Missing links: what next for global supply chains?

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.