Designing Smarter Supply Chains
Trade disputes among major economies and the COVID-19 pandemic have combined to impact global growth, trade and investment at an unprecedented speed and scale. Governments and multinational companies have suddenly struggled to source and deliver basic products and raw materials. There is an urgent need to design smarter, more diverse and resilient supply chains. Here are examples of how different countries and industry sectors are responding to structural supply chain challenges.
United States: Trade and investment tensions between the US and China have prompted some multinationals to consider shifting parts of their supply chains to Southeast Asia. The pandemic may accelerate this trend. The Trump administration has been encouraging US multinationals to decouple from China and reshore manufacturing to create domestic employment. Congress is also considering legislation to mandate domestic manufacturing of health equipment and pharmaceuticals.
Europe: Many European officials are advocating a reckoning with its dependency on China. Some leaders are urging European companies to invest more in their own bloc, particularly in technology and telecoms. Beijing and Brussels are negotiating a bilateral investment treaty, aiming to conclude talks this year, and the EU has enacted a foreign investment screening regulation to defend its strategic interests. Europe is pressuring China to enact changes in human rights, climate impacts and state-subsidies that harm European companies, but is not advocating an economic decoupling.
China: Inward investment in China declined by 13% from January to March 2020 but rose 8.6% in April as the economy reopened. Across the technology, automotive, electronics, pharmaceutical, medical equipment and consumer goods sectors, China is a leading provider of intermediate materials and components. China affords global companies with skilled labor pools, modern infrastructure and its huge domestic market. While some lower-value industries such as apparel may shift production, high value tech and consumer electronic goods will continue to rely on China as a manufacturing location. Even as companies look to diversify global supply chains, selling in China will require their continuing to manufacture in China.
India: India’s goal to become a global manufacturing powerhouse and the Modi government’s spotlight on “Make in India” has prompted supply chain reform and state-based schemes and investment incentives. India wants to capitalize on supply chain shifts to attract multinational investment in the technology, defense, automotive, oil/gas, telecom and health sectors. India offers a large, English-speaking workforce and a growing domestic market. However, to attract supply chain investment, India must offer skilled labor pools, make investments in infrastructure, simplify tax and regulatory environments, and strengthen IP practices.
Japan: A recent Nikkei survey revealed that 70% of Japanese multinationals are considering supply chain revisions. The Abe government has proposed a $2 billion assistance package to help manufacturers shift production to Japan. But many Japanese firms say shifting output is impractical and uneconomical; they need to be in China because much of what they make is ultimately for the Chinese consumer, especially in the automotive and electronics sectors.
Southeast Asia: Even before the pandemic, multinationals began moving some operations from China to Southeast Asia. As China moves up the manufacturing value chain, markets such as Vietnam, Thailand and Indonesia offer lower costs. Diversification to this region offers reduced concentration risk and minimizes business disruptions. However, many manufacturing regions across Southeast Asia remain dependent on China for raw materials and intermediate goods.
Mexico: The US, Mexico and Canada trade agreement (USMCA) enters into force on July 1. Mexico believes the agreement will attract new supply chain investment by offering tariff-free trade, improved cross-border customs procedures, provisions for digital trade and services, stronger IP protections, and time zone parity with US manufacturers. One-third of USMCA trade is in the automotive sector; the agreement’s stricter Rules of Origin will require auto manufacturers to concentrate more of their supply chains within the North American bloc.
Brazil: Attracting supply chain investment depends on Brazil’s ability to make improvements in productivity and competitiveness, reduce taxes and bureaucracy, and fix infrastructure bottlenecks and exchange rate policies. The Trump administration wants to complete a mini-trade deal with Brazil by the end of 2020, but Democrats in Congress oppose any agreement with the Bolsonaro government. The EU signed a trade deal with Brazil and its Mercosur partners in 2019, but ratification is in doubt.
Edited by Albin Sikora and Jillian Nystedt
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