1. Creating a Flourishing Environment for Services Trade in RCEP
Dr. Deborah Elms
December 2016
RCEP Negotiations, Jakarta

2. 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

3. 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

4. FGI Case Studies: Number of Services

5. APEC/FGI Case Studies: Number of Services

6. 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

7. 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

8. Making Jackets in Indonesia
The Value Chain for an Outwear Jacket

9. Services Inputs 42 services for firm included in jacket
But firm generally acts as traditional manufacturer in “factory Asia”

10. 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

11. 2. Services in Construction Machinery
Establishment Stages
Pre-manufacturing
Manufacturing
Post-manufacturing
Back-office and recurrent
After-sales
Business liaison services
Company registration and licensing services
Information and statistical services
Visa and immigration services
Business establishment consultants
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
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
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
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
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

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

13. More Than 70 Services Included

14. 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

15. 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 goods- manufacturer, 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

16. The Supply Chain Product produced in Scotland Shipped to Singapore
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

17. 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

18. 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

19. 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

20. 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 in-country 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

21. 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

22. Standards Very Important
Standards, licensing and regulatory barriers are significant barriers to trade
Standards and other regulatory barriers hit smaller firms hardest, especially country-specific 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

23. 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 Asia

24. 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
41A Ann Siang Road
Singapore
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