ASEAN April 2020
Growing regional challenges to maintain food resilience during COVID-19 crisis
Latest research (survey) commissioned by PricewaterhouseCoopers (PwC) and Food Industry Asia (FIA), have revealed interesting insights and challenges faced by the food supply chain in ASEAN during the COVID-19 pandemic.
According to this report, ASEAN’s food value chain is not only a major driver of GDP and employment in the region, but is crucial for ensuring the region’s food security. ASEAN currently faces a number of long-term challenges to its food security, and COVID-19 will exacerbate these challenges in the short-term. Supply chains will be increasingly strained by shortages of labour and inputs as it becomes more difficult for people and goods to move freely. A concerted effort will be required between businesses and governments to keep supply chains open and minimise disruption to the food system and ASEAN communities.
The report summed up that while 2020 will be a year of disruption and challenge, the crisis will present as an important lesson and help to build future resilience of the ASEAN food industry and its supply chains. If various stakeholders can collaborate and work closely together, the food supply chain will emerge stronger once COVID-19 disappears or under control. The following are various extracts from the report, focusing on the major points of interest to a food manufacturer and supplier in this region:

Growing contribution of food chain to region’s GDP and employment
The food industry is a major contributor to the region’s GDP and employment, driving a large share of economic output which was estimated at US$500 billion a year, approximately 17% of ASEAN’s total GDP. In terms of employment, the industry contributed 35% of total labor workforce.
As such, this industry is extremely important to ensure the economic health of the region.
Chart 1.0 shows the contributions of food industry to GDP in various countries in ASEAN.
Growing urbanisation and food consumption will pose significant challenge to regional food supply
ASEAN is experiencing rapid urbanisation and growth of the middle income consuming class. By 2030, more than 90 million people are forecast to move to ASEAN cities, and the consuming class is expected to double to 163 million households. This growth will fuel demand - spending on food in ASEAN is expected to more than double to US$1.5 trillion by 2030, driven by both a growing population and demand for safer, healthier and more sustainable food. Amidst this positive growth, ASEAN need to meet growing demands whilst facing unprecedented supply side challenges. The following are the challenges identified in this report:

(1) Low availability of arable land – ASEAN only has 110 hectares of arable land per 1,000 people which compares unfavorably to US (470 hectares) and EU (205 hectares). Land has continued to become more scarce due to degradation linked to water shortages, poor soil management and competing land usages. This is expected to exacerbate as the effects of climate change are increasingly felt – due to desertification and salification the amount of arable land per capita may fall by as much as 5% by 2030.
(2) Stagnating yields - low availability of land is compounded by the region’s yields stagnating and falling short of other parts of the world. Despite the volumes of rice that are currently exported by many ASEAN members, the yield gap with the United States still stands at c. 40%; compared with Brazil the gap is c. 20%. A key driver of this is that farms in ASEAN are much smaller than their American or European counterparts, with lower capacity or capability for investment in technology. With climate changes, this will be an increasing challenge. There is an urgency to further develop the agri-tech sector.
(3) Aging workforce – the report also highlighted that the region’s smallholder population is aging, with the average age now between 50 and 60. Younger generations are increasingly unwilling to stay in the sector. This will create labor shortage, dampen productivity while slower to take up new farming technologies.
(4) Food waste - globally, about 30% of all food that is produced go to become food waste, representing US$1 trillion in lost economic value annually. ASEAN is a large and growing contributor to food waste, driven by a combination of fragmented supply chains, underinvestment in infrastructure such as cold storage systems, and growing consumer waste.

