Around the world, business leaders are scrutinising supply chains against the prospect of a more fragmented global economy. Some saw Brexit as a blip and US-China tensions as transitory, but a pandemic and war in Europe has forced everyone to accept that their global business strategy may no longer be fit for purpose.
“You have to be more resilient in a multipolar world, even if it risks being less efficient,” says Alexandre Tavazzi, Head of CIO Office and Macro Research. “This means developing a strategy that protects your business against sudden shocks to supply.” Thousands of businesses have already shifted operations into politically friendly countries, the biggest taking partners with them. Reports that one of the tech giants could be manufacturing 25 per cent of its products outside China by 2025, for example, have accompanied announcements that its biggest suppliers are building factories in India.
Shifting elements of a supply chain to politically friendly (“friendshoring”) or nearby (“nearshoring”) nations comes with trade-offs, however. While India and other emerging economies may provide shelter from geopolitical headwinds, it will likely take many years and millions of dollars before they can offer companies the same infrastructure as China.
Inflationary pressures are also weighing on supply-chain decisions. At the end of 2022, Germany’s Federal Minister for Economic Affairs and Climate Action Robert Habeck reported companies had “stopped production altogether” as rising gas prices began to strain companies’ balance books.
Some may consider these costs worth paying, particularly if they rely on rare metals or sensitive technologies only available in certain countries. Automotive manufacturers, for example, may be willing to shoulder the costs of sanctions in order to maintain access to China’s vast supplies of lithium and cobalt, essential to the production of electric vehicles.
Supply chain vulnerabilities
As climate change compounds the risks to global supply chains, businesses are faced with a growing list of unknowns. “The companies that can navigate this uncertainty will have built some slack into their supply chains,’’ says Wendy Cutler, Vice President at the Asia Society Policy Institute.
Building this supply-chain resilience will not be cheap. In a recent report, Bank of America estimates that it could cost western companies around $1tn over the next five years to shift foreign manufacturing operations out of China, while inflation compounds the cost of holding extra inventory. To deal with this uncertainty, companies not only need contingency suppliers but must also be aware of vulnerabilities across the supply chain.
While the tech giants deliberate over long and complex supply chains, companies in lower-tech industries face other pressures. “In the era of globalised manufacturing, companies that grew to be giants in the apparel industry believed in ‘chasing the cheapest needle,’” says Professor Marshall Fisher of the Wharton School of Business. “But today, fast-changing consumer demands mean that successful companies are often the ones willing to pay more to work with more dependable suppliers closer to home.”
Some have calculated that the costs of reshoring supply can be offset by the rising cost of labour across emerging economies.
Meanwhile, the increasing sophistication of technology is making it cheaper to buy a single machine that can produce multiple components, rather than rely on a number of international suppliers. A study by the Association for Advancing Automation found that industrial robot sales to North America jumped 18 per cent in 2022 as companies brought production in-house.
Pay to play
Alexandre Tavazzi,
Head of CIO Office and Macro Research
As companies work to reglobalise supply chains, three factors should determine their strategy, says Tavazzi. “First, can the company self-fund? If not, investment may be too expensive in an inflationary environment. Second, can they leverage a brand name or key technology to justify short-term price rises? And third, can they demonstrate their strategic importance and fund the transition through government subsidies?”
Above all, companies should reassess their priorities. In a reglobalised world, it may be only the most resilient that survive.
