The fractured global supply chain
Dennis Unkovic
Partner
Meyer, Unkovic & Scott, LLP
United States
The global supply chain is fracturing, and these disruptions promise to permanently alter the global economy going forward.
Let me begin by dispelling one widely held misconception; the collapse of the global supply chain is not the result of the COVID-19 pandemic, COVID-19 accelerated a breakdown that has been underway for years. Beginning in the mid-1980s, under pressure from investors and financial experts to post higher profits, American and European companies began shifting manufacturing jobs to countries in Asia with much lower labor rates. The inevitable decline in manufacturing weakened their domestic markets, and eventually these companies came to realize that cheap labor was not enough reason to upend operations and move jobs overseas. This was particularly true for American and European companies who moved their operations to China where labor is no longer cheap.
There are four MaxTrends™ which I believe are fundamentally changing manufacturing in the global economy.
MaxTrend™ one: Cyber warfare
The last several years have seen cyber attacks increasing on American and European companies. One memorable attack occurred when the Colonial Pipeline was hacked and pipelines were paralyzed along the eastern coast of the United States for more than a week. Cyber criminals know that supply chains, because of their complexity, make tempting and easy targets. Far too late, companies are learning that their supply chains are extremely vulnerable, particularly when spread around the world. American and European companies need to undertake a comprehensive risk analysis of their existing supply chains and, where possible, move them out of Asia and closer to home.
MaxTrend™ two: 3D printing
The revolution of 3D printing (a/k/a “additive manufacturing”) is changing the dynamics of manufacturing. No longer does a component have to be produced in large numbers by low-paid factory workers on the other side of the world. 3D printing gives companies a better option to produce not just prototypes but also parts and components in large quantities. More efficient and economical production processes encourage local manufacturing, which will negatively impact Chinese companies as they face real competition for the first time in decades.
MaxTrend™ three: Robots
The impact of robots is increasingly being felt in our everyday lives. More and more, robots powered by artificial intelligence (AI) are working alongside humans in factories and warehouses, increasing speed, efficiency, and workplace safety. Amazon and other major online retailers have changed the landscape of how consumers are purchasing goods and demanding overnight delivery; localized sourcing of these consumer goods brings immediate availability and lessens the dependence upon the global supply chain. While robots will never fully replace human workers, they are erasing the need for overseas labor.
MaxTrend™ four: The growing role of governments
COVID-19 alerted governments to how vulnerable they are to foreign-based supply chains. At no time was this more obvious than when countries were trying to source personal protective equipment (PPE) and vaccines. Led by the U.S., countries are adopting policies to encourage, and in some cases mandate, that strategic products be manufactured within their borders. For example, semiconductor chips which are essential to all modern automobiles and many other devices are increasingly in short supply. Less than 18% of the chips used in the U.S. are domestically sourced. The Biden administration is increasingly aggressive, through tax incentives and mandates, that strategic products such as these chips be manufactured within the borders of the United States.
What is coming
Driven by the four MaxTrends™, there will be a decrease in importing Chinese-manufactured goods. Over the next five years China’s two decades of dominance over global manufacturing will decline. Since China currently makes products and components valued at US$2.4 trillion annually, this will have an impact on the global economy. American and European manufacturers will be forced to realign or reshore in order to be competitive. Since Chinese labor is no longer inexpensive (which was the main attraction to China), companies will be incentivized to either move their supply chains to countries such as Malaysia, Indonesia, the Philippines, and India, or back to domestic suppliers. Additionally, critically valuable goods vulnerable to cyber-attacks or easily produced through 3D printing are most likely to reshore back to the United States and Europe.
This will not occur overnight or without proper tax incentives. Hopefully western political leaders will take note and act quickly. This is a unique period, and if Europe and the United States are smart, they can recapture the manufacturing capabilities lost over the last three decades and regain their economic power.
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