The Hershey Company
An artists' rendition of the Hershey Malaysia manufacturing facility currently under construction.

Building an Asian Supply Chain from the Ground Up

Aug. 11, 2015
One big challenge for multi-nationals moving into Asia is that products must be tailored to the specific region.

It seems consumers across Asia are discovering what U.S. consumers have known for 100 years—The Hershey Co. produces good chocolate. The question for Hershey is how to meet that growing demand.

While the company has facilities in Asia to serve the market, in 2013 Hershey decided the time was right to make its largest investment in the company's 18-year history in the region. A new, $250 million confectionery manufacturing plant in Johor, Malaysia, set to open later this year, will put the company in a "strong position to meet the growing demand for our products across the region" explained Terence O'Day, Hershey's chief supply chain officer, when announcing the investment.

Where is the demand coming from?

Demand takes the form of the 600 million consumers that make up the ASEAN Economic Community (AEC), which is comprised of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Sometime this year this community of countries will begin operating much like the EU and become a single market that aims to make commerce across the region more seamless.

"ASEAN is becoming a bigger consumer market, as its middle class is growing rapidly and consumption was very strong in 2011 and 2012 in Thailand, Indonesia, the Philippines and Vietnam," explains Koichi Ishikawa, an ASEAN economic specialist at Asia University in Tokyo.

These potential consumers have not gone unnoticed. In fact, the ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore and Thailand) have been attracting more outside businesses than China, with about $128 billion in foreign direct investments, overtaking that of China's $117 billion in 2013.

Hershey is so confident in the region's potential that its Malaysia plant will be one of the largest facilities in the company's manufacturing network, with 700,000 total square feet.

The Malaysia plant investment is an important part of the company's modernization and expansion of its global supply chain to position the company for its next 100 years of growth. Malaysia, according to Hershey's corporate PR department, offers "easy distribution access" to more than 25 markets across the region and Asia in general. And perhaps just as important as location is the ‘strong supply chain infrastructure.'" So strong in fact that this location will have the capability to produce the broadest array of finished products of any Hershey factory outside of the U.S. and Mexico.

Smart supply chain strategies these days don't focus on choosing one location over another but rather on spreading out the supply chain to service particular markets. For Hershey the ability to "produce high-quality products tailored to local taste preferences and to meet rapidly growing demand will be keys to our success," explains Peter Smit, senior vice president, Asia, Europe, Middle East and Africa.

What Hershey knows—and other U.S. companies are learning—is that products must be tailored to the specific region. In fact Malaysia has the globally recognized Halal food manufacturing certification that is an advantage for products sold in the region.

A Socially-Conscious Supply Chain

Serving the region by customizing products is the strategy that multinationals are following. An EIU survey of companies with operations in ASEAN countries found that being more responsive to local demand was cited as the number one reason for putting production in the region. (This is as opposed to low-cost labor, which has been historically why companies offshore production.)

Ford Motor Co. would agree with this reasoning. "Our manufacturing in ASEAN is set up primarily as a production hub for ASEAN itself," Matt Bradley, president for ASEAN at Ford, recently told The Economist. "More than 90% of the cars we sell in the region are produced here. We do see opportunity to expand production. Given the population base in ASEAN, and the rise of the middle class, there's going to be a lot more consumers who can afford to buy our products."

Ford has three plants in the region: two in Thailand and one in Vietnam.

Coca-Cola also has a clear understanding of how to expand its global supply chain by keeping customers' preferences front and center. The soft drink giant has produced products for the region for many years and understands not only product preferences but the underlying nature of the customer.

"Consumers in Asia's emerging markets are the most socially conscious shoppers in the world," said Atul Singh, president of Coke's Asia-Pacific group, at the recent World Economic Forum on East Asia. "They need to trust who they're buying from and they care whether these companies are committed to creating positive social and environmental impact. In a world of total transparency and always-on digital connections, trust that has taken 128 years to develop can be destroyed in less than 128 seconds." (Coke is 128 years old.)

There exists a "socially-conscious" supply chain in Asia. To accommodate these beliefs Singh says that companies must "do the right thing, every time in every location. And, we must do this with authenticity and transparency. Consumers, especially young people today, expect nothing less."

Infrastructure is Key

With a careful eye on which countries within ASEAN are achieving growth, in 2012 Coke announced it was investing an additional $300 million in Vietnam in addition to the $200 million it had already invested in the country.

"Vietnam is an important growth market in Asia-Pacific as we work to achieve our 2020 Vision goal of doubling system revenues this decade," said Muhtar Kent, Coke's CEO, during a visit to Hanoi. "Vietnam's economy has maintained healthy growth in recent years and this new financial commitment is more than an investment in our expansion in Vietnam—it is also an important acknowledgement of our belief in the long-term potential of this key market."

Coke's investment in Vietnam includes "building new infrastructure to support strong and sustainable growth," Kent notes. Indeed, infrastructure is a key issue that needs to be addressed in order to enable commerce across the region. According to the Asian Development Bank, at least $600 billion is to be spent by members of ASEAN over the next decade on roads, ports, railways, telecoms, and in a host of other areas such as power, water and sanitation, flood defenses and airports in order to maintain the region's competitiveness in global economic development.

These investments will be well received by the 79% of U.S. companies operating in the region that have increased investment—and trade—during the past two years. The American Chamber of Commerce in Singapore reports that 91% expect these investments to grow over the next five years.

To support this growth, Cliff Waldman, director of economic studies for the Manufacturers Alliance for Productivity and Innovation (MAPI), explains that the financial base is key. "What you really want to look at when investing in developing economies is the financial infrastructure."

While building up the financial and logistics infrastructures might be a challenge, it doesn't seem to stop the U.S. multi-nationals from investing in Asia, and there are many companies that continue to invest in the region in hopes of attracting the 600 million upwardly mobile consumers.

And these upwardly mobile consumers are expected to drive chocolate demand up by 20% this year, according to the Indonesia Cocoa Industry Association—just what The Hershey Company wants to hear.