After two years of supply chain problems, the majority of efficiency-seeking foreign direct investment (FDI) firms have started searching for alternative suppliers.
Even the most ardent proponents of the type of globalization we became accustomed to in the early 2000s are now accepting that we have entered a phase of de-globalization and decoupling of global value chains (GVCs). The underlying reasons for this trend (political, protectionist, environmental and economic) have already been extensively discussed. Add technology, such as robotization and smart factories, and a greater focus on supply chain resilience to the mix, then there is no stopping this trend from taking over. The question therefore is not ‘whether de-globalization is actually happening’, but rather ‘what does this mean for international business?’. Another question that arises in this context is how this development can be effectively managed to keep at least parts of our free trade system intact. We are witnessing changes in supply chains on a scale that is fundamentally turning industry logic upside-down, and their effects on energy markets serve as a useful analogy. What impact will these changes have on GVCs? Much like with the revolution in energy markets, the depth and duration of these changes will largely depend on how long this current phase of ‘disturbed equilibrium’ will last. The changes will gradually become more irreversible the longer this period of ‘disturbed equilibrium’ lasts. The Ukraine crisis might have led to a cooling of relations between the West and Russia and a blip in oil and gas supplies; we might have even returned to the initial status quo. Yet with no signs of the armed conflict letting up, public opinion (and by extension, political options) is shifting. Europe has started expanding its infrastructure and pursuing new energy relationships (e.g. brokering new gas deals with Qatar, building liquefied natural gas (LNG) terminals across the continent, or driving the European Hydrogen Backbone initiative coupled with a rapid expansion of renewable energy production). A return to the status ex ante would in the meantime be costly, considering the stranded assets this would give rise to.
Similarly, after two years of supply chain problems, the majority of efficiency-seeking foreign direct investment (FDI) firms have started searching for alternative suppliers. Some may have found alternative suppliers in the wider Regional Comprehensive Economic Partnership (RCEP) area, whilst many more are shortening their supply chains and sourcing much closer to home. While China +1 might contribute to diversifying supply chains (e.g. by sidestepping the CCP’s policy on COVID-19 lockdowns), it does not solve the problem of over-extended supply chains, freight-cost hikes and harbour closures. The more companies invest in robotization, the more experienced they become in applying smart-factory technology, and the less likely it is that they will want to rely on suppliers on the other side of the globe.