The Challenge of Transformation

Innovative and flexible supply chains are needed to help Southeast Asia live up to its potential.

The following is based on a speech given by Mark Wallace, UPS Senior Vice President-Global Engineering and Sustainability, at the Harvard Asia Business Conference in Cambridge, Mass.

In the second of a two-part series, Wallace focuses on the transformation of Southeast Asia. 

Click here to read part one.

As Southeast Asia prepares to emerge from China’s shadow, we see the potential transformation of a region – from a diverse collection of nations to a unified economic powerhouse.

Potential is the operative word here.

As we see in China’s transition from a manufacturing to a consumer economy, logistics will play an equally critical role in the remaking of Southeast Asia.

The 10 nations that recently formed the ASEAN Economic Community known as the AEC bring together a melting pot of cultures and interests.

The region has a strong foundation, strong growth in manufacturing and exports, population, middle-class consumption and urbanization.

It also has what some call the region’s demographic dividend – some 65 percent of the population is under 35.

That’s a stark and important contrast to the graying of developed economies.

It’s said that GDP growth could double by 2020, to $4.7 trillion.

But that word “Community,” as in the ASEAN Economic Community, is an aspirational description.

[Also on Longitudes: You Build it. They Come. What’s Next?]

Overcoming Obstacles 

The AEC includes some of the richest – and poorest – countries in the world.

Tightly controlled regimes must find common ground with rambunctious democracies.

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Opportunities to help drive growth are great.

AEC states also compete fiercely for foreign investment.

Overcoming these obstacles will take: technology, logistics and policy.

Technology, of course, centers on e-commerce, the universal enabler. Mobile penetration is 110 percent.

Among Internet users, the AEC has one of the world’s highest penetrations of social media, including the world’s second-largest community of Facebook users.

But even including economies like Singapore and Indonesia, e-commerce accounts for less than 1 percent of total retail sales.

Total Internet penetration is also low – about 25 percent – compared to 88 percent for North America, 73 percent for Europe and 28 percent for Africa.

The change that’s coming demands a much stronger broadband and mobile infrastructure.

It also demands building trust in online purchasing and improving security across borders.

It will also be vital to find ways to integrate cash transactions in areas where three-quarters of all transactions are COD and where fewer than one in 10 Southeast Asians has a credit card.

Gold Rush to the Last Mile

For the logistics industry, the region brings multiple opportunities and demands.

In short, it’s going to take an innovative and flexible network of supply chains to help e-commerce live up to its potential.

It should be no surprise that there’s a gold rush as competitors race to the last mile of delivery, where consumer expectations are highest.

We’re seeing big retailers like Alibaba and its new partner SingPost, online retailers like Lazada and Zalora and fast-growing players like Vietnam’s G-H-N enter the game.

As intra-Asia trade grows, the advantage is going to go to those who have built intra-Asia networks.

As in China, UPS is looking closely at our business model.

It will need to meet the demands of the same anywhere, anytime, any-media consumers you find in most any economy these days.

In Singapore, which the World Bank has named the world’s number one logistics hub, we created Philips/Western Digital’s Global Warrantees and Returns Center.

We also have a dedicated healthcare warehouse to handle cold storage and soon medical devices.

We operate a complex just-in-time supply chain for Benz Motorsports, which helps us deliver go-kart parts to Singapore direct from a factory in Italy – or get them overnight to the company’s racing team, wherever they are on the circuit.

In a place like Myanmar, the needs are more basic. But the opportunities to help drive growth are great.

We’re offering freight forwarding, contract logistics and express delivery in a newly liberalized country and economy that is becoming a magnet for foreign investment.

That means Myanmar businesses will now have one-to-three-day transit times across Asia, Europe and the U.S.

That’s absolutely critical to an emerging economy or for apparel manufacturers and others hustling to keep up with fast-changing fashion cycles.

Cost Advantage Need Logistics Support

The same is true for Nike in Vietnam and Seagate in Thailand. The cost advantage in developing economies must be supported by logistics.

The right logistics are critical to small- and medium-sized businesses, which at 96 percent of all AEC businesses and up to 53 percent of GDP, are vitally important to the economy.

For example, we handle logistics for a Vietnam builder of model helicopters that went from a 10 by 10 workshop to a 20,000-square-foot factory that sells all over the world including direct to consumers.

Of course, if all this could simply be left to market forces, competition would find a way.

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Progress needs policy.

But whether the economies are developed, developing or emerging, progress needs policy.

That includes modernizing and removing the bottlenecks from customs, building infrastructure, allowing the free flow of data, improving the security for goods in transit – especially in the air – and continuing to remove customs barriers.

The Trans-Pacific Partnership would help do all of those things.

The World Bank estimates that TPP will raise GDP by an average of 1.1 percent for the 12 member countries by 2030, and exports will rise more than 10 percent.

The TPP region is home to 600 million Internet users, and the agreement was crafted with digital trade in mind.

It establishes standards to make sure trade expands as fast as the Internet demands.

TPP negotiations were successfully concluded in October of last year.

Now the agreement awaits approval from domestic legislatures across the region.

[Also on Longitudes: China in Transition]

Transcendent Time

Asia is in midst of an amazing and transcendent time. It already has changed the world – in the balance of economic power, human opportunity and in the flows of trade.

Looking ahead, there are more world-shaking changes to come.

China is transitioning its economic base by tapping into the power of a consumer market larger and hungrier than anything the world has ever seen.

Southeast Asia is transforming, taking 10 nations with diverse economies, governments and cultures and forging them into the next great global economic story.

For logistics, the past and the future meet, in the investments, technology, innovations, partnerships and policies that are recreating the industry.

Both the transition and the transformation mean the logistics sector must rethink and remake itself down to the foundations to meet the needs of millions of consumers it wasn’t built to serve.

And to tie together cultures and economies in ways that shape and accelerate a rising regional economy.

It’s a huge opportunity and a great test. The next five years will tell us who is ready for both. goldbrown2


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Mark Wallace is UPS Senior Vice President of Global Engineering and Sustainability.

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