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JLL navigating Asia-Pacific supply chains

Michael Ignatiadis, Head of Manufacturing Strategy, Asia Pacific, JLL | Image: JLL

Michael Ignatiadis, Head of Manufacturing Strategy, Asia Pacific, JLL and MHD engage in a dialogue exploring the dynamic implications of the China +1 strategy on supply chains and manufacturing across the Asia-Pacific region. The interview delves into the strategic advantages of diversification, emerging real estate trends, operational challenges, and the economic impact of increased industrial demand in India and Southeast Asia.

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MHD: How do you see the shift towards a China +1 strategy impacting the landscape of supply chains and manufacturing in the Asia-Pacific region?

JLL: The shift towards a China +1 strategy is expected to significantly impact the landscape of supply chains and manufacturing in the Asia-Pacific region. This strategy will help build a robust ecosystem of outbound industries, leading to higher localisation rates. This is beneficial for both the destination country and manufacturers as it creates growth opportunities and reduces reliance on a single source.

Moreover, by diversifying manufacturing operations across multiple countries, companies can mitigate the impact of potential future tariffs and trade disruptions. Overall, the China +1 strategy presents an opportunity to strengthen supply chains and enhance manufacturing resilience in the region.

MHD: What specific advantages do India and Southeast Asia offer that make them attractive alternatives or complements to China for supply chain diversification?

JLL: India and Southeast Asia offer specific advantages that make them attractive alternatives or complements to China for supply chain diversification. While raw materials or key components may still need to be imported from China in most sectors, these regions present unique opportunities.

Firstly, India and Southeast Asia boast a low cost of labour and energy, making them cost-effective manufacturing destinations. Additionally, their skilled and extensive workforce ensures access to a large pool of talent. These regions also offer significant market potential, with a rapidly expanding middle class and a large domestic market. This presents opportunities for companies to tap into consumer demand and drive business growth.

India and Southeast Asia possess abundant natural resources, which can support various industries and enhance supply chain resilience. Lastly, these regions are actively investing in infrastructure development to improve connectivity within their respective countries. This focus on infrastructure drives operational efficiency and facilitates seamless movement of goods, making them even more attractive for supply chain diversification.

 

MHD: In terms of real estate, what trends are you observing as companies look to establish or expand their manufacturing and distribution centres in India and Southeast Asia?

JLL: As companies look to establish or expand their manufacturing and distribution centers in India and Southeast Asia, several trends are emerging in the real estate sector.

Firstly, there is a greater supply of real estate development in these regions. While Southeast Asia is still a nascent market, it is experiencing rapid growth, with a more institutionalized prime market. The amount of logistics prime stock has significantly increased, with notable growth in Vietnam, Kuala Lumpur, Jakarta, and Thailand.

This trend is expected to continue, with cities like Kuala Lumpur, Jakarta, and Hanoi projected to add around 1 million sqm each between 2024-2026, and Bangkok and Hanoi adding approximately 600,000-700,000 square meters (sqm) over the same period.

Secondly, demand levels are rising as a result of strong supply. Overall net absorption, which is a measure of demand, has increased from approximately 800,000 sqm in 2019 to around 1.4 million sqm in 2023 in key cities like Jakarta, Kuala Lumpur, Bangkok, Ho Chi Minh City, and Hanoi.

Another trend is the growing preference for built-to-suit (BTS) properties where companies are increasingly seeking custom-designed facilities that meet their specific manufacturing and distribution requirements. This trend is observed prominently in Ho Chi Minh City and the smaller Manila market, where BTS developments dominate.

Lastly, there is greater utilization of Special Economic Zones (SEZs). These zones offer tax incentives, streamlined regulatory processes, and infrastructure support, making them attractive to companies. SEZs provide an ideal environment for manufacturing and distribution activities, driving their popularity in India and Southeast Asia.

MHD: What challenges do businesses face when setting up operations in India and Southeast Asia, and how can they mitigate these risks to ensure a smooth transition?

JLL: When setting up operations in India and Southeast Asia, businesses face several challenges. One common challenge is the rush to explore locations where peers have already established their presence. While this can be a consideration, it’s crucial to assess each location through an end-to-end supply chain lens. Manufacturers may have diverse suppliers and customers, and the center of gravity should be determined based on their specific requirements. Additionally, it’s important to consider that the business landscape, including tariffs and incentives, may have evolved since peers were initially set up in a particular location.

To ensure a smooth transition and mitigate risks, businesses should conduct thorough due diligence on the chosen site. This process should encompass commercial, technical, legal, and environmental aspects. By thoroughly assessing these factors, companies can identify and mitigate any potential risks associated with the site, ensuring a smooth and successful setup of operations.

 


MHD:
How might the increased demand for industrial real estate in these regions affect local economies and real estate markets, particularly in terms of pricing and availability?

JLL: The increased demand for industrial real estate in these regions is expected to have an impact on local economies and real estate markets, particularly in terms of pricing and availability. The rising demand will likely exert upward pressure on rents and property values.

Logistics rents in Southeast Asia currently range from USD 55-65 per sqm p.a, with Singapore’s average net rent at around USD 128 per sqm p.a. Rental growth is influenced by the balance between supply and demand, but the presence of larger multinational corporations that require higher-quality space is likely to lead to higher rental levels. In 2023, Kuala Lumpur experienced the highest rental growth at 7%, followed by Ho Chi Minh City at 4%, and Hanoi and Jakarta at 2%. In Bangkok, rental growth was limited due to an influx of new supply and competition from existing older assets with lower rent levels.

Values of prime logistics real estate in Southeast Asia average between USD 675-911 per sqm. Singapore’s average capital value (across all grades) is around USD 1,900-2,000 per sqm. Similar to rental growth, value growth in these regions follows a similar trend. Increases in demand will likely contribute to an appreciation of property values.

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