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Southeast Asian Businesses Must Adapt to Survive in the Shadow of the US-China Trade War

Blog by: Seth Ravin, CEO of Rimini Street

The US-China trade war is impacting businesses at every level, particularly since additional U.S. tariffs on Chinese exports took effect in the latter half of 2019. The continued uncertainty and risks to industry sectors across Southeast Asia are causing economic growth to slow in countries including Singapore, Malaysia and Indonesia.

As a result, change is imperative for businesses in the region. Facing unpredictable circumstances and risks from the US-China trade war, manufacturing operations across the region must make quick decisions about how to deploy their operations. In addition to focusing on regional and global expansions to reduce its exposure to the trade war, businesses in Southeast Asia must also re-examine operational costs. As the trade war heats up, more invisible costs are expected to emerge.

For the SMEs that make up the majority of ASEAN businesses, and contribute between 30 percent and 53 percent to local GDPs, cost is a vitally important factor in that decision-making process to ensure that they have the flexibility and resources to respond to changes in difficult economic environments.

Re-examining the overall supply chain amid profit pressure
As the global business climate became more competitive and profit margins shrank, large enterprises in the U.S. and Europe initiated changes long before the US-China trade war, and have begun to adopt a "China plus one" strategy focusing on countries in Southeast Asia as an alternative, to reduce costs as the trade war continues. In the past, people might have tolerated additional costs for services for IT, but business as usual does not work anymore.

For example, when you purchase a new vehicle, you can choose to take it to a trustworthy repair shop in your neighbourhood to maintain your vehicle, or go to the original vendor. In the world of enterprise resource planning (ERP) services, this choice wasn't available to businesses. Organizations were required to pay a large annual fee for maintenance in an almost monopolized market, but the value that the customers received was disproportionate to the annual support fee they paid - an unfavorable condition for businesses. Compared to the 3 to 4 percent profits companies are earning in the manufacturing industry, their ERP vendors might garner a profit as high as 90 percent. These annual maintenance fees do not have to be looked at as an already budgeted for expense that must be paid without question.

For this reason, third-party service providers emerged and disrupted the model to which software vendors were accustomed. 

Lower cost, better service
When businesses begin to look deeper at the total price of support and what it really means, it may not be apparent that millions of dollars are often wasted each year due to the outdated support model of software vendors.
For example, a global manufacturer with annual revenue exceeding US$4 billion, paid an annual service fee of US$1.4 million to its software vendor. With our services, the company saved a total of US$2.5 million each year in maintenance fees, upgrades and support for customized items and in-house maintenance resources.

Enterprises also gain the flexibility to upgrade applications when it makes good business sense, rather than at the whim of the ERP vendor. Third-party vendors also support customizations of the software at no extra cost and require no additional resource allotment. CIOs should determine the true value they receive for vendor support and maintenance spend when considering a move to a third-party support model and ensure that IT teams are available to work on high-value initiatives.

Every market is facing unique issues because of the US-China trade war. Third-party ERP service providers can provide a great opportunity to save resources and plan for growth during this time of market disruption and redeployment of businesses. Companies can save operational expenditures originally intended for software vendors and apply it in more important areas of the business to address current global challenges. Every enterprise must understand the opportunities available to them to increase operation flexibility.

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