In these precarious and difficult times for the global economy, the Asia-Pacific region is feeling the pain. The impact of the coronavirus on the region will be severe, extensive and unprecedented, according to the International Monetary Fund (IMF).
Asia’s growth rate in 2020 is expected to be 0%. That’s lower than the last global financial crisis in 2007 or during the Asian financial crisis of the late 1990s. Asia has not experienced zero growth in the last 60 years. That said, Asia’s current growth still fares better and its outlook beyond 2021 looks stronger compared to other regions.
A Brief History
To better understand where the Asia-Pacific logistics networks are headed, it is important to take stock of where we have come from. The pandemic’s impact was first felt in mainland China, where the outbreak began. Disruptions in China then rippled through global supply chains like wildfire due to the important role they play in global manufacturing. As the pandemic spread beyond China’s borders and into other Asian countries, cargo quickly began backing up at critical export hubs such as South Korea, Singapore and India. Government-enforced travel restrictions then propelled labor shortages, leading to a reduction of trucking capacity for export pickups. This transport constriction drove many shipping lines and airlines to cancel sailings/flights and to quickly remove capacity from the market to protect against substantial asset operating losses. The resulting interruptions of logistics flows from Asian suppliers then began impacting a range of manufacturing operations overseas.
Although manufacturing in the region has begun to ramp back up, a return to full capacity in the short term is still unlikely due to the ongoing ripple effects of the pandemic across critical trading partners, particularly in Europe and the United States. This will have long-lasting impacts on the landscape of the Asia-Pacific logistics market.
Just-in-Time to Just-in-Case Networks
The term “just-in-time” was originally coined by Toyota in Japan during the 1970s. Due to the country’s resource limitations at the time, Toyota was looking to minimize waste in its supply chain and manufacturing operations. Over the years, many companies have followed Toyota’s lead here and also paired this just-in-time supply philosophy with lean inventory management principles. As the pandemic spread, it quickly exposed the flaws of extended and complex value chains, and organizations’ heavy reliance on Asian manufacturers. These flaws have driven many companies to begin exploring just-in-case rather than just-in-time models.
Just-in-case is a more agile and robust strategy in which companies hold higher inventory levels in destination markets to quickly call on when major disruptions occur. While this incurs greater cost in the short-term, many organizations know it can be a major competitive weapon for revenue growth if customer supply can be maintained while traditional competitors are struggling.
Changes to Asian Logistics Networks
As a reaction to COVID, many organizations are looking at options to shorten or diversify their supply chain networks and explore nearshoring or localizing product supply through reshoring. In the medium term, this constriction of supply chains may negatively impact logistics operations in the Asia-Pacific region as companies look to find alternative countries with capable manufacturing bases and beneficial export policies (Western Europe or South America, for example) to offset their reliance on Asian suppliers.
This may also lead to bolstering additional warehousing capacity nearer to major customers in the U.S. and Europe as organizations attempt to improve speed of goods to customers in these markets. Inevitably, manufacturers may also decide to reposition their logistics operations to countries or regions that have the highest market potential for their goods rather than those that are strategically positioned in Asia. This could also result in a greater need for last-mile storage space and the expansion of demand for localized warehousing for just-in-case inventories outside the region. This trend toward localization of product supply, storage and distribution has the potential to impact countries like Singapore — a major logistical hub for the Asian region — rather than consumer bases.
As logistics leaders examine their longer-term network strategies in the region, they should maintain as much short-term agility as possible to make rapid shifts if the organization’s supply philosophy changes.
Senior Director Analyst,
Gartner Supply Chain