Leaders of multinational companies face unprecedented uncertainty in shaping their supply chain strategies and reconfiguring their companies’ network footprints in response to global geopolitical upheaval.
Dynamics between manufacturing powerhouse China and several major trading partners have accelerated pre-existing production shifts. Technology and relative labour costs are changing. Covid-19 demonstrated the need for more resilient supply chains at a time when geopolitical tensions have created more complex considerations for global trade partners.
In addition, CEOs must assess how to establish an ESG-compliant supply base while identifying which geographical location will be the engine of economic growth in coming years. These complex considerations are why over 90% of global manufacturers intend to redesign their supply footprints in the next five years according to a survey by Boston Consulting Group (BCG).
Resilient companies are two times as likely to outperform non-resilient peers in long-term total shareholder return (TSR) performance. What’s more, a successful footprint transformation can improve companies’ resilience and sustainability and cut their global manufacturing and supply-chain costs by 20% to 50%.
Southeast Asia has emerged as an attractive location in this evolving landscape as companies look to manage supply costs and mitigate risks. This presents a substantial opportunity for Southeast Asia’s connected global business hub of Singapore.
Southeast Asia: A new manufacturing epicentre
Adding to this attractive proposition is the compelling cost-competitiveness of Southeast Asia’s manufacturing landscape. BCG’s proprietary Global Manufacturing Cost Comparison Model assesses that baseline manufacturing costs in Southeast Asia are now up to 15% lower than in China — even before applying potential logistics and tariff costs — in a region boasting large volumes of skilled, low-cost labour.
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Southeast Asia has already benefited from significant shifts away from China, with exports to the US soaring by 65% from 2018 through 2022 while US goods imports from China declined by 10%.
Domestic consumption in Southeast Asia is projected to reach US$4 trillion ($5.4 trillion) by 2031. Rapid regional growth has also fashioned a large domestic market, with a GDP of US$3.6 trillion in 2022, with the share of middle- and high-income households on track to reach 84% of households by 2031.
Regionally, the Association of Southeast Asian Nations (Asean) has implemented a range of supportive policies in recent years, with measures to enhance the free flow of goods and services among member states. Expansion and modernisation of ports have been complemented by investment in energy, transport, and digital infrastructure. The Asean highway network, Singapore-Kunming rail project and Indonesia-Malaysia-Thailand Growth Triangle are all examples of this evolving ecosystem. These initiatives align with the wider Asean Economic Community Blueprint, which looks to embed a deeply integrated and mutually beneficial regional economy, with seamless movement of goods and people.
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Major trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CP-TPP) mean the region has competitive trade access with countries that together account for 40% or more of global GDP.
Globally, the value-add of Southeast Asia’s manufacturing industry will double from US$748 billion in 2022 to US$1.4 trillion by 2028. The projected CAGR of 11% puts Southeast Asia at the forefront of global manufacturing growth, outpacing competitors India (8.4%), China (3.6%) and Mexico (3.3%). According to BCG’s proprietary Global Trade Model, Southeast Asia’s exports will grow by nearly 90%, reaching US$3.2 trillion by 2031.
The region is poised to capture value from increasingly dynamic global manufacturing shifts, a landscape explored in detail in BCG’s recent report “Harnessing the tectonic shifts in global manufacturing”.
Connecting with Singapore
Southeast Asia’s manufacturing market is currently dominated by six key countries, with unique considerations as to the opportunities they present.
Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam boast diverse manufacturing opportunities across a broad range of industries. Singapore offers a unique market opportunity, as Southeast Asia’s most mature economy with advanced manufacturing capabilities.
Singapore government’s Manufacturing 2030 initiative offers a compelling foundation for companies. It aims to boost the value-add of manufacturing by 50% by 2030, maintaining a 20% share of GDP, and positioning Singapore as a global business innovation and talent hub for advanced manufacturing.
Manufacturing 2030 takes a three-pronged approach. First, attract the best global and local companies in niche areas to maintain Singapore as a critical node in global value chains. Second, ramp up efforts to grow the size and capabilities of local enterprises in advanced manufacturing. Third, to work with local polytechnics and universities to make engineering and manufacturing attractive to students.
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This focus on advanced talent and manufacturing is at the heart of Singapore’s approach. Over US$750 million was invested annually from 2015 to 2020 in continued education and training and US$2.4 billion was invested in fostering industry-focused research within advanced manufacturing.
The Development and Incentives Manufacturing (DEI) is an important consideration for companies considering Singapore, providing a concessionary tax rate of 10% to encourage companies to engage in high value-added manufacturing activities, either through a new set-up or an expansion of existing operations in Singapore.
Singapore’s business-friendly approach is certainly reaping rewards. It is ranked second globally in the World Bank’s Ease of Doing Business index and fourth for global competitiveness by the IMD World Competitiveness Centre.
Southeast Asia and Singapore’s manufacturing opportunity is undoubtedly on the rise but companies must make careful strategic choices to unlock the greatest share of this value, assessing local benefits and challenges.
Singapore is a globally connected hub with 26 bilateral and regional FTAs in place, over 200 shipping lines connected to 120 countries, and one of Asia’s leading shipping ports. Its talent market ranks third globally in the World Economic Forum’s Workforce Quality Index and over 70% of residents communicate in two or more languages.
Balancing these robust business foundations, however, are challenges of a small domestic economy, high operating costs, and reliance on foreign labour that limits manufacturing opportunity largely to high-value manufacturing.
Companies need to reflect on the complexities of entering and operating to ensure a successful supply chain transition. They need to understand how global trade flows will evolve, and how this may shift competitive advantages over rivals.
Benchmarking costs across different countries and regions is also essential. This includes understanding the impact of key components such as regional differences in wage rates, labour productivity, operating overheads, tariffs, taxes, and more. Even within individual countries, companies need to analyse the most attractive region or location based on the availability of local talent, supply base, government incentives and infrastructure, among others.
This is a vibrant, high-growth but diverse region, creating complex competitive considerations. Companies must also prepare to navigate a fragmented business ecosystem heavily reliant on the power of relationships.
Southeast Asia remains a compelling and attractive destination for supply chain relocation, thanks to persistent geopolitical trends, regional policy measures and a growing domestic market. While the regional opportunity is ripe, understanding the local context is vital to realising this opportunity. Those who tread this path successfully are poised to position themselves at an exciting new heart of global manufacturing potential.
Kazutoshi Tominaga is managing director and senior partner at Boston Consulting Group; Hitesh Tak is managing director and partner at Boston Consulting Group. The authors would like to thank their colleague Michael McAdoo, partner and director, global trade & investment at Boston Consulting Group for contributing his insights to this article
