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Indonesia to benefit from diversification of global supply chain, DBS says

Jakarta Post - July 8, 2020

Yunindita Prasidya, Jakarta – Indonesia will benefit from the diversification of the global supply chain as multinational companies are looking into ways to reduce reliance on China to manufacture their supplies following the outbreak of COVID-19, Southeast Asia's largest bank DBS has said.

During a virtual media briefing on Monday, DBS group head of global transaction services John Laurens explained that the shift of major supply chains into ASEAN countries would be part of the "new normal" for businesses.

"Diversification will continue on and markets like Vietnam, Bangladesh, India, Indonesia, benefit from that diversification," Laurens said, listing the ASEAN countries and other low-cost markets as beneficiaries of the shift.

The COVID-19 pandemic has severely disrupted the global supply chains. The World Trade Organization (WTO) has estimated that global trade will fall 18.5 percent year-on-year (yoy) in this year's second quarter. Meanwhile, the International Monetary Fund (IMF) has projected the volume of goods and services trade to shrink by 12 percent in 2020.

The pandemic has also made some companies question their heavy reliance on China, while China's ongoing trade war with the US has also burdened the industries with additional tariffs.

Indonesia has taken measures to take advantage of the situation, with the government establishing a special task force to attract businesses leaving China and facilitate their relocation to Indonesia.

On June 30, President Joko "Jokowi" Widodo announced that seven foreign companies had confirmed plans to relocate production facilities, mostly from China, to Indonesia. He added that 17 more were looking into opening facilities in the country.

The relocation of the seven companies is projected to bring US$850 million to Indonesia while potentially employing around 30,000 workers, based on the Investment Coordinating Board's (BKPM) estimates.

"I've ordered the ministers and the BKPM head to provide the best services for the industries relocating from China to Indonesia," Jokowi said on June 30 during a visit to the Batang Industrial Park in Central Java.

In a report titled "CIO Insights 3Q20" released on June 29, DBS explained that the pandemic had exposed the risk of over-concentration in the supply chain.

According to data from the World Bank that the report cited, as of 2017, China accounts for 27 percent of the global manufacturing output, far exceeding the United States and Japan which account for 17 and 8 percent respectively.

"The black swan event of COVID-19 exposed the vulnerabilities that companies with high dependence on China faced for their manufacturing needs," the report reads.

"The disruptions have since sparked a major rethink among companies if their heavy reliance on China for manufacturing is viable in the long run," it adds.

China became a destination for many companies because the country offered low labor cost, a moderate tax rate and a strong business ecosystem, the DBS report states, adding that despite the trend of diversification, China will remain the "World's Factory".

In a separate survey conducted by the American Chamber of Commerce in China and Shanghai in collaboration with PricewaterhouseCoopers (PwC) China, 84 percent of respondents said they had no plans to move production or supply chain operations away from China as a result of the pandemic.

Source: https://www.thejakartapost.com/news/2020/07/08/indonesia-to-benefit-from-diversification-of-global-supply-chain-dbs-says.html