A Ukrainian farmer is harvesting wheat around a crater thought to be caused by an airstrike ©Getty Images
A Ukrainian farmer is harvesting wheat around a crater thought to be caused by an airstrike ©Getty Images

What will the next era of supply chain globalisation look like?

19 August 2022

With the Russia-Ukraine war the latest event to destabilise linear supply chains, sourcing from the cheapest locations or dominant suppliers is a high-risk decision. Diversification will help move away from this model, but is procurement ready to branch out?

Relationships are a wonderful thing; they’re rewarding, nurturing and encourage mutual growth. But over time they can sour, and finding yourself locked into a bad relationship is never a positive experience. And as we’ve seen over the last 18 months, connections can go very bad, very quickly.

The pandemic’s immediate and enduring impact on supply chains led to talk of an end to globalisation, the theory being that dependence on low-cost and low-diversity networks is altogether too risky a strategy. The recent barrage of disruptions and their aftershocks has served to highlight just how fragile our interconnected global supply chains have become, as well as the complexity of extricating trade when geopolitical relationships change. But while the need to build greater resilience into supply chains is undeniably prudent, calls to do away with globalisation and many of the alternatives posited still appear both reactionary and excessive.

In April this year, US treasury secretary Janet Yellen called on the US (and Europe) to “reduce its reliance” on Russia and China by shifting supply chains “away from strategic rivals” and forming new trade relations with allies instead. The theory behind this is that so-called ‘friendshoring’ fosters peace and diplomacy while delivering greater control over critical supply lines. It is noble and not without appeal, but perhaps also naive – and it has caused more than a few raised eyebrows.

Keep your friends close

Blocked seaports cut 7m tonnes of wheat and 14m tonnes of corn from global supplies, increasing world hunger ©Getty Images

Friendshoring is a divisive concept, though it does make sense from an idealistic point of view. Partnering with allied countries should lower the chance of supply chain disruption, politically at least, and reduce reliance on nations that may leverage trade dependency for political gain, thereby strengthening world economic resilience.

In a report published earlier this year, Deloitte highlighted policymakers’ belief that pairing reshoring with friendshoring could actually eradicate supply chain weakness. Politicians argued this model would address all core issues at once: reduce interdependence between nations, enable bypassing of geopolitically sensitive countries and improve resilience, “while supporting important international relationships”.

But would it really work? Not according to Raghuram Rajan, former governor of the Reserve Bank of India. In a critique of friendshoring for Project Syndicate, Rajan pointed out that a lurch away from globalisation is neither that simple nor desirable for all parties. He argued that globalisation has a net overall benefit for both developed and developing countries, stating that “the benefits of a global supply chain stem precisely from the fact that it involves countries with very different income levels, allowing each to bring its comparative advantage to the production process”. Friendshoring, he added, would eliminate that dynamic and leave everyone worse off.

Regionalisation: a natural response?

It’s worth keeping in mind that up until 2020, the global supply chain had worked efficiently. Running lean was precarious, but it allowed for incredibly sophisticated, complex global networks that fed household demand for good-quality, cheap consumer goods throughout the 1970s, 1980s and 1990s – a consumer appetite that is only growing. In so doing, it supported the growth of markets in South Korea, Taiwan, Singapore and, of course, China.

Impediments such as the Suez Canal blockage or environmental events like floods were infrequent enough for supply chains to recover quickly. When dealing with Brexit, Covid and the war in Ukraine in succession, the impacts were so layered that it made sense to question the global model and look for opportunities that add security. Reshoring is an obvious choice because making domestic manufacturing more self-sufficient – as evident in China’s dual circulation strategy – lowers reliance on imports.

But, as Deloitte acknowledged, “few governments have the power to mandate where companies source from or make products”. And even if they could, establishing manufacturing capability is no small feat.

Ana Pertot, group head of procurement at electrical bike manufacturer Bolt, says she’s aware of the risk involved in being overly reliant on a single region for sourcing, but it’s not always possible to find suitable alternatives. “It’s easy to say what the professionals should do,” she says.

