As the world recovers from Coronavirus, globalisation has come up for debate. Many influential people – across industry and government – are calling for corporations to build resilience into global supply chains. But what does this mean? Does it mean we need to localise all manufacturing, as many have recently suggested – or does it mean just the opposite?
Trade During the COVID-19 Crisis
The world has endured an unprecedented global pandemic which was answered by lockdowns on a global scale, and the shut-down of economic activity across much of the planet. Global manufacturing was disrupted as supply-lines in major economies, starting with China, came to a halt. Then, as the virus moved around the world with a domino effect, factories shut down completely as lockdowns were imposed.
The resilience of supply chains has been severely tested over the past few painful months. One indispensable area which has continued to function throughout the pandemic is the food industry. Farms have been able to keep going owing to the open-air nature of the work. Food-processing and packaging industries have been able to keep working because of the high level of automation in those sectors, and also because they have been designated as key industries that simply must keep going (though some, such as US meat-processing plants, have been badly hit). Although initially supermarket shelves were stripped as shoppers resorted to panic-buying, the situation was soon brought under control, and world trade in food continued more-or-less unhindered. Like much of the manufacturing sector, most supermarkets work on the low inventory, ‘just in time’ principle, where food is shipped directly into stores, avoiding the need for expensive warehousing. Success for this sector during the pandemic depended on the fluidity of supply-chains, most particularly, the ability of the logistics industry to keep functioning.
The Fragility of Supply Chains
Like the food industry, modern global manufacturing involves a dependency on a vast network of interlinked supply-chains many hundreds if not thousands of miles away. One single example is the Qingdao Bestya International Trade Co. Ltd. of Shandong Province, China, which supplies parts to European vehicle manufacturers, including alloy wheels to Mercedes and BMW. There are many thousands more such suppliers.
COVID-19 has highlighted the vulnerability of these global chains. Factories in Europe were forced to suspend production as the flow of components coming out of China dried up. Food supply across Europe could also have been disrupted if the crisis had driven countries to close their borders to all vehicles.
Even defenders of globalization would have to acknowledge the vulnerability of globalized supply-chains exposed by the pandemic, as governments struggled to control the spread of the disease. At least 75 countries, including ordinarily outward-looking governments like Germany’s, restricted exports of critical medical supplies. And then there was the huge dependence on China for personal protective equipment. China supplies 42% of the world’s imports of PPE.
The fragility of global supply chains has provoked debate over reshoring and localisation of supply to ensure security of critical resources. This is a discussion which was going on before COVID-19, as globalization was put under the microscope and the world order fragmented with the emergence of nationalist leaders and perceived populist movements – Donald Trump, Indian Prime Minister Narendra Modi and Brexit being examples of this. COVID-19 has confirmed many politicians in their belief that national self-reliance and strict border and immigration controls are essential, and that national interests should trump international cooperation
Supply Chains: Local or Global?
The concept of entirely localised supply-chains – self-sufficiency – is attractive on several levels and, importantly, it bridges the political divide. Nationalists will say they are putting the needs of the nation first. Environmentalists will say it reduces the carbon footprint of a nation, as logistics activity is minimised. Some economists (and some left-wing politicians) will say it creates local jobs and reduces costs. Some strategists will claim it increases the security of supply. All these claims have validity, but is reshoring of supply chains really the way ahead? Over the years, North Korea has striven to achieve self-sufficiency in food supply, with catastrophic effects. Bad harvests led to a famine in the 1990s, and periodic crises of supply, where people have gone hungry, and died of malnutrition.
North Korea may be an extreme case, but it illustrates the risks of putting all one’s eggs, as it were, in one basket. Reshoring of essential production in an unstable world is now a top agenda item, following the struggle countries experienced in sourcing face-masks, visors, and ventilators, but there are risks in engaging in a mass repatriation of production. Firstly, there is the huge cost of moving plant and re-establishing it locally. Then there is the challenge of training workers, though much of this plant may, in fact, be automated. Finally, there is the danger of concentrating production in one place, where the whole supply-chain would be vulnerable to another global shock all at the same time, if it hit that region.
Diversification of Supply Chains Will Bring True Resilience
The answer is to build resilience into supply-chains by diversifying. For many manufacturing companies, this could mean moving some… but by no means all… supply-lines out of China, and establishing them elsewhere. But to decouple from China entirely is to throw out the baby with the bathwater, given that China’s advanced infrastructure and skilled workforce is second to none, and will remain so for the foreseeable future.