Stronger supply chains

The global economy has become increasingly unpredictable. A pandemic, geopolitical tensions, shifting trade policies and the growing push towards sustainability have forced businesses to rethink how they source materials, manufacture products and move goods across borders.

For ASEAN, whose economies are deeply integrated into global manufacturing networks, these disruptions have highlighted an important lesson: efficiency alone is no longer enough. Resilience has become just as important.

These are among the key findings of Strengthening Supply Chain Resilience in ASEAN: Firm Responses to Trade Shocks, Sustainability and Digital Transformation, a policy brief published by the Economic Research Institute for ASEAN and East Asia (ERIA).

Drawing on interviews with more than 40 multinational corporations and ASEAN firms, alongside business surveys involving over 900 companies, the policy brief examined how businesses are responding to trade uncertainty, climate-related pressures and rapid digital transformation, while outlining policy priorities to strengthen ASEAN’s long-term competitiveness as a global production hub.

ADAPTING TO A NEW TRADE REALITY

For decades, manufacturers built supply chains around one overriding objective: producing goods as efficiently and cheaply as possible.

That approach has been tested repeatedly in recent years. The COVID-19 pandemic disrupted production worldwide, geopolitical tensions reshaped trading relationships, protectionist policies became more common and businesses found themselves under growing pressure to reduce carbon emissions.

More recently, reciprocal tariffs introduced by the United States (US) have added another layer of uncertainty for companies operating across international markets.

Although ASEAN initially benefited from companies shifting production away from China during earlier rounds of US-China trade tensions, the latest tariff measures now affect several ASEAN economies as well.

At the same time, reduced tariffs on some Chinese imports have narrowed part of the region’s previous competitive advantage.

Even so, ASEAN exports to the US continued to grow in 2025, suggesting that many businesses have successfully adapted to the changing trade environment despite heightened uncertainty. Rather than waiting for conditions to stabilise, companies are changing the way they operate.

SPREADING RISK ACROSS THE REGION

One of the clearest trends identified in the ERIA policy brief is diversification. Rather than relying on a single supplier, factory or export market, businesses are spreading risk by sourcing materials from multiple suppliers, expanding production across different countries and seeking new customers within ASEAN and beyond. The study found that many Japanese manufacturers accelerated local sourcing and strengthened business continuity planning following the pandemic. While some production has shifted from China to ASEAN, companies are generally expanding existing facilities instead of building new ones.

Many are also adopting an “in China for China” strategy by producing goods specifically for the Chinese market.

Among ASEAN firms surveyed, more than 60 per cent reported changing their procurement strategies, with greater emphasis on environmental, social and governance (ESG) standards and supplier diversification.
ASEAN has become the preferred destination for much of this expansion, although businesses continue to grapple with higher procurement costs, complex regulations and growing sustainability requirements.
 

SUSTAINABILITY AND DIGITALISATION GATHER PACE

Alongside diversification, companies are increasingly investing in sustainability and digital transformation to strengthen their competitiveness.

The ERIA study found that more than half of Japanese firms operating in ASEAN have introduced decarbonisation measures, with many more planning to do so. The most common initiatives include improving energy efficiency, installing rooftop solar panels, adopting renewable energy and measuring emissions more systematically. Nearly two-thirds of ASEAN firms surveyed have also begun decarbonisation efforts, particularly larger manufacturers, through measures such as energy-efficient operations, electric vehicle adoption and environmentally friendly packaging.

At the same time, businesses are adopting artificial intelligence, cloud computing, cybersecurity and factory automation to improve productivity and respond more quickly to disruptions.

However, progress in both sustainability and digitalisation remains uneven, particularly among micro, small and medium-sized enterprises (MSMEs). Many continue to face financial constraints, shortages of skilled workers, limited technical expertise and the high cost of cleaner technologies and digital investments.

The policy brief noted that narrowing these capability gaps will be essential if ASEAN is to remain competitive.

As global supply chains become increasingly shaped by technology, climate commitments and geopolitical uncertainty, businesses that can adapt quickly while embracing greener and smarter ways of operating will be better positioned for long-term growth.

BUILDING RESILIENCE BEYOND DIVERSIFICATION

One of the policy brief’s central messages is that diversification alone will not make supply chains resilient. While relocating factories or sourcing from more suppliers can reduce dependence on a single country, it does not eliminate risk if new production locations lack reliable infrastructure, efficient logistics, capable suppliers or supportive institutions.

Instead, ERIA argued that resilience depends on strengthening the broader business ecosystem through better trade facilitation, stronger regional connectivity, industrial upgrading, supplier development and closer cooperation on sustainability, digitalisation and risk management.

To achieve this, the policy brief outlined priorities over the short, medium and long term.

In the near term, governments should improve customs procedures, strengthen rules-of-origin enforcement, curb transshipment and provide businesses, particularly MSMEs, with timely information on geopolitical risks.
Over the medium term, ASEAN should reduce non-tariff barriers, harmonise standards and improve physical and digital connectivity while leveraging regional frameworks such as the ASEAN Economic Community (AEC) and the Regional Comprehensive Economic Partnership (RCEP).

Looking ahead, continued investment in renewable energy, green finance, digital infrastructure, supplier development and workforce skills will be essential to maintaining ASEAN’s competitiveness.

As global trade becomes more uncertain, the brief concludes that future competitiveness will depend less on producing at the lowest cost and more on the ability of businesses and economies to adapt, innovate and build supply chains that are flexible, sustainable and prepared for future shocks.

Source: BorneoBulletin