Malaysia, Singapore, Thailand: What to consider when setting up a distribution centre

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    • Regional distribution centres in ASEANRegional distribution centres in ASEAN
    26 April 2021


    By UOB FDI Advisory


    Key takeaways

    • Companies looking to diversify their supply chains post-pandemic can consider ASEAN countries such as Singapore, Malaysia and Thailand, which offer a good mix of cost effectiveness and competitive business growth.
    • When choosing a regional distribution centre, businesses should consider where their key customers are located, and what network and connectivity options are available.
    • Besides making supply chains more resilient to disruptions, regional distribution centres can offer value-added services such as repackaging and quality control checks to cater to local requirements.

    The grounding of the mega container Ever Given in the Suez Canal for six days in March once again highlighted the fragility of supply chains. The incident was the latest in a string of events that have caused disruptions to the global supply chain since the outbreak of the COVID-19 pandemic. The worldwide supply crisis, and ensuing demand shock when countries started shutting down, exposed vulnerabilities in the supply chain and production strategies of many multinationals.

    In an interview with UOB FDI Advisory, Jerome Gillet, CEO, DHL Supply Chain Singapore, Malaysia and the Philippines, asserts that the time is ripe for businesses to rethink their global supply chain strategy and meet changing consumer preferences.

    For companies looking to diversify their supply chains post-pandemic, Gillet believes that ASEAN member countries offer a good mix of cost effectiveness and competitive business growth.

    “Diversification is a major theme as many companies look to diversify their suppliers to multiple locations and to be nearer to their key customer markets so that they can continue to operate even if borders are closed,” says Gillet.

    Jerome Gillet

    According to DHL's Jerome Gillet, many companies are looking to diversify their suppliers to multiple locations to be nearer to their key customer markets. Photo: DHL

    To be closer to the customer, companies should consider building one or two more regional distribution centres (RDCs) near end-markets. Being closer to the customer means speedy fulfilment and faster response times to cater to local demand.

    In addition, having another RDC provides a contingency plan should there be supply chain disruptions. Besides enhancing distribution capabilities, RDCs also offer the ability to provide value-added services such as repackaging and quality control checks to cater to local customer requirements.

    Across ASEAN, member countries such as Indonesia, Vietnam, Singapore, Malaysia and Thailand are popular sites for RDCs. In this article, we review three possible locations for your next RDC.

    Where should your next RDC be?

      Singapore Malaysia Thailand
    Business ecosystem
    • Ranked #2 in ease of doing business
    • Highly educated and diverse talent pool
    • Strong research and development (R&D) capability
    • High operational efficiency, with a strong innovation ecosystem
    • Ranked #12 in ease of doing business
    • Multilingual and talented workforce
    • Business-friendly ecosystem and policies
    • Has several free trade zones including the Digital Free Trade Zone (DFTZ)
    • Ranked #21 in ease of doing business
    • Skilled and cost-effective workforce
    • Continued investments in multi-modal infrastructure offering greater diversity of transport options
    Network and connectivity
    • World-class connectivity - linked to more than 600 ports in 123 countries with 200 shipping lines
    • Ranked #7 globally, and #2 in Asia under the Logistics Performance Index 2018
    • Developed logistics network and port infrastructure with seven major ports. The Penang port is the oldest and longest established port in Malaysia.
    • Ranked #41 globally, and ranked #9 in Asia under the Logistics Performance Index 2018
    • Extensive road transportation network, connecting Indochina with the South China region
    • The Eastern Economic Corridor (EEC) project offers US$43 billion of infrastructure investment projects including public transport, airport expansion and seaport development
    • Ranked #32 globally, and #7 in Asia under the Logistics Performance Index 2018

    *Information accurate as of March 2021

     

    Singapore – regional hub for global players

    Gardens by the Bay

    Cargo ships seen just beyond Singapore’s Gardens by the Bay. Singapore’s excellent connectivity makes it a popular choice as a regional distribution centre. Photo: Shutterstock

    Multinational logistics providers such as DHL appreciate the robust infrastructure, quality of talent and strong government support that Singapore offers.

    “Singapore still ticks all the boxes for a strong regional distribution centre,” says Gillet.

    The island state is home to the world’s busiest maritime transport network – connected to more than 600 ports in 123 countries. Singapore’s Changi Airport is one of Asia’s largest cargo airports. Although the local market is small, Singapore has focused on its role as a transhipment hub connecting port lines between countries and providing value-added services such as contract logistics that provide end-to-end solution for companies.

    “The support from the Singapore Government has been amazing. Feedback was welcomed and even sought when new policies were rolled out to adapt to the new normal.”

    Singapore places an emphasis on innovating its supply chain capabilities to better support customers. For example, DHL’s Asia Pacific Innovation Centre in Singapore houses a design thinking studio and looks at logistics innovations such as smart glasses for warehouse assembly lines and drones for delivery of time-critical goods. In addition, the city continues to build its logistics connectivity for products that are time-sensitive and that need a highly reliable supply chain.

    During the pandemic, the Government pro-actively helped logistics companies continue their operations. Says Gillet: “The support from the Singapore Government has been amazing. Feedback was welcomed and even sought when new policies were rolled out to adapt to the new normal.” At the same time, the Government introduced a Business Continuity Planning (BCP) guide with appropriate measures and arrangements for suppliers and customers.

    “Singapore is a safe place to operate from during these times – there is political stability, and the Government has handled the [COVID-19] situation well. In fact, the protocols implemented in Singapore have been used in other countries,” adds Gillet.

