Image courtesy of ShipMap Project by KILN

Hundreds of thousands of ships cross the world’s oceans and seas daily. On the water canvas, their wakes draw a moving picture of the global supply chain across major shipping lanes. In the last few years, the architecture of this sketch has changed, from a rather linear structure, into a more warped and fragmented one, with multiple poles. One of these is Southeast Asia. 

Based primarily on the lowest-cost principle, trade has historically developed between two poles – the sending side, usually developing countries with cost-effective manufacturing - and the receiving side, or the per-capita rich developed countries. However, developing countries are developing fast, turning into big consumers themselves. This was the first jolt that started repolarizing world trade. Then, in the gravitational battle between the world’s largest economies, new fences are erected between the American Chinese orbits. Geopolitical tensions, including China’s bullying of its neighbors in the South China Sea, and new geopolitical alliances, like the Sino-Russian one, together with full-blown wars and fears of potential other conflicts, have driven further apart the trading system. 

During the pandemic, heated discussions over how localization and regionalization may dilute or replace globalization started to emerge. Globalization is not dead. Rather than the prescient signs of de-globalization, localized and regionalized trade help to create stronger links within global trade and to reduce dependencies on one or few partners. According to McKinsey, every country relies on at least a fifth of imports by value from three or fewer trading partners. 

The world’s manufacturing capacity remains tilted to the Eastern hemisphere, especially China. Sudheer Vijapurapu, managing director for New Asia Shipbrokers (NAS), explained why: “Whereas the West is limited by greater environmental restrictions to add capacities, the East has the manpower, feedstocks, land availability, and demand - over 70% of which resides in this part of the world, for more capacity additions. It is unlikely that supply chains can become completely localized, as these inter-dependencies will continue to exist, regardless of the disruptions unfolding.”

China’s world factory is not easily replaceable and few are those who try to. However, to protect themselves from the perverse effects of protectionist measures, the manufacturing sector has started to diversify from its reliance on China, replacing the “made in China” strategy with “made around China.” Some spoke too early about decoupling from China, but it is rather a recoupling of the manufacturing footprint to other places, in a twinning model whereby assets are spread out at multiple locations (twins) instead of being plugged into a single one, in order to derisk production and supply chains. 

Indonesia, Malaysia, the Philippines, Thailand, and Vietnam were found by a BCG study to rank among the most cost-competitive countries in the world. In other words, ideal twinning destinations, perfectly located between Northeast Asia and South Asian markets, as well as having a very attractive market of their own. Higher-cost Singapore also benefited from the post-China-relationship-rebound, but not so much in manufacturing as it did in the financial sector, with investors fleeing Hong Kong due to a national security law that is said to criminalize dissent. In other ways, the growth of Singapore as a leading financial hub speaks of the fragmentation in the global financial sector, which has moved away from a dependence on Western capital with the emergence of the Asian financial stalwarts – Singapore, Hong Kong, and Tokyo. 

The manufacturing sector in Southeast Asia has developed as a hub-and-spoke model: trade is coordinated from major hubs to the rest of the region and the rest of the world. Thailand is nicknamed “the Detroit of the East” thanks to its lively automotive sector, Vietnam is a leading force in textiles, Malaysia has a booming electronics industry, Indonesia is positioning strongly in electric batteries; in the renewables industry, Malaysia and Indonesia’s palm oil industry and Thailand’s sugar cane industry are also leaders in the world, driving exports of biodiesels and other products to Europe. Singapore helps tie the region together with the largest trans-shipping port, a burgeoning financial sector, and as a hub for multinationals operating across the region. Geopolitical-driven investments are many in the region, with record levels of FDI in recent years for most Southeast Asian countries. 

