Markets in motion

posted on 9th April 2019
Markets in motion

Trade wars, shifting manufacturing production and rapid economic development are all playing a major role in reshaping Asia’s air cargo business, reports Donald Urquhart

The US-China trade dispute and its deeper ramifications in terms of manufacturing production has had a major role in shaping developments in and around Asia’s air cargo market in recent months, along with other international trade-related developments and uncertainties, and these trends have continued into 2019.

Marco Bloemen, managing director of Seabury Consulting, warns that already 50% of China-US air freight is suffering from the tariff dispute and this situation could significantly worsen if no resolution is found, in which case 100% of all China-US air cargo would be subject to a 25% tariff.

“None of us wants to see trade diminish,” says Chin Yau Seng, senior vice president for cargo at Singapore Airlines (SIA), but “unfortunately we have already seen some immediate impact in the January and February numbers”.

But like many in the industry, SIA remains hopeful that some form of resolution will come sooner than later. Whatever the outcome is, the world’s factory of Asia – both its key engine of China and the sub-component producers spread far and wide across southeast Asia – have probably changed for good. And with it, long-established supply chains.

One thing is for sure: the uncertainty and concerns created over the tariff dispute between China and the US has precipitated some degree of movement of manufacturing activities out of China into the likes of southeast Asian countries like Vietnam, Thailand and Malaysia, says Chin. “We have seen some of those trade flows change,” he says.

But it’s also unlikely there will be a wholesale shift of manufacturing out of China simply because it is such a huge manufacturing centre that it just isn’t possible to have too major a chunk of it move overnight. “Supply chains just simply cannot adjust fast enough to such a move,” adds Chin.

But from Chin’s perspective, for companies with lower-end manufacturing in China who were already thinking of moving out, as China was re-gearing to try and shift to higher-value manufacturing, that pace has picked up as a result of trade tensions.

“Since about the mid-point of last year, some of the factories in Vietnam have really ramped up production,” he notes. “We also see a lot more growth out of Indo-China, so as an airline, we have to adapt.

“Fortunately our network is quite diversified; it’s not just concentrated with all the activity in China. We do have a very strong presence in southeast Asia including Thailand, Vietnam, Myanmar and Cambodia. So we are benefiting from some of those flows, even though this is coming at the moment, at the expense of some of the China cargo.”

Indeed, being based in southeast Asia has advantages for SIA. “As an airline we are fortunate that we have a degree of diversification and that we can also leverage on the connectivity of the Singapore hub,” to tap the broader market that it serves, Chin says.

For Vietnam-based Do Xuan Quang, vice president of cargo at the airline Vietjet Air, the trade dispute is clearly benefiting many countries in southeast Asia including Vietnam, Malaysia and Thailand. “For Vietnam, I see the clear result of this trade war, and I can see many investors from China moving to Vietnam,” he says.

This is increasing the amount of exports from Vietnam to the US. In particular Japanese and South Korean manufacturers involved in high-tech production are shifting because they see Vietnam and also Thailand as alternative production markets, Quang says.

“In Vietnam, especially, we are benefiting from this in the short term, but in the long term there are many challenges. The trade war is very political and in the long term no one knows,” he says, adding that Vietnam’s trade deficit with the US has already been raised in a recent visit to the country by US President Donald Trump.

From a cargo handling perspective, Yacoob Piperdi, executive vice president for Gateway Services at Singapore handler SATS, cautions: “What happens to China exports reverberates around the region – it affects the CTO (cargo terminal operator) operations quite considerably.”

But he notes that just taking Singapore as an example, over the last two decades the tiny island state has signed more than 53 free trade agreements, promoting duty-free exports through the Singapore hub. “While there is clearly an impact of the ‘China effect’ on trade, there is also a great deal of opportunities for exports and re-exports out of the Singapore hub, and the business of a CTO is really to grow and transform,” Piperdi adds.