     

    Malaysia – technology powerhouse

    Butterworth

    Aerial view of the transportation hub around Butterworth in Penang, Malaysia. Photo: Shutterstock

    Any RDC considerations for Malaysia would have to take into account three key hubs: Kuala Lumpur, Johor and Penang. Kuala Lumpur International Airport is Malaysia’s largest airport. Its relatively close proximity to Port Klang as well as its central location between Thailand and Singapore, offers multi-modal transportation (air-land and sea-land) options.

    Johor, meanwhile, is the Malaysian state closest in proximity to Singapore and offers synergies with this location. RDCs operating in Johor can tap on Malaysia’s lower land and labour cost while serving the Singapore market. There are also active efforts to promote sustained economic cooperation between Johor and Singapore.

    Penang’s attractiveness lies in the strong base of technology or electronics manufacturing activities based there. “Penang is well-known for electronics manufacturing and there are further opportunities in the areas of healthcare and technology,” says Gillet.

    This is evident in the state’s ability to attract the third highest manufacturing FDI inflow in Malaysia – contributing 50 per cent of the country’s key investments in electronics and electrical, machinery and equipment, scientific and measuring equipment industries.

    The credit lies in Penang’s network of over 3,000 diversified and competent local suppliers covering automation, electronics, packaging, plastics, precision engineering and metal work, software development and more.

    “Penang is well-known for electronics manufacturing and there are further opportunities in the areas of healthcare and technology.”

    Technology and healthcare companies continue to flock to the island-state because of its supportive investment ecosystem via InvestPenang and the Penang Development Corporation. For example, US semiconductor manufacturer, LAM research, has pledged up to MYR1 billion in February 2020 despite the COVID-19 pandemic.

    A key effort that would boost Malaysia’s role as a RDC is the development of digital free trade zones (DFTZs) to capitalise on the growth of the internet economy and cross-border e-commerce activities.

    One of the components of the DFTZ is the development of an eServices Platform to efficiently manage cargo clearance and other processes needed for cross-border trade. The intent is to enhance Malaysia’s attractiveness as the regional fulfilment hub for global brands to reach ASEAN buyers.

     

    Thailand – (automotive) electric dreams

    Going up north, Thailand and Bangkok’s strategic location in the heart of the Mekong region helps manufacturers in Indochina connect with the South China region.

    To further strengthen its infrastructure developments as a manufacturing and logistics hub, Thailand launched the Eastern Economic Corridor (EEC) that will turn three of Thailand’s provinces (covering a total of 13,285 square kilometres) into a manufacturing hub reachable by land, sea and air. The EEC will provide connectivity to Cambodia, Myanmar and Vietnam – Southeast Asia’s next growth markets.

    Logistics and supply chain company, CEVA Logistics, has since set up a new branch in Laem Chabang – an area known for its major deep seaport, transit cargo terminal and future home to Thailand’s third airport.

    Thailand’s Eastern Economic Corridor will provide connectivity to Cambodia, Myanmar and Vietnam – Southeast Asia’s next growth markets.

    Furthermore, Thailand has long been a key automobile production hub and can tap on its strength in this area to serve as an RDC for the automotive sector for the region.

    “Thailand has highly qualified resources in automotive manufacturing. The move towards electric vehicles will also contribute to future growth,” says Gillet.

    Thailand targets to have electric vehicles account for 30 per cent of car production by 2030 to tackle toxic air pollution and also boost its capabilities in electric vehicle manufacturing. The Thai Government has introduced incentives such as a three-year tax holiday for manufacturers of plug-in hybrid vehicles and an eight-year corporate income tax waiver for battery electric vehicle makers. As activities in this space pick up, its role as an RDC for this new emerging sector would likewise increase.

    Charging Station

    An EV charging station in Thailand. The country plans to boost its capabilities in EV manufacturing to take advantage of the global shift towards EVs. Photo: Shutterstock

    As seen above, Singapore, Malaysia and Thailand offer various advantages for businesses looking to tap into ASEAN’s growth and rising middle class. Ultimately, choosing an RDC location depends on where key customers are located, the preferred transportation modes, as well as sensitivity to cost.

    The continued growth of manufacturing activities in ASEAN, bolstered by the rollout of the Regional Cooperation Economic Partnership (RCEP), will contribute to the rise of RDCs across ASEAN. This in turn will boost the robustness and diversity of supply chains and minimise future disruptions.

     

    Through our established network across ASEAN and linkages to Greater China, UOB is well positioned to connect our customers from around the world to the region’s diversified markets. Our unique combination of in-market presence, local insights and expertise, coupled with the partner ecosystems we forge, enable us to help businesses and consumers seize opportunities for sustainable growth.

     

    This article shall not be copied, or relied upon by any person for whatever purpose. This article is given on a general basis without obligation and is strictly for information only. The information contained in this article is based on certain assumptions, information and conditions available as at the date of the article and may be subject to change at any time without notice. You should consult your own professional advisers about the issues discussed in this article. Nothing in this article constitutes accounting, legal, regulatory, tax or other advice. This article is not intended as an offer, recommendation, solicitation, or advice to purchase or sell any investment product, securities or instruments. Although reasonable care has been taken to ensure the accuracy and objectivity of the information contained in this article, UOB and its employees make no representation or warranty, whether express or implied, as to its accuracy, completeness and objectivity and accept no responsibility or liability for any error, inaccuracy, omission or any consequence or any loss or damage howsoever suffered by any person arising from any reliance on the views expressed and the information in this article.

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