“We know that we need to find alternative component suppliers in different regions. But often partners in Europe are too expensive, don’t have capacity or are fully booked. We recently found a suitable partner, but they didn’t have capacity for us until 2024. In that situation, we must be less idealistic and more pragmatic.

“In the future we may explore manufacturing parts ourselves without a partner involved. But until then, finding an alternative path will be a mix of approaches and theories, rather than a single path,” Pertot adds.

Top sources of materials and labour critical for the energy revolution

Zelia Kranich, sustainable sourcing director for pharmaceutical giant Merck, agrees. “With pharma, if we can’t source ingredients we’re using today, we don’t have access to them or they become extremely expensive, that’s going to seriously affect our ability to do business.

“And so, each industry must figure out where their supply hotspots are. What do you have to focus on? What regions of the world does that impact the most and which of your products does that impact? That’s the framework you must work to,” Kranich says. “I don’t think it’s as easy as saying ‘we’re going to pull out of region X’. It’s more about understanding what kind of operation you have and what your needs are.”

Long-term solution to short-term problem? Policymakers are acutely aware of these challenges. The UK, US, India and EU have all tried to boost self-sufficiency by incentivising manufacturers to set up domestic manufacturing units. But in practice this may be a long-term solution to a short-term problem. Remaking industries doesn’t happen overnight, and companies that rely on natural goods, or whose supply networks are complex and intricate, have little choice other than to remain with the status quo.

“You can see the intuitive appeal of distance being a driver of managing risk,” says John Glen, visiting fellow at Cranfield School of Management and CIPS economist. “But if you look at supply chains and manufacturing, for example, we’ve decimated our manufacturing in the UK over the last 30 or 40 years. To expect that to respond quickly to a short-term demand is unrealistic.

“It underestimates the existing supply chain relationships, why we have them and why they’re so attractive,” Glen argues. “It also underestimates the sensitive investment decisions that would have to be made to bring that capacity nearer to home. That poses a risk. Who’s going to invest millions in increasing capacity when there’s a chance that supply chains could return to normal in the next two to three years?”

The risk in backing change

More countries are investing in self-sufficiency such as Africa’s fertiliser recycling facilities ©Getty Images

So it’s easy to see why shortening supply chains is seen as an antidote to volatility and risk. The latter was already high on the agenda pre-Covid, while a defining theme of sustainability is resilience. Protecting long-term viability of supply chains remains a matter of business prosperity and national security, but when it comes to risk and resilience, the answers are not as straightforward as they seem.

As far as globalisation is concerned, there’s a convincing argument for retaining close ties with hostile nations – the threat of economic sanctions is a natural deterrent. Having witnessed the effects of measures placed on Russia, how likely is it that China will invade Taiwan? As Rajan said in Project Syndicate: “If China were to prepare for an invasion, it would start by reducing its reliance on Western economies, a process that Western friendshoring would inadvertently advance. Economic entanglements may be messy, but they help keep the peace.”

It’s a sound argument as even sanctions could not and would not immediately end after a conflict. Friendshoring would lead to fragmentation and countries choosing a side, says John Ferguson, globalisation, trade and finance practice lead at Economist Impact. Modelling conducted by The Economist demonstrates that fragmentation hurts trade and GDP on grand scales, he adds.

“We need to restore faith in global trade because this path we are taking is a real risk and one that will hurt us all in the long run,” says Ferguson. “How do huge manufacturing companies decide who to side with and who not? You could choose a side only for that to change the following year – and as we know, supply chains don’t just shift overnight. So, I think a world of dominant friendshoring would be really detrimental to everyone.”

There is some truth in the need to reduce exposure to and reliance on volatile and hostile nations. But rather than removing an entire supply chain from a particular region or market, doing so by degrees is a more attractive and more likely scenario. This path would incrementally limit exposure to threats and push supply chains into other markets – but risk is a constant, as anyone in procurement knows. You aren’t going to eradicate risk by moving markets – just change its complexion, says Omera Khan, professor of supply chain management at Royal Holloway University, and a strategic risk expert.  

