If you’re younger than 40, you might have a hard time comprehending that it wasn’t very long ago when a “Made In Japan” label on an item was indicative of merchandise that was manufactured inexpensively. However, you might have noticed a trend throughout your life where these items have shifted from manufacturing in Asian countries like Hong Kong or Taiwan to countries such as China, Bangladesh and India.
Though dependent on a variety of macroeconomic and geopolitical factors, the evolution of low-cost sourcing/manufacturing countries is more or less the same: Over time, these countries develop a rising middle class, inflating the price of labor and overhead. While this growth in wealth chips away at the cost advantages of production, it simultaneously creates viable consumer markets. As countries move from “we make it” to “we buy it,” manufacturers search for new locations to manufacture while retailers tap the new consumer markets.
This phenomenon is precisely what is happening right now in China, and the rest of Asia to varying degrees. A swiftly growing middle class is putting upward pressure on labor costs and squeezing margins on manufacturers. At the same time, this burgeoning middle class is filling the markets with attractive target consumers for finished goods.
As many retailers have learned through past global expansions, there are many cultural considerations to make before diving in and tapping into these new consumer markets. But an equally large question surrounds supply chains. How do retailers procure goods in markets where the transportation infrastructure has developed around export rather than distribution? Even more complicated, how is last mile distribution handled for e-Commerce fulfillment?
Understanding The Asia-Pacific (APAC) Region As A Consumer Market
The most important thing to know about APAC is that it is not a single market; it is a collection of many countries that are geographically and culturally distinct. Within each country are diverse regions that exhibit their own cultural identities, sometimes also maintaining autonomy over economic development policies.
In many areas, this decentralization is new and emerging quickly. For example, Jakarta used to be the only entry point into Indonesia, but decentralization of import control has opened alternative ports with their own advantages and disadvantages.
Demand patterns in Asia are best evaluated for each individual market so that the most appropriate distribution models can be selected for each one. What works in Shanghai may not work in Beijing, and demand patterns are shifting as quickly as the region itself. This makes it increasingly important to evaluate changes frequently and to refresh distribution networks often so they can reflect changes to their respective markets.
Market Opportunity Wrought With Transportation Challenges
Asian markets differ in the quality of transportation infrastructure available, but almost all of them have highly fragmented carrier environments, poor safety compliance records and increasing urbanization that is stretching the capacity of roadways. Rail transport is not a viable option in many Asian countries, though air shipping is increasing and sea options are available on certain lanes between markets.
Many markets in Asia rely heavily on human powered transport, introducing an added layer of complexity to last mile delivery. Bumpy roads and reliance on bicycles and motorcycles make fulfillment of breakable items extremely difficult for many customers, and this problem extends to a great deal of the transportation network in some areas.
Distribution: Build It Or Buy It?
Availability of reliable transportation carriers using reasonable infrastructure, coupled with consumer buying behaviors and demand patterns, should inform decision-making on where distribution centers should be located.
However, distribution network planning also relies on forecasting demand patterns for at least three to five years, and free trade agreements, customs and duties complicate distribution when international border crossings are necessary. Depending on which markets are served and the service levels required, it may make more sense to use existing distributors for fulfillment and/or procurement.
Whether distribution centers or distributors are used, the service elasticity of demand is important to calculate when creating a network. Better service results in increased demand, so plan accordingly for a rise in demand in areas that experience high service levels. Build the expected demand increases into your network design so that it can efficiently scale up to satisfy demand. If demand planning is murky, look for distribution solutions that are highly flexible, even if they come with additional costs.
Though many challenges exist for establishing supply chain excellence in Asia, the power of the consumer market there makes the endeavor worthwhile. The region has already overtaken the U.S. in demand for certain consumer products like cars and television, and eMarketer expects e-Commerce sales in Asia-Pacific to outstrip those of North America and Western Europe by the end of this year. Retailers expecting sustained growth have no choice but to look to the East sooner rather than later.
Tim Foster has more than 20 years of supply chain experience across the APAC region both as a consultant and as an executive with leading multinational manufacturers. Serving as Chainalytics’ Managing Director of the APAC region, Foster understands the entire local, regional and by-country pan-Asian picture — from the macro-economic factors impacting the region to each market’s unique logistics demands and business complexities.