He cites the airside perishable centre – the first in Asia – that SATS built back in 2010 that has more than doubled in size from about 140,000 tonnes in 2010 to over 300,000 tonnes last year.

“If you build the right infrastructure, you also help to divert trade flows,” Piperdi says. “And I think that’s important from a ground handler perspective – whether it’s a cargo management system that allows us to share data so that we gain more efficiency with others in our ecosystem, or build new facilities to support new growth areas in the cargo business like e-commerce, all of these are positive things, notwithstanding the challenges of trade wars.”

Oiling the wheels of commerce

Two important free trade agreements look set to help “oil the wheels of commerce” in Asia in the coming years , according to IATA’s chief economist Brian Pearce.

The first is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), otherwise known as the ‘resurrected TPP’ after the US ditched it following Donald Trump’s election as US President.

For international trade expert Deborah Elms, executive director of the Singapore-based Asian Trade Centre, this trade agreement is worth paying attention to, saying it is “the most consequential agreement we’ve had in decades, since NAFTA – not counting the European Union,” she said at the LogiSYM conference in Singapore.

The CPTPP represents a substantial 13.4% of the global gross domestic product, or roughly US$13.5 trillion. All-told, 11 countries make up the CPTPP including five in Asia – Singapore, Malaysia, Vietnam, Brunei and Japan – plus Australia and New Zealand and four countries on the other side of the Pacific Ocean – Canada, Mexico, Peru and Chile. With Australia’s ratification last year and Vietnam shortly thereafter, the CPTPP entered into force at the end of December 2018 and is now coming into effect.

Three key aspects of the TPP are important to understand, Elm notes. For starters it’s much broader than most agreements as it covers all goods – every last tariff line is covered and almost every tariff line will go to zero, mostly from the beginning.

“Many of them are very steep tariff cuts, so if you want to export things to Mexico for instance where the country has crazy high tariff levels, where 35% is not uncommon, many of those drop to zero on day one.” But in some cases she notes, the tariffs will go down gradually, like Vietnam for instance, where most tariffs will go to zero over 3-5 years.

And significantly, almost all  service sectors are covered as well, including warehousing, retail, food and beverage. “This is revolutionary, especially in this region where services are very protected,” she says citing the example of Japan where services are very restricted at the moment.

Also covered is government procurement and e-commerce. “So this is much broader than any other agreement we’ve ever had. It’s also deeper, including new rules on special property rights, standards, some new things on the environment, labour rights, some competition rules and some new rules on Customs.

Pearce estimates that the full effects of this agreement may only be felt by air cargo in the next few years.

Another important agreement, still under negotiation, is the Regional Comprehensive Economic Partnership (RCEP), which includes the 10 member states of the Association of Southeast Asian Nations (ASEAN) and Australia, China, India, Japan, South Korea and New Zealand.

“So if you look at how much trade, especially how much Asian trade, is covered by just two agreements, it’s massive and growing all the time,” Elms says, meaning “many new opportunities are on the horizon.

Wider trade disputes

But in this current environment, Andrew Herdman, director general of the Association of Asia Pacific Airlines (AAPA) says it’s important to consider that the US under Donald Trump has picked trade fights with a number of countries and trading blocs, notably the EU, South Korea, Mexico, India, Turkey, Canada. “We should be careful focusing too much on the China-US trade war and the resolution of that,” he says. “It may be temporary; it may be on only certain items, and it might also see trade attacks elsewhere.”

He notes that strategies for production and reducing dependence on one country are strategic decisions, and businesses at least in this case, make strategic decisions in response to what are “essentially tactical political games being played by states”.

Herdman continues: “But I do see people diversifying their risk in terms of where they are sourcing; I see them making their supply chains more resilient, and from an air cargo perspective, we have to respond to that. We are used to being nimble and adjusting to developing markets and the ups and downs; we have to be even more mindful of the fact that it is an unpredictable game.”

