McKinsey: ASEAN manufacturers can recapture the market through digital

26 March 2018 5 min. read

In the latest report from its Digital Capabilities Centre in Singapore, the strategy and management consulting experts McKinsey & Company have examined the ASEAN manufacturing landscape, noting that despite enthusiasm from local producers the region is lagging in respect to early adoption.

Launched last year, McKinsey’s Digital Capabilities Centre (DCC) in Singapore is a live showcase of the emergent technologies of ‘Industry 4.0’ in a model factory setting, demonstrating the latest advancements in data analytics, automation, robotics and production processes such as 3D-printing which together the firm believes has the potential to change the manufacturing sector beyond recognition.

As one of five such centres set up across the world – each tailored to the local sphere – the DCC in Singapore was established to serve the Southeast Asian market, which it says in its latest report can reinvigorate itself as a global manufacturing hub with the adoption of digital technologies. Yet, while a whole 96% of the more than 200 local business leaders interviewed believed that Industry 4.0. would prove transformational to their sectors, just 13% had initiated processes for implementation.There is an increased awareness and optimismThe enthusiasm from managers in the manufacturing and tech supply segments for Industry 4.0 technologies was more pronounced for those of the manufacturing-based economies of the six countries surveyed, such as Indonesia, Thailand and Vietnam, who believed that implementation could add more than 10 percent to revenues while cutting costs to the same degree.

Altogether, 93% of respondents from all countries (which included Malaysia, Singapore and the Philippines in addition to the aforementioned) were of the opinion that the opportunities presented outweighed the risks, with some two-thirds having grown more bullish over just the past year. Again, this rise was particularly marked in the more manufacturing-dependent nations.Companies are struggling to make Industry 4.0 a realitySuch optimism however belies the regional levels of adoption; well behind the global front-runners Germany and the US at just 13% of ASEAN respondents indicating their businesses had taken steps to implement measures related to Industry 4.0. – which the consulting firm describes as the confluence of certain key disruptive technologies and trends;

“The movement has gained critical momentum as a number of factors have come together: the astonishing rise in data volumes, computational power, and connectivity, especially new low-power wide-area networks; the emergence of analytics and business-intelligence capabilities; new forms of human-machine interaction such as touch interfaces and augmented-reality systems; and improvements in transferring digital instructions to the physical world, such as advanced robotics and 3-D printing”.

The main reasons cited by manufacturers for the sluggish ASEAN adoption rates of these technologies were familiar ones, both globally and locally, including (among challenges in respect to data integration and co-ordination across operations) concerns over cybersecurity risks and the dearth of digitally-proficient human capital. A recent report by fellow strategy firm A.T. Kearney argued that the lack of a cohesive ASEAN approach to cybersecurity posed a $750 billion threat to the regional economy, while an earlier Oliver Wyman survey found that 74% of APAC organisations found it highly difficult to recruit suitable cyber talent.In ASEAN, impact could be $0.2 trillion to $0.6 trillion per year by 2025Yet, McKinsey argues, the Industry 4.0 opportunity is of a magnitude that ASEAN manufacturers can ill-afford to drag their feet on or ignore – projected to bring between $1.2 trillion and $3.7 trillion per year in global productivity gains by 2025. And this is especially so for a region hampered by relatively low production rates, which, with its significant manufacturing components, could itself net up to $627 billion of the windfall delivered by the global digital boom.

The potential opportunity to reinvigorate the local manufacturing industry is also a timely one. Once a major force, the ASEAN region was left in the shadow of China’s meteoric rise. But as the latter economy pivots toward a domestic consumption-based model, with wages on the rise, the nations of the ASEAN bloc have the chance to recapture a large chunk of the production-export pie.ASEAN’s labor costs are lower than China’sTo do so however, ASEAN manufacturers, according to McKinsey, will need to address their productivity shortfalls – with Vietnam for example 87% less productive in respect to daily-output-per-wage compared to its northern neighbour. This is despite comparatively low wages across Southeast Asia – in some instances well below half that of the sector average in China, including in Vietnam, which has labour costs at under one third.

“To be attractive to multinational manufacturers and bolster its manufacturing economies, the region cannot compete on low wages alone,” the report concludes. “It must also focus on improving productivity, which, along with making the region more attractive to foreign investment in manufacturing, can also support domestic improvements in wages and living standards… Unless the region builds a more globally competitive manufacturing sector, it could miss a critical opportunity to increase its overall level of prosperity and well-being.”