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THE POSITION OF ASEAN+ IN THE GLOBAL VALUE CHAIN & HOW IT CAN BE STRENGTHENED

THE POSITION OF ASEAN+ IN THE GLOBAL VALUE CHAIN & HOW IT CAN BE STRENGTHENED

The ASEAN Key Figures 2021 reported a consolidated GDP in 2020 of $3.0 trillion for the ASEAN region, which is home to over 680 million people. Ranking it as the 5th largest economy in the world, after Germany ($3.8 trillion). By 2030 the ASEAN are likely to become the 4th largest economy, considering the current growth rate and future growth outlook, that is forecasted to an annual 5% for the next decade. This article will investigate the role of ASEAN+ in the global value chain, their growth potential and how the region can strengthen its position. 

ASEAN – The World’s Manufacturing Hub 

No matter if electronics (Thailand, Malaysia, and Philippines), automotives, rubbers (Thailand), machineries, chemicals (Malaysia), textiles, garments (Vietnam), semiconductors (Philippines and Singapore), biopharmaceuticals, petrochemicals, medical technologies (Singapore) and many others, companies around the world rely on their production sites or their sourcing located in the fast-growing ASEAN market. Although – besides from Singapore – this is mainly true for low-wage assembly work, current and future developments are creating new opportunities for the region and seem to be the chance for the ASEAN to move up the manufacturing value chain. These developments involve the companies’ need for more resilience in their supply chains, the ongoing digitalization and fourth industrial revolution as well as the growing pressure on companies to lower their emissions. 

Visit at the Bernina Factory in Thailand during the On-Site Seminar 2022

Regional Comprehensive Economic Partnership 

On 1 January 2022 the Regional Comprehensive Economic Partnership (RCEP) came into force. The world’s biggest regional free trade agreement was signed on 15 November 2020 between the ASEAN+ (excluding India) and aims to strengthen the region’s competitiveness. This is especially true for manufacturing. The agreement covers around 30% of global GDP and world population. Furthermore, it is accounting for over 25% of global trade volume. 

The RCEP is expected to accelerate the flow of goods and investments between Southeast Asia and their trade partners and will help ASEAN+ to gain further importance in the global value chain. The FTA within ASEAN+ will lower trade barriers, making it easier and cheaper to import manufacturing inputs and provides new opportunities for companies in designing supply chains that leverage advantages and skills across the ASEAN members. The Boston Consulting Group estimates that by 2030, $400 to $600 billion additional output can be generated yearly. Foreign Direct Investment (FDIs) have the potential to increase between $14 and $22 billion per year and 90’000 to 140’000 new jobs can be created annually. 

©/MAXPPP – 3rd Regional Comprehensive Economic Partnership (RCEP) Summit on the sidelines of the 35th Association of Southeast Asian Nations (ASEAN) Summit on November 4, 2019 in Bangkok, Thailand. (Photo by Liu Zhen/China News Service/VCG)

Foreign Direct Investment 

Foreign Direct Investment (FDI) has been the main driver for growth in manufacturing across the region. Originally, the US, EU and Japan have been the biggest sources of FDIs. However, investments from Asian markets like China or South Korea are on the rise when manufacturers started to look for low-cost production sites and to deeply penetrate ASEAN markets. 

Although the Covid-19 pandemic lowered FDI in the ASEAN by nearly 25 percent from $182 billion in 2019 down to $137.3 billion in 2020, ASEAN remains one of the most attractive investment destinations. According to the ASEAN Investment Report 2020-2021, the ASEAN share of global FDI increased from 11.9% in 2019 to 13.7% in 2020. Moreover, in the period between 2018 to 2020 the annual financing of international projects in ASEAN amounted to $74 billion, which means a 100% increase to the previous period between 2015-2017. 

Collaboration Efforts Boosted by the Global Pandemic 

To counter the pandemic challenges in the global value chain ASEAN countries undertook collaboration efforts to ensure the flow of essential goods, as well as to increase resilience in supply chains and sourcing among the member states. In this regard, one of the most important collaboration plans launched during the pandemic, was the Hanoi Plan of Action on Strengthening ASEAN Economic Cooperation and Supply Chain Connectivity in Response to the COVID-19 Pandemic. The joint response was crucial as the majority of FDIs are linked to global value chain activities and production networks in the region. 

