Corporates in the Asia Pacific (Apac) region are bringing production and sourcing closer to home as they seek both to mitigate the risk of overreliance on distant suppliers and take advantage of incentives created by newly established trade deals, according to research by HSBC.
The Global Supply Chains – Networks of Tomorrow report, which polled the senior management of 450 corporates from nine Apac markets – Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, Singapore and South Korea – found that corporates are increasingly looking within the region for their sourcing needs.
Over the next 12 to 24 months, Apac corporates will base more than half (53%) of their supply network in Asia, up by nearly 6 percentage points from 2020, the survey found. At the same time, they are also trimming their relationships with sellers in North America and Europe, which will account for just 23% and 14% of their supplier base in the coming months – a decline of 2 and 1 percentage points respectively.
While this realignment of supply chains has its roots in the disruptive events of recent years, HSBC says the region’s nearshoring trend is also being spurred on by the entry into force of the Regional Comprehensive Economic Partnership (RCEP) – an Apac-centred trade deal covering almost a third of the world’s population and 30% of its GDP.
Last year, the United Nations Conference on Trade and Development forecast that the deal would cause Asian importers to do less business with the EU, US and other non-RCEP markets, cementing the region’s primacy in global trade – a prediction now backed up by HSBC’s findings.
“Companies in Asia Pacific have begun to realign their supply chains to capitalise on the advantages offered by RCEP,” says Aditya Gahlaut, HSBC’s regional co-head of global trade and receivables finance. “RCEP harmonises the rules of origin across much of the region, lowering the cost of inputs for manufacturers and making their goods more price competitive. At the same time, it provides greater access to larger markets for exporters, spurring investment within RCEP and from beyond.”
The location of their suppliers is not the only change Apac’s corporates are making. HSBC’s research also reveals that fully two-thirds are looking to reduce the number of companies they buy from – an increase of 20 percentage points since 2020.
“It may seem counterintuitive – if a company faced supply disruptions in the past, you would think it would want to work with more suppliers,” says Gahlaut. “But it makes sense for companies to secure their sourcing from fewer suppliers while cultivating longer-term, more strategic relationships with them.”
However, a sizable minority – 27% – are moving in the opposite direction, with plans to increase their supplier numbers over the next 12-24 months, although this figure is down from 2020’s 34%. “Where we’re seeing the move towards having more suppliers is when a company is reliant on only one market. Geographic diversification is an important consideration when designing more resilient supply chains,” Gahlaut adds.
With all this reshuffling comes new pressure on corporates’ cash positions, to the extent that just 62% are funding their supply chains with available working capital, down from 85% in 2020.
In addition, while demand for traditional trade finance has remained more or less flat over the last three years, the current tough macroeconomic environment is boosting demand for products such as supply chain and receivables finance, which are now used by 32% of respondents, up from 25% in 2020.
“Inflation has increased the amount of funding customers require. We have seen a huge spike in customer demand for working capital solutions,” says Ajay Sharma, HSBC’s regional co-head of global trade and receivables finance.
HSBC also finds that disruptions to global supply chains and the resulting logistical challenges have driven nearly four-fifths of Apac corporates to hold excess stock over the last two years, with an average increase in inventory of 36%. This, the bank’s research shows, has led to an upswing in demand for inventory financing, with 44% of respondents now availing themselves of the product, up from 37% three years ago.