billion in revenue over the next few years, according to a December 2015 study released by global consultants Frost and Sullivan.

Thailand’s economic policy, which focuses on high-tech manufacturing and expansion of trade, combined with increased foreign capital inflows, will support accelerated growth in air services, the report said. Frost and Sullivan estimates that Thailand’s logistics industry earned revenue of $71.7 billion in 2015, and the consultants believe it will reach $96.5 billion by 2019.

Frost also Sullivan’s work also found that the formation of ASEAN in 1967 and the impact of various free-market agreements on key manufacturing sectors outside the region are certainly working to shape Thailand’s logistics landscape.

“Government plans to position Thailand as the trade and service hub of the Greater Mekong sub-region and as the gateway to Asia are opening up opportunities in the logistics and transport industry,” says Jeff Tan, automotive and transportation senior consultant for Frost and Sullivan. “Thailand’s road transport plays a key role in connecting the landlocked countries of Indochina.”

Tan adds that cross-border trucking will be supported by increased foreign investment in Myanmar, Cambodia and Laos, accelerating road network development in Thailand, the report maintains.

Last year, the Hong Kong Trade Development Council (HKTDC) reported that Thailand’s manufacturing sector—dominated by automotive and electrical products—represented 80 percent of its exports in 2015, and that exports made up half of the country’s GDP. In the meantime, Thailand’s exports to other ASEAN countries also grew by an average of 12 percent per year during the period from 2009 to 2015, HKTDC analysts say, with Myanmar, Cambodia and Laos being the fastest-growing trade partners.

However, a final note of caution is being invoked by trade experts who say that “global uncertainties” such as stalled economies in the EU and Japan could be a threat to Thailand’s exports. These uncertainties might possibly derail transportation and logistics projects.

Analyst in the region also warn that delays in government spending and failure to invest optimally in logistics infrastructure could hamper freight movement, thus lowering Thailand’s productivity—and have a negative impact on all of those closely aligned nations comprising ASEAN.