Though countries in the region have benefited from the rife between the US and China as preferred “friend-shoring” partners, they maintain neutrality towards both spheres of influence. China retains its status as the region’s top trading partner, but the US has also started to pivot more in the region at a diplomatic and trade level, launching the Indo-Pacific Economic Framework for Prosperity (IPEF) with 14 countries, including seven ASEAN members. Expansionist Chinese naval exercises in the South China sea have also triggered more engagement from the US. ASEAN’s neutrality is a precious and vulnerable thing to protect, especially when the world’s biggest powers are becoming more assertive in the area. Other countries are also making inroads in Southeast Asia; for example, Canada is currently negotiating a free trade agreement with ASEAN, committed to be complete by 2025. 

The other driver for the re-coupling of supply chains is logistics, also impacted by geopolitical tensions and wars. There has been no shortage of logistics shocks in recent years. From pandemic-induced imbalances to the “Texas freeze,” the impacts of sanctions and trade disruptions following the Russia-Ukraine war, as well as supply-demand fluctuations as economies try to rebalance and deflate, the logistics sector has hardly had a moment of peace. 

The most severe impacts came from the choking of key connecting points, the Panama Canal and the Suez Canal, those thin connections between the world’s oceans showing the fragilities of maritime trade. Currently, the Red Sea crossing is the biggest obstacle in global trade. Yemeni Houthi rebels started launching missile strikes against vessels crossing the Red Sea, which carries about 20% of the world’s maritime trade, as reported by the BBC. At first, military ships linked to Israel were targeted, but soon enough merchant vessels also became the victims of attacks. These attacks have diverted ships, forcing an expensive re-route via the Cape of Good Hope in South Africa. Freight costs from Asia to Europe tripled, wrote the Economist. Unable to pass through the Red Sea, ships added anywhere between 20 to 50 days to their voyages, noted many of our interviewees.

To protect themselves from potential disruptions, the chemical sector in the region has prioritized localizing intermediates and end-products. Chevron Oronite, operating one of the region’s largest additive manufacturing facilities out of Singapore, has recently expanded its Jurong Island plant to bring in packaging technology otherwise imported from the US and Europe. Its focus on regional resilience has helped the company maintain reliable supply throughout the logistics challenges of the last few years: “On the back of our four plants in APAC, we were able to withstand the successive supply chain shocks and disruptions, from the pandemic to the Texas Freeze, which forced a sizeable number of our competitors to declare force majeure, leaving Chevron Oronite as the one of the few additive producers continuing operations. This has further demonstrated our supply chain reliability and allowed us to navigate further global disruptions like the recent Panama Canal and Red Sea issues, which impacted shipping times and logistics reliability,” said Eugene Ng, general manager for sales & marketing for APAC at Chevron Oronite. 

The logistics sector follows a similar logic of multi-pole modus operandi, and Southeast Asia is in focus as a key access point into the APAC region, especially through the Straits of Malacca, one of the busiest water crossings in the world, probably equally as important as the Panama or Suez canals. Maersk has announced half a billion US$ in infrastructure investments in Southeast Asia. These are predominantly focused on shipping infrastructure, including new terminals at the Port of Tanjung Pelepas (TPP) in Malaysia. Maerk is also looking to connect ocean logistics more closely with inland logistics. The company is building mega-distribution centers, one in TPP, serving as an import-export hub, and another in Singapore called World Gateway 2 for both local and regional distributorship. In total, the company is adding 480,000 sqm of capacity between Malaysia, Indonesia, Singapore and the Philippines, by 2026. Elaine Low, managing director for Maersk Southeast Asia said: “Our investments are, in a sense, a response to marketplace volatility. (…) Non-controllables, like what we see in the Middle East or Houthi attacks on Red Sea merchant ships, impact not only how we re-route our vessels but also how we drive our business forward. This year started with extreme volatility, and we project continued - and concerning - headwinds ahead.”

Besides the headwinds, there are also tailwinds that are actually pushing forward shippers, particularly in the long-haul business. According to ClarkSea, average daily earnings for the world’s shipping fleets was 33% above its 10-year trend at the start of this year. Disruptions at key crossing points, like Panama or Suez, are causing ships to take longer routes, tightening the vessel space available. This bumps up freight rates. Interestingly, the pre-Covid period may have been a golden period of globalization, but it was also probably the worst time for shipping. “Very flat rates prevailed, to the extent that some owners were on the brink of folding up just before the pandemic,” explained Sudheer Vijapurapu, managing director for Singaporean shipbroker New Asia Shipbrokers (NAS). 

