The EconomistMay 16th 2020 BriefingGlobalisation 592
1I
f a vengefuldeity were to design a
weapon to wield against the global sup-
ply chains that characterise modern busi-
ness, it might well hit on a virus which hit
production facilities all around the world.
In the face of covid-19, though, the sinews
of business have, for the most part, held up
remarkably well.
Air freight has suffered, but shipping
has steamed on—and its comparatively
long transit times have provided a buffer to
the supply shocks which followed China’s
shutdown. Prologis, an American com-
pany which operates one-and-a-half Man-
hattans-worth of warehouse space around
the world, says that 95% of its customers
have remained at least partially operation-
al. Systemic risks such as those which
brought the banking industry crashing
down during the financial crisis have, as
yet, failed to materialise.
This is not to say that business is boom-
ing. But it is demand, not supply, that is
lacking. To the extent that the sinew is not
working it is for want of a task, not for want
of strength.
That companies have been aflurry over
their supply chains is not in doubt. From
January to May supply-chain disruption
was mentioned nearly 30,000 times in the
earnings calls of the world’s 2,000 biggest
listed firms, up from 23,000 in the sameperiod last year. Mentions of “efficiency”
declined from 8,100 to 6,700. Managers
know that supply chains are good conduits
of economic pain. Looking at the aftermath
of the tsunami and earthquake which hit
northern Japan in 2011 Vinod Singhal, Brian
Jacobs and Kevin Hendricks, three man-
agement scholars, found that the share
prices of suppliers to companies directly
affected dropped by 4%, and those of their
customers by 3%.
The sources of disruption, and thus
pain, can be impressively obscure. In 2012,
a month after a fire at a factory in Germany,carmakers from Düsseldorf to Detroit
found themselves facing production cuts.
It turned out that Evonik, the factory’s
owner, was responsible for between a quar-
ter to a half of the world’s supply of cyclo-
dodecatriene, a precursor chemical to a
resin widely used in the business. Otto
Kocsis, who works for Zurich, an insurance
firm, has found that while the proportion
of disruptions that can be attributed to “tier
one” suppliers—those with which manu-
facturers deal directly—fell during the first
half of the 2010s, the proportion which
could be attributed to companies that
manufacturers hardly knew they were
dealing with, like Evonik, shot up.
One way to avoid such pain is to keep as
diverse a supplier base as feasible—some-
thing which also helps you deal with cus-
tomers quick to change their fancies. Zara,
a Spanish fashion retailer, exemplifies the
approach, with its different frock lines
reaching the shops entirely independently.
Another is to maintain spare manufactur-
ing capacity. Though companies may pride
themselves on their lean manufacturing,
the world’s factories do not typically run at
full tilt: across the world the proportion of
their potential capacity which industrial
firms actually use has been flat or falling
over the past two decades.
Then there is inventory. It is widely as-
sumed that modern supply chains relent-
lessly eat away at this source of resilience,
but that is not entirely true. Investors can
punish firms if they start piling up stock,
especially if there are other signs of trou-
ble. But they also look askance at firms that
cut too close to the bone.
Hong Chen, Murray Frank and Owen
Wu, another trio of business-school pro-
fessors, have looked at the period between
1981 and 2000 when average inventories in
America Inc declined from 96 days to 81
days. The share prices of the companies
which slashed inventories by the most and
of those which did not cut at all both suf-
fered compared with those which made
moderate cuts. Work by Ananth Raman and
a colleague at the Harvard Business School
shows that when a sharp increase in opera-
tional performance is followed by some
sort of downturn, investors pay heed to the
nature of the setback. If it is down to some
exogenous factor, such as a flood, the firm
goes unrebuked. If it is down to an internal
issue, and so suggestive of excessive cost-
cutting, returns on investment decline by
3.8 percentage points.
Since the financial crisis of 2007-09
companies have actually been increasing
the amount of stock they have on hand. In
America the ratio of inventories to sales
just before the pandemic had risen to levels
last seen in the early 2000s (see chart). The
expansion of warehouse space that has re-
cently been seen around the world is not
just down to the rise of e-commerce—Businesses can cope with awful surprises—up to a pointBusiness resilienceHanging together
Not that lean
United States, inventory-to-sales ratioSource:CensusBureau1.61.51.41.31.21.1201510052000951992alise savings. Bernard Hoekman of the
European University Institute warns that
companies may choose to automate ser-
vices rather than to offshore them. The
same warning applies, in reverse, to people
hoping that reshoring production brings
back jobs. It may do if you are an engineer.
It will not if you wait tables.
As defenders of the status quo try to ex-
plain that strength lies in openness, and
critics crow about globalisation going too
far, the reality is that both will probably get
their way. The medical and pharmaceutical
sectors should expect pressure to localise
more of their production in those coun-
tries that have enough clout to apply it.
Those Chinese companies hoping to take
advantage of the global market in ideas will
find it harder to access. Foreign acquisi-
tions will be treated with suspicion. Ameri-
can scrutiny of their suppliers will make
international commerce harder.
But once companies can start investing
again many will continue to set up theirsupply chains in such a way as to chase the
next source of growth—mindful, of course,
of governments prone to placing obstacles
between them and their favoured suppli-
ers. It is something global business knows
how to do pretty well (see next story). “If I
were advising Davos man, I would advise
him to keep quiet and take it on the chin,”
says Mr O’Rourke, adding that his study of
history has taught him the benefits of mod-
eration in all things.
That return to the norm could be im-
peded if political leaders see the public de-
sire for security as requiring an all-out as-
sault on what went before. “It was clear that
this kind of globalisation was ending its cy-
cle,” Emmanuel Macron, the president of
France, recently told the Financial Timesin
a disquisition on the lessons of the covid-19
pandemic and the retrenchment it might
bring. If so, better for the world to start a
new, rebalanced cycle, less centred on a
single dominant exporter, than to give up
on the process altogether. 7