Digital Maturity Will Drive Southeast Asia’s High-Value Manufacturing Growth: How Do We Get There?

As the pandemic may have spotlighted, this sector has notoriously been slow to transform, and unlike the banking and finance world, which has zipped ahead with fintech innovations, logistics has been dragging its feet when it comes to infrastructure and digital development and stamping out segregated siloes.

Just last year, Boston Consulting Group reported that 90% of manufacturing companies within the North American region have and will relocate within the next five years. News reports cite Southeast Asia as the new epicenter for manufacturing, so what kind of opportunity is this presenting for Singapore?

While there are bumps in the road, there are bright spots ahead, and in this “messy space,” there is a ton of opportunity to grab hold of.

In our latest podcast episode of The Forward Podcast, we explore this and more alongside Jeffrey Tan. Jeffrey has spent two decades frivolously learning and seeking to create change in logistics infrastructure, customs compliance, shipping, and supply chain technology. A self-described “industry busybody”, he wears many hats. Currently, as the president of the Singapore Computer Society’s Supply Chain Management Chapter, leading efforts in technology adoption within the industry and shaking up the status quo.

Aziza: From a logistics perspective: You have had a lot of exposure working with global markets, and you have spoken in the past about traditional pain points – such as infrastructure, ports, equipment, and communication – how have these pain points evolved over the years, especially since the COVID-19 pandemic, particularly when it comes to agility and sustainability?

Jeffrey: That’s a very interesting and relevant question for our industry. In the first part of my career, I didn’t choose to be in this sector, and I don’t think any parents dream of their kids growing up to be logisticians or be in this sector. I have never met anyone who says, “I want my kid to grow up to be working in the warehouse or working in the port.” That doesn’t happen.

But by getting into this industry, you realize it is something quite unimaginable, or I would say, there is something quite noble and very enriching to be in this sector. You start to realize this is a sector that actually connects the dots in what we do as part of our daily lives. We just take everything for granted, right? You get your food on the table, you get your things on the supermarket shelves, you order anything, and it almost comes like, you know, the delivery on the same day. This doesn’t happen by chance. It’s the hard work of this sector, which we call the logistics and supply chain sector. It’s something that people often ignore until the pandemic hits. People start to realize, “Oh, how come I cannot get what I want on the shelves in the supermarket?” People started snatching up toilet paper. In my 20 years in the industry, I had never seen so much toilet paper stocked up in the warehouse. That was something very interesting. When I walked into the warehouse, my automated storage retrieval system was full of toilet paper. That was the era. It was very interesting. You highlighted the point about this sector’s issues in terms of infrastructure, connectivity, and technology development.

If you look at it before the pandemic, even, this is one of the industries to be in terms of its history. This is also one of the most challenging pain points of this industry when it comes to infrastructure readiness.

When it comes to digital transformation and digital development, it is one of the slowest sectors to progress, unlike the banking and finance industry where they have invested a lot into technology and have advanced with fintech and stuff. This is one of the sectors that is often trying to catch up, and the pandemic actually brought that to light where things started to break down.

Why is that so? Singapore is a very special, unique place to be in where the infrastructure developments are world-class, and we started that journey more than 30 years ago, 40 years ago, where we already started on the digitization journey. But logistics and supply chain are never a domestic business. It is a global international business.

This is where other countries’ digital maturity and infrastructure maturity have not caught up with what the rest of the developed world has. You find that disparity in that context. This is what gave way during the pandemic, during COVID-19, where you see infrastructure not being enough. There are not enough warehouses in some countries and not enough cooling facilities. Some countries are still very much in the paper-based type of processing and documentation.

So when the border comes to a close, when connectivity comes to a halt, this is where the entire supply chain gives way. People realized that only during COVID, or during the pandemic period, things started to take shape.

There has been a lot of digitization effort going into the sector. There has been a rush to develop infrastructure. This is what we have seen in the last three years, four years of COVID-19.

Aziza: In terms of that growth and that move and shift into digitalization, there’s a lot of disparity in the rate of growth in certain areas. Just last year, Boston Consulting Group reported that 90% of manufacturing companies within the North America region were going to have to relocate within the next five years. News reports in tandem with that show that Southeast Asia will be seen as the new epicenter for manufacturing. What kind of opportunity is presenting itself now for Singapore? You mentioned how Singapore has been ahead of the curve over the last 30 years. So what does that mean for Singapore?

Jeffrey: Actually, even before the pandemic, we were seeing a lot of shifts in the supply chain where manufacturers were moving out from the manufacturing powerhouse like China into Southeast Asia. Some of the hottest destinations were Vietnam and Indonesia and some of these countries. This is, I would say, the phenomenon that we have seen even before the pandemic. Southeast Asia seems to be one of the hotter spots today for this relocation of manufacturing. But there are several points that I want to highlight, and it’s quite important to know.

First and foremost, from the Singapore perspective, Singapore has evolved to be really not the traditional manufacturing industry. Singapore has remained very focused and manufacturing needs to be more than 20% of its GDP. We actually moved from lower-end manufacturing, which is less skill-required, to more sophisticated high-end manufacturing, advanced manufacturing. This is a sector that continues to stay strong in Singapore. We have seen some countries that actually lost their focus and let manufacturing drop to less than 10% of their GDP. That doesn’t really help the country during a crisis situation. We saw during the pandemic some key examples.

Manufacturing remains the core because this is where production happens. You get your supplies, you get your stuff that you really want. However Singapore is one of the most costly places to do manufacturing, and it is definitely not for typical manufacturing to be hosted in Singapore. However, Singapore takes a different position in this context. Core advanced manufacturing will continue to remain in Singapore and attract top-tech companies that are into advanced manufacturing, from chip manufacturing to anything else. They relocate to Singapore as it is one of the most politically stable, best-connected countries in terms of transportation and supply chain.

It focuses on moving manufacturing to some of the special economic zones set up with other countries like Indonesia, Malaysia (the Johor-Singapore Special Economic Zone), and China where there are a few industry partner collaborations going on. In Indonesia, like in Batam, the special economic zone has been developed for years. This is what we call offshore manufacturing, where Singapore companies and their partners will be manufacturing in these locations. Singapore remains a hub for its HQ, for its operations. This is what we see. But then when it comes to the rest of the Southeast Asia countries, Vietnam, Indonesia, and Malaysia are developing rapidly, trying to catch this phenomenon in terms of the shift in the supply chain where a lot of the multinational big corporations are relocating their plants into Southeast Asia.

One of the key challenges for this movement and relocation is connectivity. In terms of transportation, how ready these places are. Not the entire country in Vietnam or these other countries are very developed in terms of transportation connectivity. Singapore is a bit luckier because we are small. We developed that years ago, and now we are part of the most connected ports in the world. The other challenge is the labor force, and the skill level of the labor force. These countries have progressed, but the labor forces are not at the level of China, where it has grown to very advanced skill sets.

Of course, the next challenge is to bring the workforce to the right level where more advanced or high-value manufacturing can happen in Southeast Asia. We have seen this development moving pretty rapidly over the years.

The other aspect is digital maturity. But I guess if I look at it, digital is the best tool most countries can use to catch up when it comes to digital investment and development. We have seen that over the last few years, Vietnam, Malaysia, and Indonesia have made huge advancements in digital development.