Over the past 24 months, businesses in Southeast Asia, a region that has a passing through of US$3.4 trillion worth of trade annually, have been forced to focus on and reassess their global supply chains. These businesses are on a journey of transforming their supply chains, to mitigate and de-risk their businesses, and are doing so by redirecting their supply chains and production facilities closer to home.
The pandemic has exposed the vulnerability and inherent inefficiencies of traditional supply chains but broader geopolitical and societal changes are at play as well.
Despite that, it’s important to note that global economies, even before the coronavirus broke out, have already started tightening their foreign investment regimes. The Committee on Foreign Investment in the United States (CFIUS) had been granted more powers to intervene in transactions involving critical technologies.
But when the virus unfolded, it gave even more cause for governments to work towards protecting their own economy, trade, and community. Governments started offering investment incentives and increased foreign investment restrictions, which seriously impacted where companies locate their production facilities.
In Southeast Asia, there were several free trade agreements, along with loosening of tariffs in the region to attract trade. Incentives such as tax holidays and cash grants are now also awarded to businesses seeking to relocate their production facilities to the region.
Initiatives such as the Southeast Asia Manufacturing Alliance and Regional Comprehensive Economic Partnership (RECP) connect companies with a network of trusted partners. International manufacturers can also utilise Singapore’s SG+ twinning model and gain from setting up dual production locations in the city state and its neighbouring countries.
As a result, business owners are prompted to re-assess their investment strategies, emphasising their focus on domestic rather than international markets.
As part of that, business owners set off to build resilient supply chains that can withstand significant disruptions. To determine if an overhaul is needed, business owners first need to ask themselves:
- Do we need greater visibility over our entire supply chain to better foresee disruption?
- Do we need to relocate production of certain critical items?
- Are we over reliant on certain manufacturing hubs or third parties?
- What is the risk of terminating a particular supplier?
- Do we need to boost our tech capabilities in order to create digital ecosystems?
- Have we sufficiently managed or mitigated risk via our contracts and the law relevant to our business?
Transforming supply chains
Of note, there are several ‘new era’ aspects that businesses must consider when transforming their supply chains.
Environmental Social Governance (ESG) – Consumers increasingly favour companies with sustainable and goal-oriented practices, they are willing to pay more for sustainable and socially-conscious products so manufacturers must be confident that their supply chain upholds sustainability standards. Committing to sustainable practices, however, will strain margins (at least in the short to mid-term) and will require manufacturers to rethink various parts of their supply chains to strike a balance.
Digitisation – Business owners should also be looking for opportunities to integrate digital capabilities into their supply chains to save long term costs and create efficiencies across the board. Manufacturers wishing to work with a technology providers will need to ensure that they gain control and access to any intellectual property or know-how generated by the partnership.
Data privacy – The above point is closely-related. Tracking items often includes personal data. If this data is to be shared, it will be essential to consider data privacy regulation right at the very start and the design process must take into consideration:
- who will collect the data;
- how and for what purpose will the date be collected;
- where the collected data will be stored/processed;
- how the data will be protected; and
- who will have access to the data.
Third party suppliers
As part of the broader due diligence process, a manufacturer considering the acquisition and engagement of a third party supplier must identify any legal or operative risks in the target’s own supply chain, and to do that by asking:
- how reliable is the target’s supply chain?
- how much visibility does the target have of its own supply chain?
- how has the target reacted to any disruption so far, how were disruptions dealt with?
- to what extent has the target invested in digitising its supply chain?
If there is a major change in circumstances, long-term contracts involving suppliers can leave a party in an arrangement that is no longer commercially viable. The pandemic serves as a prime example and reminder when many companies have found themselves unable to fulfil their contractual obligations.
It may be possible to agree on revised terms, including deferring payment or performance with a counterparty fairly easily, but if that is not possible, the process may likely involve a contract-renegotiation law of the applicable jurisdiction or litigation.
Lawyers play a significant role in helping businesses manage and mitigate their risks, transform their supply chains, and plot a better course ahead. These projects take years to implement, and it is therefore of utmost important for businesses to undertake appropriate due diligence and engage the right legal counsel.
JTJB has specialised in Maritime and International Trade law practice since its formation in 1988. Today, JTJB’s maritime practice is anchored in Singapore with a network of offices across the region to serve the client’s maritime needs in Singapore and in the region. With its experience, specialist focus and dedicated network of trusted legal professionals in this region, JTJB is well placed to serve the maritime sector, and to handle and serve clients’ legal needs anytime, anywhere.