A new report reveals the full extent of the relocation and reorganization of global supply chains now underway, and how it is being accelerated further by COVID-19.
Reimagining Supply Chains: Recovery and Renewal in Asia Pacific and Beyond, focuses on the Asia Pacific region as a vital intersection of global supply chains, and how trade wars, digitalization, ESG demands and the pandemic are now redrawing the supply chain map in this vast region.
The research, from Baker McKenzie and Silk Road Associates (SRA), examined export market share across 350 product categories and 150 countries. It found that while the earlier part of the decade was relatively static in terms of production and share of exports, between 2018 and 2019 there were some significant swings from China towards other emerging markets in many, but not all, sectors.
Chief amongst these was the consumer goods sector, in which China's share of global exports dropped by 4% (from 46% to 42%) in one year. The difference was picked up across Southeast Asia, Latin America and Europe. Southeast Asia in particular gained an additional 2% share of global consumer goods across key export categories, including smartphones and furniture.
There were also notable swings away from China in areas including computer hardware and audio visual and comms tech exports. Specific countries benefitting most from this trend included Vietnam and Mexico.
However, China will take heart that while some low-cost manufacturing activities continue to shift to other geographies, in certain areas where China has a strategic focus, such as the energy, mining and infrastructure equipment space, they are actually gaining export market share, in part fueled by the Belt & Road Initiative.
Therefore the simplistic view that production is moving out of China is not borne out by the data. Instead it offers a complex picture of a new, more agile landscape emerging, that is impacted as much by specific sector issues, geopolitics, sustainability concerns and the desire to bring essential production onshore as it is by labor costs and tax incentives.
Digitalization and Sustainability
Meanwhile, the digital transformation of supply chains is also accelerating. According to the report, just as workplace technology has made great strides due to the pandemic, so too will the management of global supply chains as companies increasingly combine geospatial technologies with AI to identify potential risks, bottlenecks and underperformance in their supply chain.
Anne Petterd, Head of International Commercial & Trade, Asia Pacific, said "Leading multinationals will likely look to integrating preemptive risk management and much deeper data analytics into their supply chains. Being able to fully map their supply chain to understand the geographic location of suppliers and feed the maps with alternative data, such as natural disasters or lockdowns, can help companies to have in-built defenses against large shocks to their supplier ecosystems."
Businesses are therefore increasingly likely to move away from reliance on a single supplier in a high-risk location (e.g. flood-prone industrial park) or on a cluster of suppliers all located in the same concentrated area.
Sustainability is also shaping the future of supply chains. Nikolaus Reinhuber, Chair, Global IMT Group, notes that labor cost has been a key driver to manufacturing in low-cost countries, noting, however, that "there are additional drivers ranging from quality to reliability, and including the implications from changing or developing regulatory frameworks, as well as higher ESG standards required by customers and investors."
COVID-19 has brought into sharp relief the need for this supply chain digitalization and diversification. According to Baker McKenzie, through client conversations with multinational companies across the Asia Pacific region in various industries, there is clearly a rapidly increasing importance being placed on supply chain management, from operational teams to the boardroom.
While many companies in the short term look to secure lower-cost suppliers and focus their efforts on maintaining their financial health and even just survival, in areas such as PPE, businesses are already being highly incentivized to onshore production.
Longer term, businesses increasingly see the need to have a more fundamental reimagining of supply chains. The supply-side shocks that characterized the early part of the pandemic have seen many companies preparing for substantive supply chain restructuring, albeit with many waiting until economies further stabilize.
The combination of all of these factors will result in a very different supply chain landscape by the mid-2020s.
Ben Simpfendorfer, Founder & CEO, Silk Road Associates, said: “The global supply chain faces historic disruption. We will see more change in the next five years than the last 20. We are moving to a new model entirely shaped by competing forces, from US-China trade tensions, to COVID-19, to rising automation and digitalization.”
Five Key Global Supply Chain Trends
- US-China trade relations are the big driver of supply chain change
- Based on trade data from Silk Road Associates, China has lost global export market share at an accelerated pace in 2019.
- Companies have managed to negotiate tariff exclusions with the US Department of Commerce. The prospect of winning exclusions may delay the shift in production for companies that are either unable to find easy alternatives to China or those who are capital-constrained in today’s economy.
- In Southeast Asia, manufacturing capacity including land, labor and logistics will determine potential growth as a supply chain hub.
- Latin America is another alternative for fast-moving buyers. In particular, Mexico has been capturing global export market share, buffeted in part by the United States-Mexico-Canada Agreement (USMCA) which has paved the way for reducing barriers such as customs administration and trade.
- China has a growing importance to key sectors, especially the Industrials, Manufacturing and Transport (IMT) and Energy, Mining and Infrastructure (EMI) industries. Research interviews show that American, European and Japanese firms cite China’s large and growing market as a reason to retain manufacturing in China. A European Chamber of Commerce's Business Confidence Survey in June 2020 showed that 65% members still rank China among their top three destinations for new investment.
- China’s global market share of exports to the emerging markets has risen across almost all categories.
- Foreign multinationals are also using China as a manufacturing base to sell into the emerging markets.
- Across all sectors, digitalization will impact how firms facilitate and manage supplier relationships as well as logistics and shipping processes. Automation and IoT are now also front and center in supply chain shock-proofing against disruption.
- Healthcare and Life Sciences (HLS) companies are undertaking Power Purchase Agreements (PPA) using clean energy sources.
- COVID-19 has meanwhile accelerated the adoption of 3D design technologies, as teams are forced to collaborate remotely and share digital assets with manufacturers. 3D design technologies are not new, but adoption rates are now expected to rise sharply.
- Governments will re-shore critical medical production, especially PPE products, such as masks, protective goggles, and protective gowns.
- Raw materials are the key constraint on domestic production and advanced economies will move quickly.
- Governments will use low-cost loans, financial subsidies, and long-term contracts, to spur domestic production. Production relocation for critical media products is likely to be rapid.
- Governments will also use a range of tax and investment incentive packages to encourage new job-creation supply chain activity, such as in advanced manufacturing.