CLMVT1

CLMVT: The new value chains

Three driving forces are shaping new forms of value chains, with implications for Southeast Asia. The first is the growth of the CLMVT — Cambodia, Laos, Myanmar, Vietnam and Thailand — region. The gap between advanced economies and emerging markets is closing, and our region is catching up very fast.

But the concurrent rise in wages and living standards means that soon we will not be able to rely on low labour cost as the source of comparative advantage.

The second driving force is rapid advancements in technology. Automation is replacing low- and semi-skilled manufacturing jobs, making it much harder for a country to be competitive on low wages alone.

Humanless warehouses are emerging, and some e-commerce giants are going further: Amazon is exploring automated delivery systems, and China’s JD.com is looking to automate the entire process, starting from shipping containers.

Technological advances have also made many non-tradable services tradable. These include product designs, entertainment and even medical services. The first 5G-enabled remote surgery was done in Spain this year. As services become more tradable, the concept of borders starts to fade further away.

The third driving force is increasing geopolitical tensions, with the ongoing US-China trade conflict the most timely example.

Regardless of whether these tensions are prolonged or short-lived, they will have real effects on trade and investment patterns. Trade diversion, production relocation and investment decisions driven by geopolitical pressure today will have a long-run effect on the shape of our future value chains.

FOUR KEY MOVEMENTS

What implications do these key driving forces have on the new form of value chains? I would like to highlight four key movements that we will see.

The first is the regional consolidation of goods-producing supply chains: goods will be traded more with our own neighbours than with far-off countries.

In addition to lower production costs, mass customisation and the need to adjust product design quickly are contributing to more nearshoring and onshoring. For example, rising geopolitical tensions could induce more companies to move production for US consumers from Asia to the US and Mexico.

The accelerated growth of countries in our region will drive further regional consolidation of value chains. Three of our giant neighbours — China, India and Indonesia — are home to 40% of the world population. High income growth and the rise of the middle class will increase demand in the region going forward.

Looking ahead, with the driving forces mentioned, the share of goods traded within our region will only keep increasing. Although today the US and Europe remain important export destinations, goods produced in CLMVT in the future will be servicing more regional demand. This regional consolidation will become a more prominent feature of the new value chains.

The second movement is the increased importance of services in the economy. According to McKinsey Global Institute, cross-border service trade is growing more than 60% faster than trade in goods. This trend will lead to the creation of a supply chain for the service sector, and the increasing value-added share of services within the manufacturing supply chain.

The increase in demand for services from middle-income groups and the increase in the supply of services through firms’ changing business models means that services will have a large role to play in tomorrow’s value chains. As well, trade in services is seldom a victim of trade tensions, giving it all the more potential to grow.

The third major shift is the increased role of online platforms and the sharing economy in value chains. Platforms help reduce search cost and make possible economic transactions that otherwise would not have happened.

Middlemen — most of the time large corporations — who traditionally took on the role of connecting different nodes in a value chain, dictating its path, can be replaced by online platforms that make potential buyers and sellers more visible to everyone.

In addition to facilitating economic transactions, sharing platforms eliminate the need for individual firms to make huge investments. Cloud services, for example, eliminate the need for companies to spend heavily on IT infrastructure.

SME OPPORTUNITIES

Platforms will also lower the barrier of entry for SMEs into both manufacturing and service value chains. The reduced cost of entry and the direct connection and trust between buyers and sellers pave the way for firms — especially small businesses — to design their own product flows and become integral parts of the new value chains.

The fourth change is that a country’s competitiveness will no longer be based on low-wage labour, but on the ability of its workforce to adapt to new technologies.

As firms focus less on the production part of the new value chains and more on processes that require high-skilled labour such as design and marketing, the new value chains will be more knowledge-intensive and less reliant on low-skilled labour, which will likely be replaced by automation.

This does not mean that more people will be unemployed, but other skills will be required. Robots, for example, reduce the need for manual labour but increase the need for technicians and software designers.

The workforce of the new value chains, nonetheless, must be able to keep up with the technology and be able to acquire new skills as needed. The challenge is not only how to train a new-generation workforce to have the capacity to learn, but also how to prepare the 123 million people currently in the region’s workforce for the changes to come. More importantly, how can we transform them into lifelong learners in the world of fast-changing technology?

I’d like to offer five suggestions to prepare for these changes. The first is the need to markedly upgrade digital infrastructure in the region. Second, we need to reduce frictions for service connectivity and data transfer.

Third, aside from digital infrastructure, standardisation and interoperability, regulations also need to change. Fourth, the service sector must be liberalised, and finally, the workforce must be upskilled and reskilled.

Veerathai Santiprabhob is the governor of the Bank of Thailand. The above article was adapted from an address given to the recent CLMVT Forum in Bangkok.

Source: https://www.bangkokpost.com/business/1709299/the-new-value-chains