With the imminent introduction of a new regional trade agreement, the logistics challenges posed by difficult border crossings and the ASEAN region’s island geography could ease as investments in services increase
Despite some setbacks, vehicle production is expected to grow further in South-East Asia as part of wider economic growth in the Association of South-East Asian Nations (ASEAN). Recent expansion has been fuelled by the opening of trade agreements between the ASEAN countries and wider global markets, including Korea, China, India, Australia, and Europe, and could develop even further with a proposed trans-Pacific deal that includes North America. However, road and port traffic congestion, labour shortages, and inefficiencies at border crossings are hampering the movement of vehicles both within the region and outward to global trading partners.
Ipsos Business Consulting’s Robbie Stone is business development manager for Indonesia, the region’s fastest growing market, but one which he says, like its neighbours, has struggled to develop a logistics infrastructure and market to keep pace with growing demands. “We need better-integrated regional ports, as well as cross-border highways and rail networks,” he explains. “Furthermore, the lack of experienced logistics service providers is also a challenge.”
That is not to exclude the development of a relatively sophisticated logistics market taking shape. Local, global and joint-venture providers are investing in ASEAN countries, and in some cases looking to create integrated networks between them. Finished vehicle logistics providers are also taking on more responsibility in providing value-added services, such as pre-delivery inspection (PDI) and accessorisation, although in some cases a fragmented market and weak infrastructure are holding back quality.
“Our main objective is to reduce delivery cost and time, and improve quality,” says Takaya Soga, general manager for NYK Auto Logistics, which has invested in Indonesia, Thailand, and Malaysia, as well as in regional shipping services. “In areas of poor infrastructure, stagnation of logistics metrics has a significant impact on delivery cost, time, and quality,” he adds.
Although the ASEAN region is ultimately expected to grow, thanks in part to a low vehicle ownership rate and a rising middle class, vehicle sales have recently declined. In 2014, the combined nations sold around 3.2m cars – a decline of 9.7% compared to the 3.5m units sold in 2013. One of the hardest hit was Thailand, the region’s production, sales and export champion. Thailand’s economic and political troubles saw vehicle production decline last year to 1.88m units from 2.45m in 2013. However, forecasts predict a partial rebound to 2.2m units in 2015 following greater domestic stability resulting from the country’s military takeover in May 2014.
“Thailand’s slow growth is mainly due to the decline in domestic demand. However, the impact across the region has been minimal,” says Sanpichit Songpaisan, senior consulting manager, Thailand, at Ipsos Consulting.
Indonesia also saw economic headwinds last year, with sales dropping slightly to 1.21m units. However, thanks in part to a fledgling export sector, its production grew 7% to 1.3m units. With South-East Asia’s largest population, and its political situation relatively stable following a recent election, Indonesia has the region’s most positive outlook for domestic sales.
[sam_ad id=6 codes='true']One of the key reforms that many are hoping will unlock potential for logistics development across South-East Asia is the ASEAN Economic Community (AEC) which, by the end of the year, promises greater logistics efficiency through the reduction and elimination of import tariffs and bureaucratic barriers among member nations.
Trond Tønjum, vice-president and head of South-East Asia at Wallenius Wilhelmsen Logistics (Thailand), says that although not all elements of the AEC agreement may be completely ready by January 2016, a greater standardisation of taxes and customs should be in place by then. For example, taxes in Vietnam, which are the highest in ASEAN, should be lower by January next year.
WWL is investing for growth it forsees within the South-East Asian region, with plans including the opening of a new multi-purpose car facility in Thailand mid-year, according to Tønjum. In Indonesia, which has been growing exports from a low level, WWL plans to open a multi-brand on-dock facility in Jakarta within the year. “Malaysia is the odd one out,” notes Tønjum. “It is very protective of its own brands and not the first choice for an export hub.”
But even in protectionist Malaysia, logistics providers such as Germany’s BLG Logistics are investing and anticipating further growth as the region opens up further thanks to the AEC agreement.
Among the players in ASEAN logistics, Gulf Agency Company (GAC) provides logistics services for high-and-heavy equipment, such as project cargo for the energy and construction sectors, which are also expected to see higher growth.
Logistics efficiency was further hurt by erratic weather conditions, such as floods that slowed down delivery or caused it to come to a complete halt.
The primary mode for transporting project cargo to and from Thailand is ocean, most of which GAC Logistics imports to the country on weekly shipments from countries including China. The port of Laem Chabang, as well as the surrounding Chonburi and Rayong provinces, are common termination points. Laem Chabang offers ro-ro and bulk terminals to support the movement of oversized cargo. Upon arrival at the port, GAC Logistics transports the equipment by truck to its final destination.
[sam_ad id=6 codes='true']“Normally, if the cargo is less than 4.5 metres high and four metres wide, it qualifies as non-oversized cargo. Beyond that, we need to apply for transport permits and obtain confirmation from the Department of Highways and local road authorities,” says Mendonca.
As part of customs reforms for the AEC agreement, automation has also been vital to speeding up the customs clearance process and reducing administrative costs.
“Already, ‘e-customs’ practices exist in Thailand, Singapore, Malaysia, and the Philippines. Indonesia and other ASEAN countries need to follow to ensure ASEAN’s success as an integrated supply base,” says Ipsos Consulting’s Robbie Stone.
