KUALA LUMPUR (Nov 25): Fitch Solutions Country Risk & Industry Research said Covid-19 will put a spotlight on health product supply chains in Asia moving forward.

In a report Wednesday (Nov 24), Fitch Solutions said that in the aftermath of Covid-19, a move towards reshoring pharmaceutical ingredient supply will be driven by the governments and pharmaceutical companies.

“With that said, we do not believe the rebalancing will result in a significant change in China's role in the global drug supply chain in the medium term,” it said.

Fitch Solutions said the pandemic disrupted upstream supply of active pharmaceutical ingredients (APIs) from China and the manufacturing of finished products in India.

“In 2022 we expect that both pharmaceutical companies and governments will continue to react to this by diversifying supply sources, ‘near-shoring’ production to regional peers or ‘reshoring’ to the country of sale.

“This trend builds on recent examples such as India, Indonesia and Vietnam and will serve to increase costs for sellers of pharmaceuticals, mainly for cheap generic medicines.

“For governments, significant public investment in reshoring pharmaceutical manufacturing will result in the desired benefit of strategic positioning in the event of another global pandemic,” it said.

Fitch Solutions said firms are likely to use a combination of three strategies to reduce supply chain risk: China Plus One diversification, which would entail keeping a portion of their manufacturing in China but developing a second supplier outside the country, ‘near-shoring’ to a country in the same region as their main consumer base, and ‘reshoring’.

“We believe production sites in China will shift to third countries due to China’s rising labor costs, tighter environmental regulations, and more recently confrontation with the United States,” it said.

The firm said Southeast Asian countries particularly Vietnam and Indonesia will be potential beneficiaries of the ‘plus one’ strategy.

It said some countries have already put forward plans to attract overseas investent as companies look for another center of production or distribution. These include Thailand, Malaysia, and Vietnam, which have introduced preferential policies for overseas firms investing in the country, it said.

Fitch Solutions said governments will also drive reshoring pharmaceutical ingredient supply.

“Recognising the national security implications of a disrupted pharmaceutical industry, governments around the region will also encourage drug companies to localise their supply chains.

“For example, pre-Covid-19, India’s pharmaceutical industry relied on Chinese suppliers for as much as 70% of its required APIs,” it said.