By 2030, the manufacturing industry in Southeast Asia could generate up to $600 billion USD a year, according to the global consulting firm Boston Consulting Group (BCG). For decades, the Association of Southeast Asian Nations (ASEAN) has attracted foreign manufacturers seeking low-wage workers. However, the current manufacturing sector trends suggest the region can become an industrial powerhouse.

Favourable factors contributing to the manufacturing industry

The formation of ASEAN as an organisation has helped give regional nations increased influence as a bloc in negotiating and seeking foreign trade and investment. The estimated total GDP of all ASEAN states in 2020 amounted to approximately $3.08 trillion USD. The Gross Domestic Product (GDP) of emerging and developing Asian countries, powered by the ever-growing manufacturing and trade sectors, is expected to reach over $34.52 trillion USD by 2026.

We speak to Kek Hean Hooi from Antbuildz about his mission to change the construction equipment industry

Another factor has been the increase in annual foreign direct investment (FDI) by countries like the US, the European Union, and Japan. BCG estimates that annual FDI in manufacturing in ASEAN will go up by $22 billion USD in four years, generating about 140,000 jobs per year.

Moreover, the Regional Comprehensive Economic Partnership (RCEP), which will create the world’s largest free trade area, is expected to boost investment and manufacturing. It is a deal between the ten ASEAN members and six countries: Australia, China, India, Japan, New Zealand, and the Republic of Korea.

Domestic investment is also up, with other Asian countries looking for opportunities in the region. Some investors are looking to expand into regional markets, acquiring low-cost sites to build their factories. Others are boosting the factory capacities of already-established manufacturers.

Impact of COVID-19 on supply chains

The COVID-19 pandemic affected society and the economy and disrupted global supply chains, leaving many industries struggling to survive. Factory shutdowns, social distancing measures, border restrictions, and logistical challenges hurt many manufacturing companies. Furthermore, governments established more protectionist policies to sustain their flailing economies, reducing cross-border trading opportunities essential for manufacturers to earn revenue for their products.

There had been some warning signs, such as Brexit and the trade wars between the US and China, that spurred countries to rethink their supply chains to avoid catastrophe. The COVID-19 crisis finally caught many nations off-guard, forcing them to re-evaluate their global supply chains. For example, in 2020, Singapore decided to confront the supply chain disruption with a multi-pronged strategy of stockpiling food, diversifying their imports, and producing goods locally.

According to a Gartner, Inc. survey, 66% of logistics leaders increased their logistics outsourcing budget last year. In addition, 74% said they planned to add to the budget in the next two years. A second Gartner survey of over 1,300 supply chain professionals found that 87% planned to invest in supply chain resiliency. They would also be looking to reduce costs in the logistics sector and meet consumer demands satisfactorily.

Investing in the logistics sector in Southeast Asia will diversify supply chains and make them more resilient in the face of worldwide challenges. One of the most common logistical problems is the driver shortage crisis. Drivers have had to navigate the COVID-19 pandemic control protocols, work in unsafe environments, or fall victim to geopolitical decisions affecting travel and freedom of movement.

Industry 4.0 opportunity for ASEAN

According to research from McKinsey & Company, digital technologies have disrupted many sectors, and they are now planning to do the same in the manufacturing industry. These new efforts are named “Industry 4.0”. The research surveyed 200 ASEAN business leaders who recognised the potential brought by the Industry 4.0 model. Most of the respondents, at 90%, think the new model would improve performance in manufacturing.

Industry 4.0 will bring four key technologies. One is data, computational power, and connectivity, which will deliver mass personalisation. Second is the use of analytics and artificial intelligence. The third is human-machine integration, for example, through augmented and virtual reality applications. Lastly, the fourth is advanced production methods like additive manufacturing, which has innovations such as 3-D printing.

Adopting Industry 4.0 can potentially deliver productivity gains in ASEAN worth $216 billion USD to $627 billion USD. Several factors prevent implementation, though, such as shortages in tech talent to establish the new model and cybersecurity risks making business leaders afraid of change.

The BCG report says the manufacturing industry in Southeast Asia should take advantage of their regional cohesion and adopt distributed value-chain solutions. This suggestion would mean that different countries in ASEAN could manufacture specific parts and allow other countries in the region to test or assemble them. Distributing the value chain across various nations can reduce costs or harness higher-quality manufacturing capabilities from another nation.

As it stands, the manufacturing sector trends in ASEAN bode well for the region. Applying industry 4.0 will boost productivity and bring practical solutions to Southeast Asia.