The report highlighted that the region’s supply chain remains highly interdependent, with individual countries dependent on each other and the outside world for supply of specific commodity groups. Important examples include animal feed and dairy products (with US$12 billion per year net imports combined) for which ASEAN has limited regional capabilities. Despite the significant rice export volumes of Thailand and Vietnam, most ASEAN countries remain net importers of cereals, relying on wheat and maize imports from other regions (and in many cases rice as well). Furthermore, this interdependence extends to the broad range of non-food inputs that go into production – including seeds, chemicals, oils and packaging. Simply put, the region’s food system remains very sensitive to shocks today, let alone when future challenges are considered.
COVID-19 will exacerbate issues facing the region’s food supply chain. The spread of the COVID-19 pandemic globally and throughout ASEAN will further add stress to the region’s food supply system. Whilst the region had its first confirmed cases in January, there has been significant steps taken by various governments in March and April to curb the community spread of this virus through minimising people interactions.
Nevertheless, governments have largely refrained from implementing measures that explicitly close down food production, manufacturing and distribution, deeming these to be “essential services”. Exceptions do still exist, for example, the Malaysian government is requiring critical industries to remain operational only under special terms and conditions, which includes only utilising a maximum of 50% of their regular workforce. Whilst Singapore’s latest “circuit breaker” measures designate food as essential, individual companies must apply for the right to continue operations, however at a minimal capacity. As such, these government measures have still created unintended challenges/issues across the entire food value chain.
One major issue is labor shortage due to travel restrictions. For eg. there are many Malaysian workers who travel across the causeway to Singapore to work daily. It was estimated that foreign (non-resident) ASEAN nationals constitute around 5 million of the overall ASEAN labour force.
The second issue is input shortage as the food industry rely on many other industries for its inputs namely packaging, chemicals, oils and electronics. Any restriction in the production of its input materials will curtail its production level. For example, one of the largest sources of the region’s dairy products is New Zealand, which has been relatively less affected by the current crisis. However, shortages of packaging have limited the capacity of regional bottling and other distribution operations, in turn impacting the supply of dairy products. In the Philippines, until recently animal feeds were not exempted from new regulations. Similar situations have occurred where oil and chemical production has been restricted. Many governments have begun to recognise this – for example Malaysia has split exemptions into “essential goods” and products that are “part of the supply chain for essential goods”.
Third issue, according to this report, is border challenges, meaning when inputs or finished products reached national borders, they face difficulties in clearing them due to lack of clarity on logistical guidelines and restrictions faced during transport as well as at shipping ports. Labour shortage at regional ports also create significant backlogs of containers, particularly as many regional ports lack digital/remote custom clearances. For example, as at the end of March, the quantity of unclaimed import containers at Manila’s port had increased by 66% compared with pre-crisis levels, much of it is food.
Restrictive measures have also impacted the demand side of the food supply chain, namely through regulatory restrictions on food service operations. On the other hand, panic buying of essential food products led to an increase in the need to top up necessary inventory to support the spike in demand. In addition, the pandemic has also threatened the incomes of workers, with most of them paid on daily basis, and this will indirectly affect their affordability to buy food products unless the government step in to offer support or subsidies.

Nevertheless, governments and businesses have largely been able to sustain supply of food to-date. This has been due to a combination of the special exemptions implemented, and the operational agility of businesses. Both government and businesses can be expected to refine and improve these over time. However, there are valid reasons to believe that should the crisis worsen, the effects on the food industry may become more and more visible as businesses will face daily operational challenges, while the whole industry remain dependent on the broader economic environment. Meanwhile, the impact of COVID-19 and restrictive government measures on the rural areas, in which the entire food system (agricultural production) relies on, have so far not been given substantial weightage as compared to urban areas.

As such, the impact of the crisis could become more challenging over the coming months, if restrictions continue. If the main phase of the crisis was to continue for another 6 months, global food businesses responding to this survey projected industry declines of 10-15% in production and revenue, and 5-10% in employment – when compared with pre-crisis expectations for 2020. If not properly managed, food insecurity could lead to prohibitive measures on food production and consumption e.g. food rationing or trade restrictions. Therefore, although the food industry has shown courage and conviction by adapting to the challenges presented so far, governments and businesses have an important role to play in mitigating the disruption the virus could have on the food supply chain across the ASEAN region.

