Russia's invasion of Ukraine and the sanctions imposed on it for doing so and new pandemic-related lockdowns in China are the latest events to shake up the global supply chain.
Combined with the Sino-US trade war and other pandemic and weather-related disruptions, this is sure to accelerate the move by Western companies to reduce their reliance on China for components and finished goods and on Russia for transportation. and raw materials, and will lead to more localized sourcing strategies. If China decides to support Russia in the Ukraine conflict, it would only fuel this move.
In the 1990s, companies used strategies such as outsourcing, offshoring, and lean manufacturing to reduce costs, maintain market position, or gain competitive advantage. China has emerged as a major manufacturing center to serve global markets.
Things began to change after the 2008 financial crisis. With a significant increase in the price of oil in 2008 and a variety of natural disasters, from the 2003 SARS epidemic to the 2011 Japan tsunami and the Thai floods, Industry leaders recognized that the strategies adopted in the 1990s could increase their exposure to operational problems and compromise their ability to respond effectively to natural disasters. This led many companies to increase local manufacturing to reduce their exposure to global risks and to be able to respond much faster to local demand.
However, given the benefits of relying on China and other Asian countries for manufacturing, the change was not radical. In fact, between 2014 and 2018, China's manufacturing output grew by 21%. In 2019, just before the pandemic, China accounted for 28.7% of global manufacturing output.
Over the past four years, the Sino-US trade war and supply chain disruptions caused by the pandemic and weather-related events have caused the pace of supply chain localization to increase significantly. The Ukraine-Russia war will profoundly change the exchange of energy, raw materials, industrial parts, and goods between the Western world, China, and Russia, and the relocation trend is expected to accelerate.
With oil and gas prices rising due to the war, transportation costs will follow suit. What is less obvious but equally important is that the war placed restrictions on the ability to use Russian transportation infrastructure to support manufacturing in Asia. In fact, many companies have been building components and finished products in China and using the Russian railway to move these items to Europe. Of course, it is possible to ship some of these items by air, but it is significantly more expensive, especially now that airlines must avoid Russian airspace.
Equally important is the fact that Ukraine supplies about 50% of the world's neon gas, which is used to produce semiconductor chips. Governments and big corporations are now scrambling for alternative supplies, but supply is shrinking and prices have risen sharply. Russia and the Ukraine are also major exporters of grain such as corn, barley and wheat, as well as fertilizers. While the full impact of the war on the world's food supply is still unclear, prices have already skyrocketed.
These factors are driving interest in local supply chain strategies. France is increasing its reliance on nuclear power plants, which already generate 70% of its electricity. Another sector in which changes are taking place in this regard is that of automobile manufacturing. Assembly lines are being closed in several countries due to shortages of materials. There is no doubt that European car companies will take a hard look at the risks associated with international suppliers and consider buying more locally, even if this requires additional price increases. This could provide an opportunity for Europe to strengthen its domestic manufacturing sector.
The localization strategy is not a panacea. With China now a dominant, if not sole, source for thousands of components, reducing reliance on it will in many cases require considerable investment and time.
Furthermore, the industry alone will not be able to address many of today's supply chain challenges. Governments will have to participate. The increase in investments in ports, airports and other infrastructure must be present. The European chip law is an example of governments' efforts to reduce reliance on Taiwan and South Korea for semiconductors. The Ukraine conflict is also likely to give a boost to the European Battery Alliance, which the European Union created in 2017 to make Europe a leader in the advanced battery industry.
Until infrastructure investments are made in local regions, companies need to test their supply chains and implement strategies to make them more resilient to potential risks. The only thing that is certain right now is that the challenges for global supply chains are going to increase in the future.
Fuente: Harvard Business Review