Gaining Importance of Diversification in Supply Chains 

The pandemic has caused major disruption in supply chains and learned companies more than before to reduce risks through diversification of their sourcing and production portfolios away from single sources in order to enhance resilience in their supply chains. A survey by Gartner in 2021 found that 87% of supply chain professionals are planning to invest in supply chain resilience within the next two years. Similarly, a Nikkei survey in 2021 stated that 84% of Japanese companies who manufacture domestically began to diversify their supply chains in response to the pandemic. There are good reasons for management to focus on supply chain resiliency. Rising economic nationalism, persistent trade frictions between the USA and China and of course the current disruptions caused by governmental restrictions due to the Covid-19 outbreaks around the world and nowadays especially in the People’s Republic of China. Therefore, more and more manufacturers are exploring alternative production sites or adapting the so-called China Plus One strategy. A strategy that is said to reduce risks of disruption significantly, while maintaining manufacturing presence in the important market of China. A further trend that can be observed and will help companies improving supply chain resilience, is the relocation of production sites closer to end markets. 

Industry 4.0 

The locating of more flexible small batch production facilities closer to end consumers is possible through emerging technologies coming with the fourth industrial revolution. Yet, most of the MNCs and Southeast Asian companies are not embracing digital technologies – such as advanced robotics or real-time digital factory simulations – in ways that can put them at the forefront of Industry 4.0. However, unlocking the potential of industry 4.0 systems will be crucial to ASEAN to strengthen its role in the global value chain. Singapore, Vietnam, and Malaysia have already announced plans to invest in new manufacturing technologies like cloud computing applications, advanced robotics and industrial Internet of Things (IoT). To become more global competitive, companies in the region should move early to capture new opportunities and gain advantages. 

How ASEAN+ Can Strengthen Its Position

Southeast Asia with its relatively open access to Western and Asian markets, will continue to be a prime candidate for new plant sites. New opportunities will arise in ASEAN manufacturing sectors as new manufacturing clusters are established in the region. 

The distribution of specific skills and strengths among the ASEAN+ countries combined with the removal of trade barriers through RCEP and other agreements among member states, provides a great opportunity for companies to adapt twinning models that allow them to take advantage of low-cost manufacturing in countries such as Indonesia, Malaysia, the Philippines and Thailand and advanced manufacturing in Singapore, South Korea or Japan. By creating multinational value chains, companies can benefit from the strengths of each location and the economic integration of the region.  

The ASEAN Investment Report 2020-2021 emphasizes opportunities to boost more sustainable FDI in the region, especially FDI connected to the value chain, which will not only be facilitated by the RCEP but also by the recent ASEAN Investment Facilitation Framework (AIFF). Moreover, ASEAN is pushing for digital transformation and private investment in the development of digital infrastructure, cloud computing, artificial intelligence and smart manufacturing. The automotive and mobility industry awaits with new opportunities for the region thanks to the growing demand for all types of electric vehicles (EVs). Not only could ASEAN leverage its large market, but also its nickel reserves. The raw material is a key to the production of EV batteries. Finally, trade tensions and disruptions in the global supply chain are also creating opportunities for ASEAN in forward-looking sectors such as medical technology, biopharmaceuticals and chemicals. 

Source: 3DEXPERIENCE Company

Manufacturers and members in the region must seize these opportunities now and position themselves to take advantage of these current changes, increase productivity and expand market share. This will require meeting commitments agreed between governments and making major investments in infrastructure and workforce development. By doing so, the deployment of Industry 4.0 is likely to accelerate and boost productivity. The current economic developments in global manufacturing are a great opportunity for the ASEAN+ market to strengthen its position in the global value chain and allow more people in the region to benefit from socioeconomic progress. 

Sources: 

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

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Food security in densely populated cities

How can you provide food security for one of the world’s most densely populated cities when you have no land for agriculture?

With a population of five million people on a landmass of only 715 square kilometres, Singapore is one of the most densely populated cities in the world. Due to its densely populated area, Singapore is highly dependent on the food imports from its neighbouring countries such as Malaysia and Indonesia.

