Betting big on diversification and digital innovation in Asia Pacific

The conditions in Asia Pacific (APAC) indicate a busy year ahead for business leaders and policymakers. The Economist Intelligence Unit (EIU) forecasts a combination of low inflation and an easing of monetary policy to support a return in consumer confidence and spending. However, the pace at which these policies will be implemented and the uncertainties accompanying a second Trump term will cause ripples. These factors, alongside a predicted uptick in the global semiconductor cycle, are set to affect the region’s trade outlook both for better and for worse.¹

Strategic diversification to manage risks and regional pressures

Consistent with 2024 results, when it comes to managing supply-chain risks, this year’s survey results show that APAC businesses are primarily pursuing a strategy of diversification. According to Anderson Martins, the head of supply chain for Nestlé Philippines, there are two main benefits. “One is the potential cost savings—if we have more offers, more competition, it’s always better.” The second, he says, relates to the business continuity plan, because relying on only one supplier when disruptions occur creates risk for organisations.

Regionalisation and reshoring are also gaining traction among APAC businesses, albeit to a lesser extent than diversification. These approaches are particularly relevant as geopolitical tensions continue to disrupt global supply chains. A notable trend is the adoption of “China Plus One” strategies, driven by factors such as US tariffs on Chinese goods and rising labour costs in China. This shift has spurred the growth of alternative production hubs in countries such as Thailand and Vietnam.² By establishing dual supply chains and increasing regional integration, firms are better positioned to mitigate geopolitical risks, reduce costs and strengthen oversight.

About 33% of the APAC-based executives we surveyed are creating parallel supply chains to avoid geopolitical disruptions, and 29% are creating dual supply chains to cater for the Chinese and US markets. For instance, HP, a leading tech producer, has initiated its largest supply-chain shift to reduce reliance on China. It aims to move 50% of its PC production outside of China in the short term and 70% in the long term, with Thailand emerging as a major supply hub.³ Similarly, chipmakers such as Micron, Intel and Ferrotec are all investing in Malaysia as theyadopt the China Plus One strategy.⁴ For businesses targeting both Chinese and US markets, dual supply chains offer a critical solution to navigate the complexities of increasingly fragmented trade environments. These supply-chain models enable firms to adapt to divergent regulatory requirements and trade policies in each market, ensuring continuity and reducing the risk of operational delays.

This balancing act allows businesses to safeguard market share in both economies while avoiding overexposure to the risks associated with any single market. As Simon Lacey, Head of Digital Trade and Geopolitics at the World Economic Forum, aptly puts it, “Nobody is walking away from China, but businesses are hedging their bets, recognising that we can’t have all our eggs in one basket.”

However, as Mr Lacey highlights, Chinese companies continue to bring an attractive offer to the market for many businesses, driven by low costs and expanding production capabilities. And despite these competitive pressures, around a third of surveyed business leaders in APAC still see opportunities for collaboration due to China’s pro-business policies. However, 37% report issues with market transparency and stability. China’s slowing economy is therefore providing opportunities for India and South-East Asian markets to expand their roles in regional supply chains, creating what Marko Kovacevic, managing director at the Digital Supply Chain Institute, calls “cost competitive markets”.⁵

The combination of dual supply chains, regional supplier diversification and selective collaboration will enable APAC businesses to better mitigate risks while still capitalising on both regional opportunities and the competitive advantages of China.

Leveraging government intervention and reconfiguration

Shifts to regionalise supply chains in APAC are being further encouraged by the negotiation and implementation of regional preferential trade agreements. Agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP), are bolstering businesses in APAC. Of the business leaders we surveyed in APAC, 38% reported increased opportunities with regional businesses due to such agreements.

