Navigating changes in global distribution

posted by Jeremy Hazlehurst
14 May 2021

Experts predict we’re approaching the end of the global factory and a major boom in warehousing awaits. But will this be more of a steady drift than a rapid turnaround?

Whether you consider it to be drama or farce, container ship Ever Given’s stranding in the Suez Canal in March this year added to the substantial spotlight on the fragility of global supply chains. The situation intensified worries already front of mind following a year of Covid-19, such as whether supply chains are sufficiently diversified, if local suppliers might be more reliable, and whether it makes sense to move away from just-in-time deliveries and invest in warehousing larger amounts of stock. But the big question for supply chain managers is: if you decide to make a change, will it even be possible? In the US, demand for especially large warehouses or distribution centres in excess of 23,000m2 – so-called ‘big box’ facilities – jumped 25% between 2019 and 2020, according to real-estate giant CBRE. “We’re really just seeing the tip of the iceberg as far as demand and growth of e-commerce,” said executive vice-president Mindy Lissner.

However, the mass switch to online shopping over the past year has led to a huge increase in demand for warehousing in general, and therefore costs. CBRE recently warned that warehousing rents in the US could rise by 10% this year. This scarcity is fuelling the rush to develop more space, and CBRE said that while 18 million m2 of large warehouse space is under construction in North America, over 40% of that has already been pre-leased. For Market research firm Interact Analysis, global warehouse building is heading for a boom. It predicts the current 150,000 warehouses worldwide will expand to 178,000 by 2025, with more than half of those being in China, India, the US, Japan and Germany. This growth is forecast to bring global fulfilment space to 600 million m2 by 2025.

Graphic 1

Build or buy?

While some have their sights on newbuilds, for others, absorption is the goal. For instance, Amazon has been buying golf courses and old shopping malls it plans to convert into warehouses, and clothing retailer Gap recently announced it would build a $140m, 78,000m2 distribution centre in Longview, Texas, which will process up to a million packages a day. Discount retailers and meal-delivery services are also snapping up alternative warehousing space. Purchasing and converting huge premises may suit large companies able to quickly ship goods over long distances, but smaller retailers seem to prefer micro-fulfilment centres as they can sit closer to cities, making it easier to preserve the huge demand for online groceries, which require refrigeration during both storage and transit. It remains to be seen whether this revamped warehousing strategy will meet firms’ needs in the long term, or even post-pandemic.

Closer to home

Large-scale trends suggest we may be approaching a period of widescale ‘deglobalisation’, which is likely to shorten some supply chains. Recent McKinsey analysis of the 23 large goods-producing value chains, which account for 96% of global trade, shows that trade intensity - the share of output that is traded across the world – declined from 28.1% to 22.5% of gross output in the decade up to 2017. Also, since its 2007 peak, foreign direct investment has decreased 70% globally. Logically, this would indicate less global shipping and increased demand for localised distribution hubs.

A more fundamental reason for shifting supply chains is cost. The price to ship a container from East Asia to the west coast of the US is now 2.5 times higher per container since early 2020. Costs to Europe are also high, as is global air-freight, and they are expected to remain so for at least a year or two, ramping up the pressure to move operations closer to home. The recent Ever Given episode created short-term price hikes and forced many ships to re-route, but sending a ship from Singapore to Rotterdam via the Cape of Good Hope route rather than the canal adds a whopping $400,000 to the voyage’s overall cost. And it’s not the only port-shaped bottleneck. Ongoing problems at the Los Angeles and Long Beach ports, which account for half of US imports from Asia – and where ships are presently waiting a week before entering – only intensify supply problems.

Graphic 2

People bring the flexibility

In other industries, some supply chains and distribution hubs are relocating due to ‘wage convergence’. For example, European fast-fashion has long relied on factories in Southern Europe, but as wages have risen their interest has moved to the super-low paid places like Ethiopia. Companies such as Gap and H&M, and brands like Calvin Klein, Zara and Under Armour now make Europe-bound clothing there. And as the new African Free Trade Area develops, other African countries will likely find they have a similar appeal, and infrastructure investments into railways linking industrial areas and ports will only make things easier.

“These developments suggest perhaps not the end of the global factory, but certainly a locational reconfiguration,” wrote Michael Witt and Enver Yücesan, professors at Franco-Singaporean business school Insead, in a recent paper. However, they add, not all supply chains are mobile and some simply cannot be moved at present. Innovative industries such as computing, electronics, aerospace and pharmaceuticals account for 13% of gross global output, but 35% of this is traded globally.

These sectors rely on dependable intellectual property laws, a highly skilled workforce and an ecosystem of expertise and manufacturers. Similarly, other industries such as agriculture, mining and basic metals have to stay close to their resources, storage or transportation infrastructure – you can’t simply nearshore a cobalt mine. So reconfiguring supply chains may be the goal, but it will not happen overnight

At the other end of the spectrum are labour-intensive goods such as toys, shoes, textiles and furniture, which represent 3% of global gross output with 28% being exported. These sectors use low-skilled labour and products that are easy to ship, so supply and distribution can be re-engineered relatively easily.

A slow turnaround

In this period of deglobalisation, will we see dramatic movements in manufacturing and distribution? Naturally, the outcome will vary by industry and sector, but large-scale offshoring came into place because the benefits of low-cost labour were compelling. Now with sunk costs, rising salaries and globalised supply chains that work smoothly most of the time means unpicking the system is a tough slog, and offers few obvious benefits besides resilience for those dramatic – but rare – major events.

“Firms will resist changing their supply chain unless they see a long-term, irreversible secular trend of loss of competitiveness,” says Zhu. Massive new Amazon warehouses might get the headlines, but overall change will be slow work. Like changing direction on a large container ship, you might say.

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