4 Special reportGlobal supply chains The EconomistJuly 13th 2019
21imposition of tariffs on America’s trading partners and renegotia-
tion of free-trade agreements, which have disrupted long-stand-
ing supply chains in North America and Asia. On June 29th, Mr
Trump agreed a truce with Xi Jinping, China’s president, that tem-
porarily suspends his threatened imposition of duties of up to 25%
on $325bn-worth of Chinese imports, but leaves in place all previ-
ous tariffs imposed during the trade war. He threatened in May to
impose tariffs on all imports from Mexico if it did not crack down
on immigration, but reversed himself in June. He has delayed till
November a decision on whether to impose tariffs on automobile
imports, which would hit European manufacturers hard.
Look beyond politics, though, and you will find that supply
chains were already undergoing the most rapid change in decades
in response to deeper trends in business, technology and society.
The rise of Amazon, Alibaba and other e-commerce giants has per-
suaded consumers that they can have an endless variety of pro-
ducts delivered instantly. This is putting enormous pressure on
mncs to modify and modernise their supply chains to keep pace
with advancing innovations and evolving consumer preferences.Arms race
The biggest force for change is technology. Artificial intelligence
(ai), predictive data analytics and robotics are already changing
how factories, warehouses, distribution centres and delivery sys-
tems work. 3dprinting, blockchain technologies and autonomous
vehicles could have a big impact in future. Some even dream of au-
tonomous supply chains requiring no human intervention.
However, technological advances also raise the spectre of an
arms race in supply-chain security. Aggressive private hackers and
state-sponsored cyber-warriors appear to have the upper hand
over beleaguered corporations and governments. Recent head-
lines have focused on America’s crackdown on Huawei, a Chinese
telecoms giant. But the issues involved go far beyond one firm, giv-
en that much of the world’s electronics-manufacturing and hard-
ware innovation takes place in China.
If a technology cold war breaks out, it would smash today’s
highly integrated technology supply chains and force an expen-
sive realignment. It may even lead to a bifurcation in the rollout of
5 g, a new telecoms-network technology that is the essential en-
abler of coming marvels such as the internet of things (iot). With
the proliferation of inexpensive sensors, the iotwill allow homes,
factories and cities to be digitally monitored and managed. A
“splinternet of things” (in which America followed one standard
and China another) would not only be cost-
ly and inefficient, it would also fail to ad-
dress legitimate security concerns about
future cyber-threats in the age of 5g.
Even if Huawei is eventually spared,
and the truce in America’s trade war with
China turns into a frosty peace, the era of
frictionless supply lines flowing from
Shenzhen to San Francisco and Stuttgart
has ended. As globalisation is transformed
into something messier, the consequences
for mncs and the world economy could be
momentous.
This report will show that supply chains
were already becoming shorter, smarter
and faster before politicians started taking
a hammer to the trading system. Given to-
day’s riskier world, supply chains will need
to become safer too. This transformation
threatens firms that have entrenched sup-
ply networks, but it also presents opportu-
nities for those that adapt nimbly. 7I
n the boomyears of globalisation from 1990, one of the ideas
that became gospel, spread by authors such as Thomas Fried-
man, was that the world had become flat. National boundaries
mattered very little in terms of sourcing and manufacturing, went
the argument.
The idea was so pervasive, says Hau Lee of Stanford University,
that “companies just built anywhere”. Now, as the outlook for glo-
balisation grows cloudy, companies are starting to question the
wisdom of the hyper-globalised supply chains thus created. Mr Lee
reckons that managers at mncs must now build new skills as they
reconfigure supply chains for a “bumpy” new world.
A survey conducted in April of 600 mncs around Asia by Baker
McKenzie, an American law firm, found that nearly half of them
are considering “major” changes to their supply chains, and over a
tenth a complete overhaul. In many sectors this will mean a re-
think of the role that China plays in sourcing. There are two main
reasons to expect that, after several decades of hyperextension,
some supply chains will get shorter. First, it is now clear that
stretching supply chains thin to make goods ever cheaper carries
risks. And second, global trade now includes not just things you
can drop on your foot, but a large amount of services.
In terms of the risks, most mncs do not know who supplies the
supplier to their supplier, but they might be held hostage if that
distant vendor cannot fulfil its obligations. The dangers are occa-
sionally brought to light by external shocks. Sometimes these are
delivered by natural disasters. In the wake of the Japanese tsunami
in 2011 a global semiconductor giant tried to map its vulnerabilities
to third- and fourth-tier vendors; it took a team of 100 executives
more than a year to work out which firms were in its extended sup-
plier networks.
More recently, shocks have been political. Brexit, Britain’s
messy departure from the European Union now scheduled to take
place at the end of October, could disrupt supply lines linking Brit-
ain and the continent. mncs have warned
that they may reduce operations in Britain
if it does. A survey by the country’s Char-
tered Institute of Procurement & Supply
indicated that a fifth of continental busi-
nesses would demand a hefty discount
from British suppliers for even a one-day
delay at the border, while more than a tenth
of British exporters expect contracts to be
cancelled outright.
Americans will not have to wait till Oc-
tober to see the impact of their political
shocks, as Mr Trump’s tariffs on steel, alu-
minium and Chinese imports are already
biting. A working paper by Mary Amiti and
colleagues published in March by the Na-
tional Bureau of Economic Research calcu-
lated that by the end of 2018 they had cost
American consumers $1.4bn a month. Re-
tailers are being squeezed, with Walmart
and Target warning of price rises to come.
Caterpillar, a manufacturer of farm equip-Bumpy new world
After several decades of getting longer, global supply chains are
contractingSlowbalisationThe new convergenceSource:Boston
ConsultingGroup*Incorporates wages, productivity,
energy costs and exchange ratesManufacturing-costindex*, United States=1008070 90 100 110 120 130
GermanyBrazilIndonesiaPolandBritain
JapanS. KoreaChina
India
Mexico2004 2018