“Anyone who thinks they’re derisking their supply chain by not sourcing from China or Russia, for example, needs to think again,” she says. “They’re not derisking, they’re just changing the risk profile. The insecurity of supply will still exist if you reshore. Who do you source from, where do you go to? Do they have the capability to supply? What will the cost impact be? There will be many new decisions.”

Khan adds that this is not new territory, and we’ve been here before. There was a time, she says, when shifting from globalisation to glocalisation to localisation was de rigueur, but that too carried the same flaw as wholesale friendshoring or regionalisation because any decision made is not guaranteed to derisk the supply chain. The solution, she says, lies in acknowledging that risk is dynamic and that taking proactive steps in global sourcing decisions is always necessary.

“Every decision we make carries some risk. In the current landscape, that might look like opportunistic risk, embracing disruption and uncertainty. What we must do to thrive in changing markets is develop resilience measures. That requires flexibility in the way our supply chains are designed,” she suggests.

“Are our people, processes and systems in place? Are they moveable targets? For example, do you have a warehouse in a region but not the bandwidth to flex on it? In that scenario, could you collaborate with your competitors as a kind of insurance policy? I say that because I think it’s no longer viable to fix assets for too long; what we want is options.

“Having objectivity and subjectivity in our risk management is necessary. There’s got to be a certain level of experience in the way we manage supply chains. Being able to decide whether you hedge or absorb risk is the future of resilience. And that’s more about the ability of supply chains to embrace shock waves and grow with them,” says Khan.

The new face of world trade

India already has a strong base in EV manufacturing, such as buses, and aims to be the new hub of semiconductor production outside of South Korea ©Getty Images

It would seem then that globalisation is at an inflection point. The price and quality of goods suits consumers, while for companies and manufacturers, access to materials and markets across the world boosts scalability and profit. Turning away from that is highly improbable. However, all is not well, and the hyper-globalisation we’ve seen over the past 10 years is unstable and must be rectified.

Research on international trade carried out by Economist Impact suggests the transition is already under way. Its Trade in Transition 2022 report, which surveyed 3,000 respondents across six regions, found that 48% were using diversification as their primary supply chain reconfiguration strategy. Only 12% were primarily regionalising, while just 5% were reshoring.

It also showed that 36% of respondents were “choosing to work with fewer suppliers” by reducing the number of tiers in their firms’ most critical supply chains. Anecdotally, Ferguson corroborates this trend, saying two of his clients were already taking steps to reduce their reliance on certain regions, despite the higher costs. This is not only a response to recent events, but an attempt at future-proofing. He says that over a 10-year period they will come out ahead, because disruptions happen and risk never goes away – so in a general sense, any degree of flexibility and diversification are a safe bet.

“Over the next decade, I think having shorter supply chains is a benefit. That means we’ll see much more diversification and a little more regionalisation. That’s going to be driven by consumers. A lot of companies are thinking about customisation, so being closer to the customer allows for quicker turnaround, and more flexibility.”

The stats back him up. In 2021, when the world was adjusting to Covid, on average it took 7.9 months for supply chains to reconfigure. Efforts were primarily focused on sourcing raw materials (24%), managing shipping lines and logistics (21%), and ensuring health and safety along the supply chain (20%).

“We’re expecting a new form of globalisation, unlike anything we’ve seen in the past,” Ferguson adds. “I think we’re going to see a real mix of onshoring, regionalisation and diversification. We’ll see a lot of companies ending single-sourcing for their most critical inputs.”

It’s a sign of positive growth, according to Khan. “We went to China years ago because it was a good opportunity, but now we’re starting to see that it’s not the only opportunity. In politics we’re building new alliances, we’re building new trade relationships with other nations. And this is an evolution of new business; we’re on the cusp of a revolution of sorts.”