The report has recommended various policies ASEAN governments can pursue to protect the food supply chain and some of them are as follows:

(1) Exemption of labor supply for the food & beverage industry from restrictive measures
(2) Financial assistance for SMEs as most of the F&B players in this region belong to this category
(3) Financial assistance for Smallholders (i.e. smallholder farmers)
(4) Preservation of open borders (domestic/international) for F&B products
(5) Social support for the community (consumers) to ensure they can continue to afford essential food products – in the form of financial support/subsidies/food banks etc

ASEAN countries have started to develop targeted financial assistance for small businesses. In Singapore, food and beverage firms will receive a 50% wage offset for employees for the rest of the year (75% for April) and will also be exempted from property tax for the rest of 2020. This has been supplemented by the provision of loans where the government bears 90% of the risk. In Malaysia, a stimulus package worth US$57 billion will include cash advances, loan holidays and wage subsidies for small businesses. Most other ASEAN countries have also announced their own stimulus packages.

Apart from various governments taking an active role to handle this crisis, businesses must also carry on with their own mitigation efforts and these include:

(1) Workforce protection – businesses to differentiate workers from those who can work remotely from home and operational workers who need to be at the worksite but subject to regular testing and safety/protection protocols.
(2) Customer and supplier outreach – offer support to vulnerable suppliers and customers with greater flexibility of payment terms.
(3) Proper inventory management – businesses to consider stockpiling and rationing critical inputs as well as moving inventory to lower-risk areas.
(4) Production flexibility – businesses to adjust to the short term spike in demand for essentials and to adjust their production and product range accordingly so as to ensure continuous supply of these products to the consumer market.
(5) Distribution – to mitigate challenges to their downwards logistics, businesses consider spreading distribution over multiple routes to reduce the impact of disruption at borders, and even agreeing to sharing capacity with other producers - for example where each party may be exposed to different geographical risks.

The report concluded that the impact of COVID-19 will have far reaching long-term effects to the food supply chain in this region and these will include the following:

(1) Changed consumer purchasing habits - with the lockdowns experienced by the wider population at large, this could result in major changes to consumer purchasing habits even after the crisis. The biggest impact is likely to be on the online food delivery market, which might gain a large number of new customers. In addition, there are also a group of consumers who prefer to cook at home and demand for more fresher ingredients, while there are some who switch to more frozen/instant food products.
(2) Increased government focus on food security - the crisis can be expected to sharpen ASEAN countries’ efforts to become less dependent on specific trading partners, and imports of food in general. Singapore is one example of a country that imports 90% of its food today, and it is realising that growing need to expand on domestic production to achieve its domestic production target of 30%. In addition, ASEAN countries are also likely to pursue initiatives in parallel that will make trade more efficient – such as digitisation of customs processes and some aspects of regulatory approval.
(3) Decentralisation of production - for large players with multiple facilities, there is likely to be a greater emphasis on reducing reliance on any particular country or facility. This may require a larger number of smaller specialist operations, or existing facilities producing a greater variety of products. Such an approach would constitute a departure from prior philosophies around regional centralisation and economies of scale – and businesses will have to be careful to ensure they effectively balance the desire for reduced dependence versus profitability.
(4) Diversification of supplier and customer bases - businesses of all sizes can be expected to look to diversify the mix of their supplier bases to reduce their exposure to individual geographies. This logic will also extend to customers, with organisations looking to limit their concentration by product, geography and industry. This may increase organic and inorganic market entry activity, as businesses seek to broaden their focus.
(5) Accelerated investment in automation - food processors are likely to speed up their investments in “Industry 4.0” technologies such as robotics, artificial intelligence and the Industrial Internet of Things (IIoT). This will reduce their dependence on on-site operational workers, with the new higher-value jobs created being ones that could in theory be done remotely (e.g. cloud computing specialists, data analysts). This in turn can be expected to boost productivity and accelerate the competitiveness of the ASEAN food and beverage industry on the global stage.
(6) Closer relationships with smallholder producers - the current crisis may also emphasise the importance of bringing smallholders more closely into the food system. This will involve accelerating digital solutions that provide clearer information to these producers, as well as microfinance initiatives that offer badly needed credit (especially in times of disruption like these).



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