Creating a Flourishing Environment for Services Trade in

Creating a Flourishing Environment for Services Trade in RCEP Dr. Deborah Elms December 2016 RCEP Negotiations, Jakarta elms@asiantradecentre. org Asian Trade Centre 1

Services Critically Important • Services are not just important on their own – 70% of world GDP, 50% of global trade • Services matter as part of manufacturing supply chains—impossible to split goods from services • New data suggests 30 -50% of total value of manufactured goods can be found in services • Innovation and value added often comes from services • Many services are provided by small companies • Many services can be provided across borders • Policy and regulations=help or destroy services Asian Trade Centre 2

Case Study Details • Series of case studies of manufacturing supply chains to understand services inputs for manufacturing • Study individual companies in Asia • Research conducted by Fung Global Institute, APEC, Asian Trade Centre, others • Wide range of different companies examined • Some case materials already released through APEC and FGI (now AGI), others forthcoming • Four case study examples presented here: – Jacket, construction equipment, autos, scotch Asian Trade Centre 3

FGI Case Studies: Number of Services Case studies Number of services 16. Herbal drug / Malaysia 15. Pharmaceuticals / China 14. Imagine POS / China & Hong Kong 13. Mouth wash / Thailand 12. Packaging / Hong Kong 11. Beverages Distrib. / Singapore 10. Industrial Cleaning / Thailand 9. Furniture / Singapore 8. Express carrier / Singapore 7. Design, Building / Singapore 6. Garments / Indonesia 5. Furniture / Hong Kong 4. Airline / Hong Kong 3. Solar / China 2. Bread / China & Hong Kong 1. Pigment / China 49 37 45 48 49 51 38 34 80 48 42 33 61 43 30 26 0 Asian Trade Centre 10 20 30 40 50 60 70 Number of services 80 90 4

APEC/FGI Case Studies: Number of Services Asian Trade Centre 5

1. Garments: The Manufacturing Process • The firm is the largest manufacturer in Indonesia, making 75 million pieces of apparel annually for some of the biggest global brands • The case study tracked a complex jacket for an American clothing brand – Most fabric from China and Taiwan – Brand in the United States – Retailed especially in US, Europe and Japan • Jacket is high-tech, complicated design – Firm specializes in harder garment designs Asian Trade Centre

Value Often Held By Brands • Brands capture much of the value of garment • Brands design product, solicit prototypes, confirm samples, design cutting templates, packaging, determines orders and shipment locations • Firm engineers work out production processes to be done in house or outsourced to specialist firms, quality control, handles shipment details • Fabrics can be sourced by brand or by firm • Compliance with brand extremely important Asian Trade Centre

Making Jackets in Indonesia The Value Chain for an Outwear Jacket Asian Trade Centre

Services Inputs • 42 services for firm included in jacket • But firm generally acts as traditional manufacturer in “factory Asia” Asian Trade Centre

Relatively Low Value Added • The firm does not operate in higher value added activities upstream and downstream – Has plans to move into these areas in future • Total services content low at 30% • Firm is part of conglomerate, many services performed by other member companies (esp back office functions) • Some jobs split like extensive worker training • Firm handles quality and compliance issues directly Asian Trade Centre

2. Services in Construction Machinery Establishment Stages 1. 2. 3. 4. 5. Pre-manufacturing Business liaison services Company registration and licensing services Information and statistical services Visa and immigration services Business establishment consultants 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Raw material procurement agent Customs-related services Quality inspection services of inputs Freight transportation services of raw materials Fleets repair and maintenance Storage – general storage Storage – tank farm Conception and design of product Patent acquisition Product development/ R&D for new technology Manufacturing 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. Asian Trade Centre Production management services Quality control and standards compliance Cleaning services of factory Engineering Services Gardening services for factory lawn Security guards services Sewage water treatment services Equipment maintenance Waste collection and recycling Government safety/ environmental inspection Catering services Workers’ dormitory Medical services Recreation facilities and services for workers Employees transportation services Postmanufacturing 31. 32. 33. 34. 35. 36. 37. Land transport of vehicles to distributors Sea transport of vehicles to distributors Retail trade services - By distributors Retail services on a fee or contract bases Retail operation management Storage and warehousing services for machineries at distributors Hire purchases and financing services for customers Back-office and recurrent 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. Auditing on financial accounts Financial services Internal auditing Insurance for machinery Insurance for staff Business and management consultancy services Company secretary Corporate communications, Courier, postal and local delivery services Estate management Human resources management Personnel search and referral services I. T maintenance and support Safety and security Telecommunication Uniform -Design and alternation Uniform -Laundry Legal services Advertisement administration Advertisement agencies services Advertisement designers’ services Advertisement – cameramen, directors, photographers and models. Electricity supply Gas supply Water supply After-sales 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. Customer complaints and compliments handling Technical support for customers Information services for customers Satellite services for remote monitoring Data center services for remote monitoring Ground radio communication services for remote monitoring Global Positioning System (GPS) services Repair and maintenance of machines for customers Buy back services to buy used parts and machines from customers Remanufacturing and refurbished services 11

