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Supply chain

Missing links: what next for global supply chains?

Published 28 December 2021 in Supply chain • 5 min read

COVID-19 has disrupted global supply chains but not changed their fundamental form. New technologies, continuing geo-political tensions and climate change point to companies in many industries having to plan for more radical change in the not-so-distant future.

COVID-19 turned global supply chains on their heads again and again in the last two years. First the pandemic disrupted demand and shuttered factories. Then wrong incorrect forecasts of how the world would recover made things far worse, leading to shortages of key components – most prominently semiconductors – which in turn badly hit the global automotive sector and other industries.

When goods once again started pouring out of factories, port and transport infrastructure failed. Container ships found themselves unable to offload their cargos; shortages of truck drivers led to containers piling up at distribution centers. Next up in early 2022 could be a ‘demand’ recession, as delayed goods arrive and businesses find themselves forced to stockpile inventory.

Combined with the US’s continuing trade war with China, and there has been widespread speculation that the eventual outcome has to be fundamental changes in the shape of global supply chains. Forecast changes have included reshoring the manufacture of strategic goods such as medical supplies and basic pharmaceuticals to America and Europe and the replacement of ‘just-in-time’ supply chains with ones with built-in redundancy.

The fundamentals 

Two factors, however, point to supply chains maintaining their pre-COVID form, at least in their overall form. First, as Ralf W. Seifert and Richard Markoff note, the problems that have been exposed are far more due to increased demand than just-in-time strategies or labor and infrastructure shortcomings.

Second, is the continuing supremacy of East Asia, especially China, as the world’s manufacturing center of gravity. Together, China, Japan and South Korea account for nearly 40% of all manufacturing; that trio plus Taiwan and Hong Kong account for a quarter of all merchandise exports.  

While it is likely that some parts of the technology supply chain will leave China thanks to US sanctions and tariffs, the country’s broader attraction to foreign investment remains intact. Last year, while worldwide foreign direct investment collapsed by more than 40%, China’s rose by 6% to just under $150 billion.

True, some of the country’s manufacturing is on the move. Much garment production has left for South-east and South Asia, and much has been made recently of Vietnam’s rise as an alternative manufacturing and assembly location to China.  

Overall, however, the scale of the shift has been modest. Vietnam’s manufacturing exports last year were only 12% of China’s. Indeed, with China’s exports rising 24.5% in the first nine months of 2021, the question is not whether global supply chains are being reconfigured, but whether they can cope with the extra volumes being thrown at them.

Changes ahead 

Within this big picture, some significant changes are occurring. In many industries, digital technologies have made it possible to track what is happening at all points along a company’s supply chain. That is preparing the way for the widespread use of artificial intelligence and machine learning technologies that can be used to manage and prevent disruptions.  

Automation is also changing the nature of production, storage, transport and delivery. Factories filled with robots, industrial-scale 3D printing, autonomous trucks and delivery by drone will offer companies new choices on where to locate production. 

Governments are also causing companies to rethink. The US’s CHIPS for America Act & FABS Act, and Japan’s $2.2 billion reshoring fund are aimed at luring strategic production back home. ESG regulations, especially in Europe are forcing companies to pay more attention to the pollution footprint of their products and the conditions under which they are made. 

Business developments are another factor. Many companies are reducing the number of their suppliers. One reason for this is that with manufacturing know-how in many industries now located in Asia, many Western companies now prefer to work with fewer partners who really understand their needs. Another is that this facilitates transparency, in turn making ensuring compliance easier.

The big unknowns 

Two big unknowns that could radically affect supply chains are geo-politics and measures adopted in response to climate change in particular and sustainability more widely.  

Under President Joe Biden, the US-China relationship has been less volatile than under Donald Trump. Nonetheless, America’s view of China remains hostile, and the election of a Republican candidate – possibly even Trump again – in 2024, could launch a new round of confrontation.  

Asia is also home to other possible political sources of supply-chain disruption, notably conflict between China and Taiwan or involving North Korea.  

Climate change could also have a major impact, possibly sooner rather than later. Carbon taxes and tariffs could dramatically change the calculations of where goods are made. Droughts or a sharp rise in the number of extreme weather events could force abrupt changes in sourcing patterns.  

Other important questions will also remain unanswered for a while. Diversifying chip production will take several years while new fabs are built and equipped, but once it has taken place, might that accelerate decoupling occur between the US and China? Between Europe and China? 

Although governments are starting to take the threats posed by climate change more seriously, how will this translate into rules that companies must follow? Do they have the political willpower to put in place reshoring measures for strategic goods?  

Moving supplier networks into China took place over three decades –the 1980s to the 2000s; could an exodus occur over a similar timeframe? Probably not, but also not inconceivable.  

For now, companies have a framework to work in and increasingly better analytic and other digital tools to work with. They know where most of their goods will continue to be made, and where they will be bought. Though the road ahead looks bumpy, strategies for coping with the post-COVID era can and should be drawn up – albeit with more provisos than five years ago.

Expert

Mark Slade DHL

Mark Slade

Managing Director of DHL Global Forwarding - Hong Kong and Macau, part of the freight forwarding division of DHL

Prior to his appointment, Mark was the Managing Director of DHL Global Forwarding Japan. A native of Canada, he has spent more than twenty years living in the Asia Pacific region. Mark is a chartered fellow of the Chartered Institute of Logistics and Transport (FCILT), and vice chair of the Shipping and Transport Committee at the Hong Kong General Chamber of Commerce (HKGCC).

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