Southeast Asia Makes a Comeback

http://www.joc.com/node/413172

Peter T. Leach
The Journal of Commerce Magazine

Led by Vietnam, the region is attracting manufacturing, and transshipment cargo is growing

Goh Teik Poh has been traveling throughout Southeast Asia during the last six weeks, visiting customers and forwarders in Vietnam, Cambodia, Thailand, Malaysia and Bangladesh. They have told him things are changing.

“They are seeing a notable change in the traditional sourcing pattern,” said Goh, president for South Asia at APL, the world’s fifth-largest container line by capacity. “Thailand, for example, no longer has any garment or footwear exports. Nike and others have migrated over to Vietnam. As a result of that, Vietnam is building up fairly rapidly.”

Indonesia and the Philippines have lost manufacturing to Vietnam, and Goh said he hears Taiwan has as well. China, however, has not. Many companies with manufacturing facilities in China have decided to open similar facilities in Vietnam.

“There’s a need to broaden their sourcing or manufacturing sites, not to be totally reliant on China,” Goh said.

Indeed, it was China’s emergence as the low-cost production capital of the world that lured manufacturing away from Southeast Asia earlier this decade, leading to China’s port and infrastructure boom that continues today. In an interesting twist, Southeast Asia — and Vietnam, in particular — is making a comeback, not at China’s expense, but because companies increasingly see the risk in becoming too reliant on a single market.

Exports from China have declined because “the (overseas) buying has gone down and because of the increased cost of production in China,” Goh said. “But I don’t think anything can replace China. India is a distant second, but Vietnam is the place to watch.”

The shift in sourcing patterns has not spared the region from the trade slump that has hit the rest of the world, but it has helped Vietnam escape much of the pain as its economy continues to grow. Other countries have been hit hard.

“Thailand is a disaster, but Vietnam is hot,” said Martin Christiansen, Shanghai-based CEO of the Asia Pacific region for APM Terminals, the world’s third-largest terminal operator by throughput.

Though the global recession has hit Vietnam’s trade volume, its economy is growing as the country benefits from inclusion in the World Trade Organization in 2006 and in the ASEAN Free Trade Area in 2005. Vietnam also has benefited from the growth of trade with China, which has become one of its biggest trading partners.

Despite the growth of apparel, footwear and furniture manufacturing in Vietnam, Christiansen doesn’t see any importers in the U.S. shifting production out of China. “It’s simply too big. It’s the only place they get the scale they need. They are adding Vietnam because of its low costs,” he said.

The risk for Vietnam is whether it is growing too much, too soon. “One of the biggest policy challenges confronting the government (of Vietnam) is how fast to grow the economy,” said Richard Martin, managing director of IMA Asia, a Sydney-based economic research and forecasting firm.

“There’s a strong high-growth camp in the government, but Hanoi has proved a poor judge of when the wheels are about to come off and how foreign trends, particularly the current global recession, will affect the local economy,” he said in IMA Asia’s August Asia Pacific Economic Brief.
Martin said Vietnam’s export-driven economy should benefit from any gains in global growth over the next 12 months. In line with regional trends, the country’s second-quarter growth rate increased 4.4 percent over the second quarter of 2008, and was up from the first-quarter rate of 3.1 percent.

“While we’ve stuck with our previous GDP forecasts (see box), they have upside potential if global demand firms over the second half of 2008,” he said.

APL and APM Terminals have jumped on the Vietnam trade bandwagon. APL had plans for some time to start a direct service to the U.S. East Coast from Vietnam, but had to wait until the harbor at Cai Mep, the Port of Ho Chi Minh City, was dredged deep enough to accommodate deep-sea vessels.

APL’s PS1 service started calling at Cai Mep in early June, soon after the dredging reached a depth of 29.5 feet. The service, which carries cargo to Seattle and Los Angeles, also handles 53-foot containers, which have 60 percent more capacity than standard 40-foot containers.

“We’re loading the first 53-footers outside of China in Cai Mep in response to our customers who need a really big ocean box that would give them lower unit costs,” Goh said.

Together with two local partners, APM Terminals is building the new 1.1 million-TEU Cai Mep International Terminal, in which it holds a 49 percent stake. The terminal will be able to handle 6,000-TEU vessels when it opens in the fourth quarter of 2010.

“That fits pretty well with the development of the supporting infrastructure,” Christiansen said.

The terminal is timed to open as Vietnam completes expansion of the highway network and bridges leading into the Cai Mep area.

“In the past, we didn’t have enough port capacity to put in new service, but with the new port capacity, shippers can get both the low labor costs and a good reliable direct service to the U.S.,” Christiansen said.

Cai Mep eventually will have six new container terminals.

Goh said APL’s volumes have increased since early July at the Southeast Asian ports it serves. As a result, APL has reintroduced some services it had suspended during the winter downturn and increased the size of its ships calling at Southeast Asia ports for other services to the U.S. and Europe.

One of those services is the weekly SAX (Southeast Asia Express) service from Singapore to the West Coast. The increased trade is coming to Singapore on feeder vessels from Indonesia, Vietnam, Thailand, Malaysia and transshipping to the SAX service.

With the upturn in volume, APL has increased rates on services to Europe and the U.S., and Goh said the rate hikes are sticking. “All this is a sign that we’ve bottomed out and are on the road to recovery,” he said.

Volume is also rising at APM’s Southeast Asian terminals in Tanjung Pelepas, Malaysia, and Laem Chabang, Thailand. “This year, compared to overall market decline, Tanjung Pelepas has held up well,” Christiansen said.

Volume at the Malaysian port is growing faster than last year because it is handling more transshipment cargo as carriers reduce direct calls at other regional ports. Instead, they are using feeder ships to carry cargo to Tanjung Pelepas, where it is transshipped primarily to Europe.

At Laem Chabang, intra-Asian cargo is picking up. “It’s one of the stronger markets in Thailand,” Christiansen said.

Thailand’s trade with Europe and Asia has been hit hard, in contrast with growth in the intra-Asian trade.

APM Terminals will open two new berths at Tanjung Pelepas later this year. At Laem Chabang, APM Terminals just added two ship-to-shore cranes that can handle ships with up to 18 boxes across.

APL is preparing for growth of trade with Cambodia, where garment manufacturing is on the rise. It currently handles that trade with a feeder service from Cambodia’s main port at Pnom Penh on the Mekong River to Singapore, where it is transshipped to direct services to Europe and the United States. It is trying to set up a regular service between Vietnam and Pnom Penh.

“We are trying to cut down our transit time by finding ways to move from Pnom Penh to Cai Mep, to connect with the mainline ship that calls directly to the West Coast,” Goh said. “But that is slow going due to customs regulations and the formalities in both countries that haven’t taken off as well, but we are still working on it.”

Contact Peter T. Leach at pleach@joc.com.