3. At the Opposite End: Car Production in the Philippines Services involved all over the value chain, including the preproduction, production and post-manufacturing stages. Thus, their contribution to output is large. Asian Trade Centre 12

More Than 70 Services Included Asian Trade Centre 13

4. Moving Scotch to Vietnam • Firm is leading producer and supplier of spirits – Produces 6. 5 billion liters annually – 100 sites in 30 countries – 28, 000 employees with operations in 180 countries – Firm truly has global footprint • Case study: mid-priced Scotch whiskey, gift packaged in Singapore, shipped to Vietnam – Company often prepares gift packaging or specialty packaging for Asian markets • Many services outsourced Asian Trade Centre

Production Process • Product is unusual, since Scotch must be wholly produced in Scotland, under GI rules • Means firm focuses ruthlessly on costs and efficiency out of Scotland into final markets • While firm usually thought of as goodsmanufacturer, is more services provider – 52 different services – More than half the total value from services – Firm outsources anything it does not see as core competency Asian Trade Centre

The Supply Chain • Product produced in Scotland – Inventory managed: Amsterdam – Takes 3 years to reach market • Shipped to Singapore – Reworked in Singapore for gift pack – Warehouse allows customization closer to market – Government allows “generic” bottles without labels – Location also allows consolidation for region • Shipped to distributor in Vietnam for sale Asian Trade Centre

Logistics Chain Complex • The firm often outsources to other large MNCs • Three carrier lines handle firms’ Asia trade – Customs paperwork handled by firm or carrier – Authority depends on final market for goods – Management of system outsourced for hardware – Software for management handled in house from Budapest, Manila and Singapore • Control and compliance very key for firm – Detailed records very important Asian Trade Centre

Singapore Warehouse • 90% of company goods in Singapore reworked – Customization easier closer to final markets • Company outsources warehouse and rework staff (supervised by on-site firm employee) – Supplier can flex workforce across multiple firms • Gift packs with mostly Chinese materials – Cheaper to Singapore than back to Scotland • Outsourced supplier handles paperwork and inventory consolidation • Shipped to local partner in Vietnam Asian Trade Centre

Challenges for Firm • Taxation policy very important to company – Tax and trade viewed in tandem for most decisions • Free trade agreements necessary • Rule of origin (ROOs) can be problematic – Rework or even stopover often invalidates origin • Big hassles from inconsistent labeling rules – Even within ASEAN, different applications • Documentation problems for customs • Highly regulated product means considerable time and money spent on compliance issues – Often compliance split between ministries/offices • Managing complexity of system a challenge Asian Trade Centre

Conclusions: Delivery of Services • Firms sometimes opt for in-house delivery of services and sometimes outsource services • Some services in chains will always be delivered by incountry service providers • Services are often bundled together • In many cases, services create the value-addition portion for manufactured goods • Regulation can significantly help or hinder firms • Uncertainty in regulation and standards is deeply problematic • Costs of following and understanding changing policy landscape can be high Asian Trade Centre 20

Suggestions for RCEP • Key point: firms need to have widest possible range of services open • Many services can be delivered via e-commerce channels, so open all Mode 1 services • No local presence requirements, as harms smaller firms the most • Common regulatory policy lowers risks and uncertainty for firms • Greater transparency in regulatory policymaking is very important, particularly giving firms longer lead times for adjustment Asian Trade Centre 21

Standards Very Important • Standards, licensing and regulatory barriers are significant barriers to trade • Standards and other regulatory barriers hit smaller firms hardest, especially countryspecific standards • Best to peg standards to international standards wherever possible – Allows firms to create products for widest possible final markets • Eliminate duplicative testing, as costs fall disproportionately on smaller firms Asian Trade Centre 22

Firms Struggle to Explain Needs • Case study interviews revealing • Firms rarely realized that problems were regulatory or policy related – If asked, “What policy problems do you face? ” answer often, “None. ” But actually… face many issues – Why? Firms don’t know what are policy problems • Hence, governments have to ask right questions, ask many times, and ask in different ways • Give many opportunities for input into RCEP • Both in-person and written comment options • RCEP will matter a lot to companies based in Asian Trade Centre 23

Asian Trade Centre The Asian Trade Centre is the premier regional thought leader, advocate and educator for trade • • Strategic, creative thinking for policy and regulatory challenges Solutions for vexing trade problems Practical advice and suggestions for improving bottom line performance Sensible input to craft modern trade agendas Deborah Elms Executive Director Asian Trade Centre 41 A Ann Siang Road Singapore 069717 www. asiantradecentre. org The information, data and graphics provided by the Asian Trade Centre is for advocacy purposes. While we endeavor to provide the best quality information, we make no warranties with respect to the use of the information which is voluntary. The information provided in this document does not constitute investment or legal advice. It should not be used, relied upon, or treated as a substitute for specific professional investment or legal advice. Asian Trade Centre 24