Specific benefits like improved market access and reduced tariffs on exports in member countries—resulting in cost advantages and regional expansion—were reported by 30% of APAC business leaders. Almost a third of respondents thought that regional free-trade agreements had increased innovation through competitive collaboration, allowing APAC firms to adapt their operations to regional market dynamics. Furthermore, the harmonisation of standards across member countries has helped to reduce compliance costs for 14% of businesses. However, in a region of varied economies and regulatory systems,13% of business leaders reported that they were still encountering increased regulatory expenses.

Although Mr Martins acknowledges the benefits of regional agreements and the increased rewards of importing from suppliers in the region, he highlighted challenges associated with preferential agreements. He stated “[Through the ASEAN-Australia-New Zealand FTA] we have lower import duties, close to zero for imports from Vietnam and Indonesia. But when there is a shortage and we need a bigger supplier of green coffee, which is from Brazil, we cannot even consider it, as we don’t have the same preferences so it’s too expensive.”

With the assistance of preferential regional agreements, APAC has become an integrated trade region, with almost 57% of the value of the region’s trade originating from intra-regional trade in 2022.⁶ Almost a quarter (23%) of APAC business leaders reported enhanced sourcing within the region, strengthening local supply chains and decreasing dependence on markets outside the region. Through the process of regionalisation and aligning production to key markets, businesses are able to enhance cost control, operational efficiency and support for local economies (see figure two).⁷ Ed Brzytwa, the vice president of international trade for the Consumer Technology Association, explained the process of decision making: “A company is going to look at what they can do at the lowest possible cost with the highest quality, while reducing risks in a variety of areas.”

Similar to the drivers of regionalisation, the push to reshore supply chains, particularly in industries affected by rising logistics costs, reflects APAC’s aim to reduce reliance on external markets. This is a result of geopolitical tensions, the long-term economic impact of the covid-19 pandemic and the fast-growing consumer base in the region.⁸ As such, the strategic concentration of production—whether that be within the region or onshore—enables better risk management and quicker response time to regional demands.

Technology adoption to counter labour shortages and enhance efficiency

The changing demographics of APAC are also top of mind for businesses and policymakers. Labour markets remained fairly tight throughout 2024, reflecting strong recovery since the pandemic.⁹ However, with further demand and supply imbalances on the horizon due to ageing populations in APAC (notably in Japan, South Korea and China), technological solutions, such as automation and artificial intelligence(AI), will help to address workforce shortages and sustain productivity.

The integration of AI into business operations is already proving successful, with 36% of business leaders in APAC reporting significant reductions in trade operation costs and 28% experiencing improvements in resource planning and supply-chain efficiency. AI-driven solutions not only streamline processes, but enhance workforce productivity, highlighting the transformative potential of AI to optimise operations and address logistical challenges. By automating repetitive and time-consuming tasks, businesses can achieve more with their existing workforce, reducing their reliance on additional labour.¹⁰

Government initiatives in the region have a vital role to play in facilitating this technological shift. For instance, Japan’s Society 5.0 demonstrates the strategic importance of digital transformation in achieving economic resilience, as it aims to integrate advanced technologies into traditional industries, foster innovation and ensure long-term sustainability.¹¹

Culturally, economies in APAC have demonstrated a strong willingness towards technological adoption, further driving this trend.¹² This alignment of cultural readiness and government initiatives creates an ecosystem that allows businesses to embrace innovation, and will encourage the region to pursue tech-enabled operational resilience.

Building resilience and unlocking opportunities

The Asia-Pacific region is transforming global trade with bold strategies. Businesses are diversifying supply chains, leveraging trade deals like RCEP and CPTPP, and driving growth in South-East Asia and India. The adoption of technologies such as AI and automation, supported by government-led digital transformation, is enhancing efficiency and adaptability, making the region a model of resilience.

However, this progress does not come without risks. Geopolitical tensions remain high, and an over-reliance on regionalisation could leave businesses exposed if local markets falter. A slowing Chinese economy and concerns over transparency and stability add further challenges. To sustain momentum, businesses must balance ambition with caution, staying flexible and prepared for unexpected disruptions.