This is not an issue that solely concerns the island of Singapore. By 2030 global food production will have to double, to feed all people on earth properly. Due to the usage of antibiotics, oil, soy, and so on, today, food production has a significantly negative impact on our environment and is accelerating climate change. Consequently, we must look for alternative means of production.

In recent years Singapore has started to implement the concept of Vertical Farming. Vertical farming, also called Skyscraper Farming, moves away from planting crops on large pieces of land but utilises high-rise buildings, such as old factory buildings or warehouses, to produce food. Crops are stacked on top of each other in a climate-controlled indoor facility. This food revolution manages to deliver considerable yields with considerably less land, water, and energy resources.

Most vertical farms use enclosed structures, similar to greenhouses, which massively save space. Hydroponic methodsuse mineralised water as a growing medium instead of soil which reduces the water requirements by up to 70%. The use of aeroponics further reduces weight and water requirements. Vertical farming typically uses a mix of natural light and artificial light. Artificial lighting is often LED-based and may be driven by a renewable power source such as solar power or wind turbines. Pesticides or herbicides are not necessary because the crops do not need any soil. Vertical farming, therefore, eliminates numerous manual labour tasks. Moreover, the use of robots and AI enables a vertical farm to provide consistent, high-quality, and prodigious output.

Not only does vertical farming help to reduce water, land and energy resources usage, it also minimizes carbon dioxide emissions by preceding the transportation of foreign products. As the organic food and beverage market are expected to grow immensely soon, Vertical Farming is likely to turn into a highly promising market. Thanks to this food revolution, Singapore is now able to enjoy environmental-friendly and local products.

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The success of artificial rain generation

The success of artificial rain generation has attracted worldwide attention and led to requests for knowledge exchange from several Asian countries

Water shortage is one of the most critical global problems of today. The United Nations estimates that more than 40 percent of the world’s population lives with or in conditions of water shortage. In Thailand, agriculture covers almost 70 percent of total land use, and a high-water supply is required to sustain it. As a consequence, there are sporadic dry periods throughout the country. In combination with decades of massive deforestation, the lack of rainfall increases the droughts, especially during the dry season. Over 82% of Thailand’s agricultural land is dependent on rainfall; thus Thai farmers face difficulties growing crops due to the lack of water.
 
In 1955, when then beloved Thai King Bhumibol Adulyadej realized that many regions were struggling with the problem of drought, he initiated the Royal Regeneration Project of Thailand. The “Rain Generation Project” is a proposed solution to counter the lack of rainfall by using artificial rain generation or cloud seeding. According to the Desert Research Institute, Cloud seeding is a type of weather modification that aims to change the amount or type of precipitation that falls from clouds, by dispersing substances into the air that serve as cloud condensation or ice nuclei, which alter the microphysical processes within the cloud.
 
The Royal Rainfall Generation Project was first launched in Khao Yai National Park on 20 July 1969 at the King’s behest. Dry ice flakes were scattered over clouds, and there were reports of some rainfall. Following the launch, in 1971 the government set up the research and development project for artificial rain generation within the Thai Ministry of Agriculture and Cooperatives.
 
Since the introduction of the technology, the invention has gone through a series of changes which have enabled the transfer of technological expertise. It also stimulated cooperation between different regional and international actors with the common goal of improving the efficiency and effectiveness of the artificial rainmaking process. To “make it rain”, the following steps are applied: “agitation” to activate cloud formation by using weather modification techniques; “fattening” to activate the accumulation of cloud droplets and finally “attacking” to trigger rain from the cloud.
 
The Royal Rainfall Generation Project has attracted worldwide attention and let to requests for knowledge exchange from several Asian countries. Interest was also shown from the Middle East, where farmers suffer from dry climates and extremely long dry seasons. Jordan, which has an annual rainfall of 20 to 200 millimetres, is the only country thus far to have considered the operation due to its geographic and climatic conditions. The procedure is expected to alleviate the side effects of the climate change that the country is suffering from, which is causing precipitation to drop from 15 to 60 percent per year.