His industry peer, Mark Mirosevic-Sorgo, managing director for global shipbroker Quincannon Asia, shared a similar view. In a scenario where disruptions ceased, there would be an immediate free-up of ships ready to carry more cargo, faster, essentially weakening the shipping industry and driving shipowners to undercut each other with the lowest cost: “The balance of shipping would completely change should the transits of the Red Sea and the Panama Canal return to normal. Since ships would require fewer ton-miles, there would be an immediate free-up of ships able to carry more cargo, faster. When the largest ships on these longer-haul routes have free space, they start looking at carrying smaller cargoes, which has a knock-on effect on the smaller ships.”

At the time of writing, there is no amelioration to what is referred to as “the Red Sea situation.” The US and the UK navies are striking back, which resurrects warfighting at sea, something that has not happened since the Falklands War. The volume of chemicals, LPG, and ethane shipped from Asia to Europe has been affected by the blockage across vital routes linking the two continents. Houston to Far East movements have also been impacted. Some ships still pass through, at their own risk. Our sources told us that more Asian shipowners, after dealing with low volumes at home, have ventured into the long-haul business and found a gap in making the dangerous Red Sea trip where others would not go. These companies have invested in ships as a wealth-creation strategy, crowding the market, and now are starting to play a bigger role in international shipping. 

In an era of low-priced commodities and an uncertain geopolitical landscape, logistics companies are prioritizing the long-haul business, not just because it is probably the most profitable, but also because their customers are searching for new markets out to sea. With China becoming more self-sufficient in key chemicals, chemical producers see their main export market shrinking and must find others. At the same time, intra-Asian trade is also on the rise, regional economies consuming more final product, according to the Brookings Institue. That can serve as a buffer against uncertainties in global trade.

Turning more global sounds like a contradiction to what we have discussed so far about regionalization; in reality, the two trends coexist. Supply chains are both shortening and lengthening. The short ends are part of the longer and wider network. While manufacturers want to be closer to the market, they rely extensively on partners – especially logistics and distribution partners – to stay global. Logistics companies, on their end, must play in both fields. To react to temporary situations, such as the Red Sea conflict, and to prepare for longer-lasting shifts, like China’s self-sufficiency, they need strong local footprints and even stronger global networks.

The key is to be in the right place at the right time, and the bigger companies with large fleets and supporting infrastructure are best positioned to do so. The number of ships available in the market today is enough, if not too high already, but there are imbalances. In the ISO tank market, low utilization rates are haunting the industry, but it is the smaller guys that get squeezed out, fighting to sustain the business. “Our global footprint and capabilities allow us to plan with a longer horizon and spread the risk across a broader base. This is an undeniable advantage in a competitive market where supply currently exceeds demand in certain regions. I will say that the tank container market remains healthy for the big players, while smaller ones may find it harder to sustain their business. We expect to see a consolidation within the market,” said  Boon Joon Chua, general manager for NewPort Tank Containers Southeast Asia, one of the largest tank container operators in the world (by fleet). 

Knowing where to look is also important. Den Hartogh, a Dutch logistics company that has expanded significantly in APAC primarily through acquisitions in recent years, is eyeing five growth pillars, which Andy Ang, managing director for Asia Pacific calls “product market combinations:” electrolytes used in EVs, isocyanates used in the production of polyurethane, food-grade products, dry bulk containerization of polymers, and biofuels like used cooking oil and tallow used in the production of sustainable aviation fuels in APAC. 

Despite the many uncertainties rocking its boats, the ASEAN logistics industry is seeing growing demand, projected to rise from US$325 billion in 2023 to US$476 billion by 2029, estimates GAC, a shipping and marine service provider. Logistics players in the region are preparing to respond to the demand by becoming more multi-modal integrated, more digital, more local, and more global, at the same time.