Fortunately for airlines, the assets are very movable. But airlines need traffic rights, they need support on the ground, they need logistics and they need market contacts, he points. “So you have to cultivate those even in markets that seem small today,” he says, citing the case of Vietnam that fairly recently was a very small market exporting primarily seafood and perishables.

“The idea that it would be a very competitive manufacturer with the likes of Samsung seemed like a very far-off dream,” Herdman notes. “But Vietnam has delivered on that, as it has revolutionised the competitiveness of Vietnam in terms of manufacturing, not just in terms of footwear and apparel, but into high tech manufacturing of smart phones and so on.”

As Chin noted, Herdman says a key driver of this diversification of production is labour costs, noting: “Chinese labour costs have been rising spectacularly in line with economic growth, and that has meant a lot of the movement and diversification away from China has been a result of lower labour costs.”

Logistics connectivity

But lower labour costs are not the only factor, he cautions. Land, energy supply, and good logistics connectivity is also important. Hence the slow move to Myanmar, with much lower labour costs than the rest of southeast Asia. “It’s not enough just to have a pool of cheap labour when you need all of these other things,” he highlights.

But while Vietnam, Malaysia, Thailand and others may benefit as companies diversify their manufacturing away from China, there’s also a downside. Many of these countries already have extensive supply chains across the region and are suffering from the disruption of Chinese exports to the US, because they are providers of China’s intermediary components. “So, there are pluses and minuses to the southeast Asian economies, even though they may see some upside from the trade dispute in the short term, and that is beginning to affect confidence in some of those markets,” Herdman adds.

And echoing Quang’s sentiments, Seabury’s Bloemen says that while he’s heard from some shippers that they are considering moving up to 25% of their manufacturing capacity out of China, “which country would you go for, and what if a dispute is started with the country you just moved to”?

Herdman notes that with Trump’s de-globalisation leanings encouraging on-shoring, it’s not just about Asia; Latin American countries have also seen some windfall, particularly Mexico in the automotive realm. But even there, this confrontational  US president has also raised trade issues.

Nevertheless, in terms of Asia, Herdman adds: “Vietnam has done very, very well and has a bright future. The playbook is written; you just have to execute it. But that’s not an easy challenge for all countries,” he says citing the importance of education, workforce development, foreign direct investment friendly policies, infrastructure and most important, being connected to the global supply chain.

Picking up on this theme, SIA’s Chin highlights the oft-quoted figure that air cargo only carries 1% of world trade by volume and 35% by value. “So we are not the only player, and obviously when it comes to production, supply chains are a lot more complex than just airport-to-airport,” he says.

“Going forward, the challenge for supply chains is to adjust – for us to be more sensitive to where the moves are, what the pressure or pain points are. You have to line up a lot of ducks to make sure everything goes well and in our business I think it has been a long, long time that the airlines have tried to stay out of getting too deep in understanding what the shippers need.”

Chin concludes: “I think we cannot run away from that. To provide the right solutions especially for our part, airport to airport, whether it’s by transhipment or direct, we really do need to get a bit deeper into understanding some of these companies when it comes to relocating their supply chains. Increasingly, that will be our challenge and we have to gear up for it.”

Growth potential

Despite the short-term trade fluctuations, the growth potential in Asia is very clear, adds SATS’ Piperdi. He agrees that Vietnam, in particular, has grown substantially, but also highlights that within the next five years the growth potential in Indonesia is very strong. Indonesia, he says, will have the third-largest middle-class population in the world in the next few years.

And despite the most-recent downturn over the last few months of 2018 and early 2019, there is substantial opportunity in Asia, Piperdi highlights, noting: “There are bright spots in pharmaceuticals and e-commerce. We will continue to invest in facilities that will help customers grow these verticals through the Singapore hub and other airports where we have operations.”

Adding to the opportunities, Quang notes that the Asian Economic Community (AEC) is already well on its way, and this will create not only economic opportunities, but air traffic growth as well.

And while all agree that growth is clearly a feature of Asia going forward, infrastructure remains a critical issue that must catch up with this dynamic growth being experienced across the region.