“As proposed under the AEC agreement, the free flow of skilled labour across the ASEAN region will also help develop information technology and communications infrastructure. The transfer of knowledge that will come with this agreement will speed up the integration of ports across the ASEAN region and will help to drive e-customs practices, thus removing bottlenecks,” he adds.
In addition to eliminating customs barriers, the full implementation of the AEC agreement framework would open the way for domestic trucking companies to cross international borders unhindered. This presents opportunities for streamlined border crossings such as between Thailand and the virtually untapped Myanmar, for example. Among recent infrastructural developments is the expansion of one of the main Thailand-Malaysia border crossings in Songkhla.
The benefits of the AEC agreement on infrastructure and cross-border movements is something of a priority for BLG Logistics, not least because of the network it is building out of Malaysia. Thomas Leiber, director of the company’s Overseas East region, believes that the AEC agreement will facilitate infrastructure development, reduce bureaucracy between borders, and help stabilise economic growth. BLG is expecting OEMs to invest further in ASEAN countries, generating a greater demand for sophisticated logistics solutions and greater integration of logistics service providers.
In Malaysia, BLG works with a joint venture partner, MISC Integrated Logistics, to operate BLG MILS Logistics, which has a primary focus on local distribution of imports and domestically produced German brands to dealerships throughout the region.
“We are beginning to deliver to dealerships with our partner. Now we have 55 trucks [and are] the second-largest transporter in Malaysia,” says Leiber.
Malaysia is the third largest ASEAN vehicle producer, having assembled around 666,500 units in 2014, a small increase compared to 2013. BLG MILS handles finished vehicles at several locations there, including Port Klang and Klang Valley, both near Kuala Lumpur, as well as at Kulim in the north-west, and Pekan, 280km east of Kuala Lumpur.
Leiber points out that quality is becoming more important in Malaysia, including a demand for PDI and other value-added services for vehicle logistics and handling, which BLG is now providing. “Modern information technology and well-trained and motivated employees are essential to maintaining quality. Climatic conditions and the infrastructure are challenging and hence damage prevention is more crucial than ever,” he says.
BLG Logistics’ main challenges are to standardise its services and products and to forecast vehicle sales accurately. “We are rolling out quality systems and methods of daily operation to monitor and influence different KPIs that we developed in Germany,” says Leiber.
In and out of Indonesia
Quality distribution through value-added services is also a growing part of the business in the region for NYK Auto Logistics, led by activities in Indonesia.
Takaya Soga, general manager of NYK Auto Logistics, says that among the company’s services, inland transport is growing the fastest in South-East Asia. In 2014, it established NYK Puninar Auto Logistics Indonesia, which provides transport, storage, PDI and customs clearance for exports from Indonesia, as well as domestic distribution. (In October last year, NYK also established a new joint venture company in Myanmar for inland vehicle transport). NYK provides a door-to-door service by combining a domestic ro-ro service operated by NYK Spil Indororo, with inland service offered by NYK Puninar Auto Logistics Indonesia.
NYK Logistics regards Indonesia, where the automotive market is likely to become the biggest in South-East Asia, as a strategic area. Soga says that the company is investing in a tracking system and smart vehicle transport system that will improve yard management.
These sorts of logistics developments are exactly what are needed in the country, according to Gopal R, global vice-president of transportation and logistics practice at analyst firm Frost & Sullivan. “With more disposable income and political stability, Indonesia’s challenge now is logistics,” he says. “In fact, the country has launched a logistics industry blueprint that will help sustain its production.”
Logistics is certainly the issue for some: in February General Motors announced that it would shutter a factory in Indonesia that it only re-opened in 2013, citing complicated and expensive logistics among the reasons for the closure.
Indonesia’s main logistics issue is that domestic production and consumption are located in the province of West Java, east of Jakarta, but demand is also in the provinces of Central and East Java at the other end of the island, along with the regions of Kalimantan and Sulawesi, both on separate islands. However, underdeveloped ports make sea logistics in the region difficult. Among the proposed improvements in Indonesia, the government announced that it would introduce a sea toll, the revenue from which it will use to improve infrastructure at 13 cargo ports.
Again, NYK Logistics is investing to make the most of these developments for growth out of Indonesia to the wider ASEAN region. Soga says NYK’s coastal services using ro-ro terminals play an important role in its hub-and-spoke service. There are terminals in Malaysia, Thailand and Singapore, and it provides coastal services in Malaysia and Indonesia.
Although the Philippines currently sells only about 250,000 units annually, this figure may be on the rise. In late January 2014, Mitsubishi opened a plant south of Manila with a 50,000-unit capacity.
Given its multiple-island geography, the Philippines has many of the same logistical challenges seen in Indonesia, according to Trond Tønjum at WWL. The company provides a monthly intra-Asia service that takes in the Philippines and Myanmar on inducement.
WWL also provides cross-border transport to Myanmar and Laos – particularly for high and heavy equipment. In Myanmar, it provides inland transport from Yangon port to dealers, who are currently located only in the capital. In two or three years, Tønjum predicts they will be more widespread.
The diversity that is inherent within the ASEAN region will continue to present challenges – even after the AEC agreement comes to fruition. And, overall, as trade flows evolve, one of the initial challenges of the AEC agreement will be the expectation of longer supply chains, implying higher costs for transport and storage. Yet, it promises to ease trade and logistics restrictions within the region, which will lead to a more powerful trading bloc. That logistics efficiency improvement will continue is evident, but the pace of future developments is still uncertain.