THE Fourth Industrial Revolution presents manufacturers in Southeast Asia with significant risks as well as tremendous opportunities at a time when technology and geopolitics are reshaping the global production landscape.

While digital technologies—such as 3-D printing, Artificial Intelligence (AI), advanced robotics and Internet of Things (IoT)—are transforming the way factories produce goods, the Sino–US trade war is redesigning global supply chains and prompting several companies to relocate production bases away from China to avoid steep US tariffs. These twin developments have serious implications for the Association of Southeast Asian Nations (ASEAN), the world’s fifth-largest manufacturing economy, which must look beyond low-cost labor for competitive advantage and adopt new technologies that will also enable it to benefit from global realignments.

Malaysia, Thailand and Vietnam are among early beneficiaries of the manufacturing exodus from China, with companies like Panasonic and Daikin relocating production. The shift has mostly been in parts and electronic components for automobiles, and consumer electronics, which are among strategic industries in ASEAN that will benefit most from technological change.

Despite evidence of this exodus to ASEAN, long-term competitiveness in the region will only be achieved by the systematic adoption of the Fourth Industrial Revolution.

Embracing the digital revolution will enable manufacturers in ASEAN to achieve efficiency and growth simultaneously. This is crucial for a region where manufacturing remains a core driver of economic growth, accounting for about a fifth of its gross domestic product, with its contribution projected to double to $1.4 trillion by 2028. Our research shows that new technologies can help ASEAN potentially create an additional $250 billion to $275 billion in incremental value in that period by improving productivity and unlocking new revenue streams.

However, ASEAN’s slow embrace of digitalization risks putting these gains out of reach. It could also undermine the region’s ability to seize a larger share of investments fleeing China amid what is proving to be a protracted trade war. The question, therefore, is not why, but how to embrace and accelerate the advance of the Fourth Industrial Revolution.

ASEAN's eroding competitiveness

New technologies characterized by an intelligent and interconnected system of people and machines are reversing decades of decline in traditional industrial powerhouses like Europe and the US. ASEAN’s low-cost advantage is eroding rapidly as rivals in advanced economies use these technologies to slash costs and improve speed, quality, and sustainability.

For example, Adidas, which until recently had shut all but one of its shoe factories in Germany and moved production to developing countries including Vietnam and Indonesia, opened a highly automated Speedfactory in Ansbach in 2015. With robots controlling production and the advantage of being closer to Europe, Adidas cut its time-to-market from 18 months to just four. Two years later it built a similar plant in Atlanta to supply the American market.

Some manufacturers in ASEAN are also transforming. A large cement company in Thailand is digitally connected to track workers and equipment in real time in the hope of gaining competitive advantage through improved efficiency and cost reduction. An automaker in Indonesia is targeting 30 percent higher operational efficiency by using robotics, IoT, and machine learning in maintenance, AI and automated visuals for quality inspection, and blockchain in logistics.

Most factories lack digital readiness

Most ASEAN countries and manufacturers, however, are not yet ready for the Fourth Industrial Revolution. A study published by WEF with A.T. Kearney last year found that except Singapore and Malaysia, other ASEAN economies face high risk of disruption. While this is partly due to differences in levels of economic development, hesitation in pushing for adoption of digital technologies also stems from concerns that machines will replace humans. Despite several studies indicating that job losses may not be as large as feared, and that ultimately new technologies will create more roles than they make redundant, the focus on jobs has meant that regional governments are still in early stages of developing digitalization strategies. Even here the focus on manufacturing is limited, with efforts primarily oriented toward service industries and e-commerce.

Unlike Singapore, which is taking targeted measures to develop manufacturing capabilities and has even built a model factory where companies can jointly develop and test technologies, its larger neighbors are only getting started. Indonesia, Thailand, Malaysia and Vietnam are mainly focusing on improving workforce capabilities and fostering investment.

Even among manufacturers, while the larger players are more technologically aware, adoption remains slow and patchy. We recently interviewed manufacturers across several industries in ASEAN and found most to be in early stages of digitalization, still using outdated Third Industrial Revolution processes that essentially provide a degree of automation with the help of electronics and information technology.

$275 billion in value at stake

With as much as $275 billion in incremental value at stake, ASEAN’s manufacturers cannot afford to take a wait-and-see approach. They must futureproof themselves by adopting an experimental and iterative approach to solve immediate problems, while simultaneously defining a long-term vision and roadmap for transformation.

As global supply chains realign, the region’s manufacturers must act swiftly to be able to leapfrog onto the world stage and increase ASEAN’s footprint in the fast-changing production landscape.

Source: Business Times

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