Globalisation 2.0: the shape of things to come

Chile and Bolivia have major lithium deposits, but brines need more processing than Australia’s rock ore ©Getty Images

So, what does globalisation 2.0 look like? In a sense we’re already on the way. We also know that technology and data will continue to shape working dynamics and bridge gaps between what is expected and what’s possible. Does this mean we’re on the cusp of a brave new world?

It does seem so. Recently, several countries have made major investments into India and Indonesia, countries tipped for a surge in industrial and manufacturing growth. Indonesia is targeting future markets – clean energy generation and EV battery production. Its investment policies are helping attract green battery firms, including Tesla, LG Energy Solutions, Hyundai, and Contemporary Amperex Technology, which are ploughing billions of dollars into setting up new supply chains across mines, processing and production of EV batteries.

Meanwhile India plans to become a major global player in semiconductors, using its existing manufacturing capacity, large, young population of affordable labour, and political friends. Israel’s ISMC Analog Fab has invested $3bn into building a new chip plant there, as part of an alliance between India, Israel, the UAE and US.

Also, the Netherlands is home to ASML, the world’s main producer of chip-making equipment, plus a large Indian community, so the countries already have strong connections and understandings.

Although India’s government hasn’t capitalised on this yet with more favourable policies, Australia has already signed trade agreements with India to supply critical minerals for these projects. Clearly, emerging markets have a lot to offer and will play a key role in the next iteration of a resilient global economy, enabling companies to diversify away from today’s big players, even bypassing Russia, China, South Korea and the US. And this is just the start.

For supply chains, it is and always will be a question of evolution. Risk in its many guises is only part of the equation and not the entire sum. In the same way, technology and data are tools, and sustainability is the mark of a shifting culture. As we are in the nascent stages of post-pandemic recovery, our adoption of ESG principles and our use of highly sophisticated tech suggests that what is required is a tune-up, rather than an overhaul. There is a sense too that the more things change, the more they will stay the same. Global supply chains work because they benefit countries at different income levels, and each contributes to the production process.

It wasn’t so long ago when that principle applied to the Middle East and Asia. To that end, creating gated communities between wealthy and advanced nations is bad for the global economy, its security and for the health of developing nations. According to The Economist, the new era of globalisation will be defined “not just by the movement of goods, people and money, but also by data flows around the world”. This point is reflected by the UN’s Commission on International Trade Law (UNCITRL) establishing a cross-border framework for digital transactions that aims to bridge the digital divide between established and developing nations.

It is hoped the framework will accelerate data imports into developing nations and spur growth in their digital economies. There are signs this is already happening. The Economist Impact survey stated: “The highest shares of executives who expect to increase their adoption of advanced technologies in 2022 are located in Africa (40%) and the Middle East (34%).” Could this do for Africa and the Middle East what the manufacturing investment did for China and the Far East?

New opportunities

Speakers at the Mobile World Congress 2022 say there's no green revolution without digital ©Getty Images

“This presents an important opportunity for developing countries,” says Ferguson. “It was long thought that development required a manufacturing base, but evidence is growing that services trade (supported by digital technologies) can be a route to growth. In this area, I’m particularly excited about the trend of ‘servicification of manufacturing’. This is the increasing use of services that are embedded in the production process and the final product, which can enable developing countries to join global value chains in these areas rather than traditional manufacturing of inputs.”

It’s a similar story with sustainability. Markets such as Spain and Brazil which are not traditionally considered advanced are leading the way on green energy development and conservation respectively, while Chile and Kenya are among the best investments for clean and low-carbon energy sources. Then what we are seeing is the natural evolution of components that will shape the future of trade and supply chains – recent disruptions have just sped up that process. In a decade, sustainability won’t be something that needs to be explained, it will just be how business is done, and digital economies that are now emerging will be further established. Both facets will create new and divergent markets – some physical, some virtual – that complement those that are already established.

In absolute terms, it’s a clear indication that globalisation is alive and well, but diversification is maturing of the way we approach resilience. The reality is the propensity to source goods and services from locales where they are most abundant, cheapest and in ready supply isn’t going to change – though our approach will.

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