The Economist - USA (2019-07-13)

The EconomistJuly 13th 2019 Special reportGlobal supply chains 5

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ment, expects tariffs to cost it $250m-350m

this year. Cummins, an engine maker, ex-

pects a hit of $150m.

Despite the truce agreed with Mr Xi, Mr

Trump’s tariffs on mainland imports re-

main in place and Huawei’s future is still

uncertain. China has imposed retaliatory

tariffs, is threatening to punish “unreli-

able” foreign firms and to withhold exports

of rare earths used to make electronics.

In short, a full-blown trade war may yet

break out. How much would it hurt?

Moody’s, a ratings agency, estimates such a

“conflagration” would cut growth in real

gdpin America by 1.8% one year into the

trade war, and reduce growth rates across

Asia by 1% or more. The oecdpredicts that

a trade war between America and China

could take 0.7%, or about $600bn, off glo-

bal growth by 2021. The imfwarns that

many countries, including those that ben-

efit from trade diversion, will be net losers.

Even if such an outcome is avoided, Mr

Trump’s actions may already have made an

impact on mncs. A recent survey of Euro-

pean firms by Credit Suisse, an investment

bank, shows an increased tendency to lo-

cate new investments in Europe, not out-

side it. The firm thinks that permanent

damage has been done by the recent trade disputes. mncs will “no

longer plan and source their supply chains predominantly on the

basis of cost”, it argues.

The trade war has also led to a rethink at Apple, which has re-

portedly asked its biggest suppliers to see how much it would cost

to shift 15- 30% of its supply base out of China to South-East Asia or

India. Liu Young-way, the new chairman of Foxconn, a Taiwanese

contract manufacturer that assembles most of Apple’s devices, re-

cently declared that his firm could supply all iPhones for the Amer-

ican market from plants outside China if necessary.

As for the rise in services, these are often intermediate inputs

into manufacturing. In 2017 global trade in goods amounted to

$17.3trn and trade in services, such as transport and communica-

tions, had risen to $5.1trn. The imfbelieves that, when measured

in value-added terms, the share of services exports in global ex-

ports is nearly twice as large as what official numbers suggest.

By the reckoning of the McKinsey Global Institute (mgi), a

think-tank attached to a consultancy, services already create about

a third of the value going into traded manufacturing goods. Trade

in services grew more than 60% faster than trade in goods over the

past decade, and two to three times faster in such fields as tele-

coms and information technology. As firms look to boost the value

of services and innovation, things that are often best done close to

consumers, mgi’s Susan Lund thinks they are less likely to chase

the cheapest labour globally.

Plan, source, make, deliver

“The supply chain has been viewed as a necessary evil for a long

time, trapping companies into incremental thinking,” argues Pete

Guarraia of Bain, a consultancy. mncbosses typically left it to mid-

level managers to squeeze out 1-2% a year in cost savings through

sourcing. Such customer-centric dynamos as China’s Alibaba and

America’s Amazon regularly push for 30% improvements in effi-

ciency. By “weaponising logistics”, argues Bain, they have shown

how supply chains can serve as a basis for competitive advantage.

Inspired and terrified in equal measure, bosses of leading mncs

are now re-examining how exactly their

firms “plan, source, make and deliver”—

the mantra of supply-chain managers

across the world.

As they do so, they will discover that

“slowbalisation” brings challenges of its

own. Mark Millar, author of “Global Supply

Chain Ecosystems”, argues that just be-

cause supply chains shrink does not mean

that they simplify. Quite the opposite. The

point of getting closer to the consumer is to

help companies expand customisation, ac-

celerate innovation and speed up delivery.

Not everyone agrees that globalisation

is slowing. Frank Appel, chief executive of

Deutsche Post dhlGroup, a German ex-

press-shipping and logistics giant, insists

that longer-term fundamental forces, such

as the rise of middle classes globally and

productivity gains from digitisation, still

favour global integration. A study pub-

lished in February by his firm found that

international flows of trade, information,

capital and workers increased in 2017.

However, that was before the full impact of

Mr Trump’s tariffs and immigration crack-

downs hit the global economy.

A more recent analysis by The Economist

of a dozen factors related to globalisation

found that eight pointed to a decline in connectedness (see chart).

Pankaj Ghemawat of nyuStern School of Business, one of the au-

thors of the dhlreport, sees a “semi-globalised” world in which

international threats and opportunities matter but most business

activities take place domestically. For most firms, this will mean

supply chains will need to become not just shorter, but also faster

and smarter. 7

Less connected

Sources:IMF;UNCTAD;BIS;OECD;Bloomberg; IATA; UPU; McKinsey

*2016†2017‡ComparedwithUSGDPperperson,growthrateatPPP

World,2007-18

1.5* 5.0

1.3 3.5

34.7 56.6

49.7 81.0

17.1† 17.9

44† 46

58.458.0

31.130.8

4.7 5.1†

2.8 5.3

50.3 176.1†

11 704†

2007 2018

Gross capital flows,

% of GDP

FDI flows,

% of GDP

Stock of cross-border

bank loans, % of GDP

Share of countries

catching up‡, %

Multinational profits,

% of all listed firms’ profits

Intermediate imports,

% of GDP

S&P 500 sales

abroad, % of total

Trade in goods &

services, % of GDP

Permanent migrants

to rich world, m

International parcel

volume, m

Int’l aircraft travel,

Revenue passenger km, bn

Cross-border bandwith,

terrabits per second

G

lobalisation is becoming regionalisation. Analysis by mgi

finds that the global value chains (gvcs) in 16 of 17 big indus-

tries it studied have been contracting since the global financial cri-

sis. Trade continued to grow in absolute terms from 2007 to 2017,

but during that period exports in those same value chains declined

from 28.1% to 22.5% of gross output. The biggest declines in trade

intensity were observed in the most heavily traded and complex

gvcs, such as those in clothing, cars and electronics. As mgi’s Su-

san Lund explains, “more production is happening in proximity to

major consumer markets”.

China’s role as the world’s workshop is starting to fade, but sur-

prisingly this may not sound the death knell for mainland manu-

facturing. Thanks to its skilled labour force and excellent infra-

structure, China remains an outstanding place to make things,

hence its continued strength in numerous sectors (see chart on

next page). Also, the rise of the Chinese middle class has led many

firms to redirect production to serve the local market. So mncs are

LovingChina, leaving China

A look at where clothes, cars and computers are made reveals

differing patterns of supply fragmentation

Three industries