Regional variations emerging in Asia's supply chain market

19 June 2020 Consultancy.asia

Supply chain leaders in China and South Asia anticipate that their manufacturing sector will be back on track in the next two to three months, while those in Oceania, South Korea, Japan and other Southeast Asian markets expect to need a longer timeline.

McKinsey & Company surveyed more than 200 business leaders of manufacturing and supply chain functions across Asian markets to gauge their sentiment in the wake of Covid-19. Supply chains have been hit hard by border closures and tentative trade, throwing many Asian economies into business continuity or even crisis mode.

As the dust begins to settle – at least in terms of border restrictions in most Asian markets – McKinsey reports that just under 40% of businesses expect that manufacturing will be up and running in the next two to three months. The remaining 60% of leaders, however, anticipate a recovery period of at least six months, while more than 5% within this bracket believe it will take a year at the very least.

Confidence in recovery of the manufacturing sector from the effects of Covid-19Zooming in to individual markets in the region reveals significant variations in sentiment. The researchers postulate that these differences result from the current state of the pandemic in each market. China, for instance, is ground zero for the pandemic, but has made considerable headway into its recovery phase.

The number of new Covid-19 cases in China stabilised to some extent by March, and the economy has gradually shown signs of opening up since then. Now, despite the fact that many economies are reconsidering their supply chain dependence on China, almost half of the respondents in the country anticipate a two to three month recovery period for their manufacturing sector.

Similar optimism prevails in South Asia. India has recently come out of a two-month lockdown, and is using a zone-based isolation system to restart economic activity. Pakistan and Sri Lanka have been out of lockdown for more than a month now, while Bangladesh also opened up its economy at the end of last month. As they move further into their economic recovery timelines, 45% of respondents in the region expect a two to three month recovery period.

Both in China and South Asia, only two percent of respondents expect the recovery to extend beyond a year. In Australia and New Zealand, this figure is at nearly 20%. South Korea and Japan also have a 15% share that expect a year-long recovery at the very least. Most respondents in both these clusters, meanwhile, anticipate a 6-12 month recovery period. Southeast Asia reflects a similar scenario.

Confidence variations by sub-region

Quick recovery?

Only a third of respondents in all these regions expect a quick bounce back in two to three months. Once again, McKinsey points to the unique situation of each market to explain these variations.

South Korea has recently come out of lockdown and is still recording a number of virus cases. In Australia and New Zealand, the manufacturing markets are heavily reliant on the primary industries such as metals and mining, which have been worst hit by the crisis. Japan, meanwhile, presents an anomaly in this case. The country’s strong disaster response system appears at odds with the relatively extended expected recovery period, although the Covid-19 crisis has presented unprecedented economic challenges.

Variations are not just visible across borders, but also across manufacturing segments. McKinsey & Company identifies five issues that are common across the board in the manufacturing sector, namely material shortages, demand shock, labour shortages, cash-flow strain and planning hurdles. In different sectors, these issues show up in varying degrees of intensity.

In advanced industries such as the automotive sector, for instance, the most pressing issue is a shortage of raw materials. Other sectors such as chemicals, metals & mining and oil & gas are facing the same issue. Meanwhile, consumer-facing industries such as apparel, fashion and luxury goods are grappling with a global demand shock, as tighter spending makes significant cuts into discretionary spending.

Operations challenges caused by Covid-19 disruption by sector

The transport & logistics sector is also facing a demand shock, not caused by a spending crunch but by compulsory travel restrictions being imposed in a number of markets. Other sectors such as construction, engineering and infrastructure are all labour intensive, and have found the shortage of labour to be the biggest issue.

While not among the top concerns, reduced cash-flow and planning are also causing considerable strain on manufacturers. The authors point out that supply chain and manufacturing companies can leverage digital tools to address some of these issues.

“While many of the top challenges faced by each industry seem to be influenced by their specific external situations, there is an opportunity across sectors for companies to leverage their data to create transparency and better address short- and medium-term demand and supply-chain implications. In this way, companies can minimise disruptions and optimise cost,” according to the report’s authors Didier Chenneveau (Taipei), Matteo Mancini (Singapore) and Sahil Shinghal (Tokyo).