Pamela Mar looks at how Asia's manufacturers can survive, and prosper, amidst changing markets and technological disruption.
APEC officials were in Vietnam for the 2nd Senior Officials Meeting in preparation for the APEC Leaders’ summit to be held in Vietnam later this year. Connectivity was high on the agenda, as it is viewed as an essential driver for deepening regional economic integration, which is one of APEC’s four key priorities. APEC has launched a 2025 Connectivity Blueprint and is following this up with mid-term goals for 2020.
Pamela Mar spoke on connectivity as a driver for growth and economic integration at the quasi-governmental Pacific Economic Cooperation Council, which held its General meeting alongside the APEC meetings. Second in a two-part series. Click here to read the first part, Why Connectivity is a Starting Point for Real Change.
What factors will lead to growth in this new era?
The first building block is human resource development-related. Leaders need to focus on people by building skills at all levels, by not limiting themselves to training their hands on new machinery or processes, but also training their minds.
This strategy encompasses everything from basic education, to teamwork and communication, lean management, resource efficiency, to how to work with data. We use videos, on-site training, and are developing tools to drive worker engagement and education by smartphone.
Through the HER project, together with Business for Social Responsibility, we trained 175,000 workers in 85 factories in four key production countries on basic health, nutrition and well-being. Our initial impact data shows that even though the training has nothing to do with core operations, factories experience a productivity gain of between 3 to 18 per cent, and benefit from reduced absenteeism and turnover in their workforce in an industry where turnover is endemic.
But training the worker is often the easy part. The bigger hurdle may be overcoming the “low cost mindset,” which focuses exclusively holding down visible costs (to increase profit?), starting with the workers. This mindset can also be seen in government: countries have competed for years on having the most “business friendly” labor environment with the lowest cost, even though for consumer products, labor is just a tiny percentage of the product’s final selling price. Yet the low-cost mindset persists perhaps because in one day and age, it helped to attract manufacturing FDI. Today, it is a key barrier to opening up minds about the need to upgrade and move beyond low skill.
The key building blocks of factory upgrading are educating and empowering workers, and for management to be solutions providers who help drive their factories’ successes. We can transform people’s mindsets on the job, but of course, it would be a lot better if the education system trained this mindset— digitally literate, initiative taking, and analytical —before they arrive in the workforce.
Obviously, this goes back to the heart of Asia’s education system which stresses rote learning and obedience. Changing that will challenge some of the region’s long-held beliefs.
The other key building block of future success is technology, as well as the data that it produces to drive change, increase productivity, and connect to the outside world.
In the typical Asian apparel factory, everything is manual – checking the fabric, cutting, bundling, sewing, tagging, bagging and boxing. It is slow, laborious and highly variable because every style is different and must be started from scratch. It takes several days for workers to learn and become efficient in production, but in a world where the order is small and filled within a day, they need to be efficient, accurate and high quality from item #1.
That is what automation can do, and today technology is becoming cheaper and more accessible. Smart cameras using artificial intelligence can check for defects, automatic cutters can handle most fabrics, sensors and RFID can track production and resources, and the race is on to create the mass market robotic sewing machine. All of these are connected, and enable the factory to manage by data and join the digital economy. We should be pro-technology because although technology is not “the answer” it is one way for factories to meet the demands of the new economy and move up the value chain.
Why is finance critical in the New Economy?
Factory managers may be able to see the digital future and consider that their future. But no matter how cheap the technology is and how willing the factories are, there is a final key input, which is finance.
Countless studies have shown that many SMEs in emerging Asia are financially precarious, and the apparel industry is no different. Manufacturers buy raw material 30 days in advance and get paid 60 days after they deliver the goods. That’s four months without income. This should be where trade finance steps in, but it often does not, which is why Asia has a reported $700 billion gap for trade finance.
If trade finance is difficult, investment for capital upgrades is even more scarce. Banks make more money trading and betting, and if they think of lending, they prefer multinationals, not SMEs. As a result, the effective cost of capital for some small manufacturers, even those with a well-known client book, can be 18 – 20 per cent a year. Many cannot possibly afford this, so they go without. In the current environment, with standards rising and pressure increasing, a lack of capital may mean that their days are numbered.
It doesn’t have to be this way, and it shouldn’t be this way. For sure, Asia has enough resources to close the trade finance gap, and seed public and bank funds for industrial upgrading. It may be a matter of political will: will finance finally serve the real economy or not?
Of course, even if we solve these problems, there is no guarantee that Asia’s manufacturers will remain competitive, relevant, and mainstays of global production – but they will greatly increase our chances 0f ensuring they are.
The future looks bleak. Why should we be hopeful?
Markets are being disrupted and technology is advancing at great speeds. Connectivity is a must. But beyond that we need to invest in people, build our education systems, and use technology to upgrade and create more and better opportunities for our region’s manufacturers and workers. And we need to ensure SMEs are adequately financed.
It is clear that the next phase of growth will be technology and data-driven, and digital. It’s where markets are going, and supply chains must follow.
This is so much more complicated than low-cost. And that’s why the public and private sectors need to be coordinated to deliver resources for growth. The good news is that everything we need to do – people, technology, finance – is within our reach. If we can do this, we will not only retain our leadership in consumer goods manufacturing, but expand it to capture more value.
The views expressed in the reports featured are the author’s own and do not necessarily reflect Asia Global Institute’s editorial policy.