Advances in production technology and a trend towards shorter supply chains make a return to “business as usual” highly unlikely.
By David East and Martin G. Kaspar
The impact of the pandemic on both global trade and foreign direct investment (FDI) has been dramatic. Even now, as some countries begin easing their restrictions to breathe life back into their flailing economies, the full effects of this virus are yet to be fully understood. Certainly, this pandemic has accelerated many trends that have been emerging over the past decade such as the implementation of a “China plus-one (+1)” strategy1, increasing automation and regionalism. The current model of globalization, particularly global supply chains, seems to be under threat of a radical reconfiguration. While many projects are still going ahead, numerous others have been put on hold. Depending on the duration and severity of the crisis, a significant number of manufacturing projects may even be cancelled completely as companies struggle economically in the short term and seek to re-structure their operations in the long term.
Traditional manufacturing companies, which in the previous months were busy shoring up liquidity to ensure their very survival, are now – in a second step – seriously questioning existing supply chain models. Planned production plants in low-labour cost countries (efficiency-seeking FDI) are stalling and supply chains are being re-structured in order to de-risk and shorten them. By the end of this process inter- and intra-company value chains might look significantly different. FDI project numbers show that this process has started already.
It is probably fair to say that even prior to this COVID-19 outbreak, globalization was creaking. An increasingly acrimonious trade war between the two main economic superpowers, Brexit, rising levels of geo-political risk as well as protectionist measures being put in place such as blocking FDI or M&A deals for “national security reasons”, rising numbers of non-tariff barriers (NTBs) or the weaponization of trade policy. But also, security related problems such as cybersecurity, terrorist threats and IP theft, as well as a rising societal resistance to the neo-liberal model in the form of anti-globalization movements and climate protests. In this sense, COVID-19 was merely the impetus for corporate managers to seriously contemplate a paradigm shift in the model of global value chains.
But it is the convergence of three major trends – market access, talent and technology – which make, for the first time, such a paradigm shift not only possible but even likely.
So, what does the future hold?
Unlike previous disruptions to supply chains, such as following the Fukushima disaster or the floods in Thailand, it is highly unlikely that we will see a return to “business as usual”. While up until now manufacturers simply had to return to their existing business model as quickly as possible owing to a lack of realistic alternatives, advances in production technology and changing market dynamics, are increasingly offering a wider field of options today.
David East is an experienced cross-border investment professional at Bureau van Dijk – a Moody’s Analytics Company. He is writing in a personal capacity.
Martin G. Kaspar works as Head of Corporate Development for a German Mittelstands company in the automotive industry. He is writing in a personal capacity.