28 June 2023
Gain insights on adapting to disruptions, embracing emerging trends, and ensuring resilience in an evolving global economic landscape.
The global economy has experienced a series of unprecedented shocks in recent years, ranging from the COVID-19 pandemic to trade wars and geopolitical conflicts. These disruptions have upended the established norms of global supply chains and necessitated a reevaluation of sourcing strategies. As CFOs take on an increasingly critical role in managing risks and driving growth, it is imperative to understand the evolving landscape of global supply chains. In this white paper by Professor Jing Wu, Department of Decision Sciences and Managerial Economics, CUHK Business School, the impact of recent shocks, emerging trends such as “friend-shoring,” will be explored and valuable insights to guide businesses through uncertain times that lie ahead will be provided.
The Reshaping of Global Supply Chains
Traditionally, global supply chains have focused on cost efficiency and risk concentration, often favoring manufacturing hubs like China. However, the vulnerabilities exposed by the COVID-19 pandemic and trade wars have led to a restructuring of supply chains across industries and geographies. The notion of linear supply chains has given way to a more complex network perspective, highlighting the interconnectedness of players within the supply chain ecosystem. This paradigm shift offers fresh insights into managing opportunities and risks.
A notable emerging trend is the concept of “friend-shoring” – forging economic ties with countries that share political trust and common economic systems and values. This trend is gaining momentum and is likely to become a mainstay in supply chain strategies. The research also finds that supply chain links to different regions can either amplify or mitigate risk during disruptions. For instance, disruptions in China during the early stages of the pandemic increased supply chain risk for U.S. companies. However, as China resumed production and other countries were hit by COVID-19, having China in the supply chain proved valuable in mitigating risk.
The Role of Governments and Policy Uncertainty
Geopolitical tensions have increasingly intertwined with the restructuring of global supply chains. Professor Jing Wu’s research indicates that U.S. companies are now hiring former government employees to navigate the complexities of the global market landscape. These government connections offer flexibility and help mitigate uncertainties arising from geopolitical tensions. Additionally, government policies, including subsidies and regional trade agreements, are fostering the expansion of local manufacturing capacities.
Envisioning the Future
Based on Professor Jing Wu’s findings, there are four key predictions for the future of global supply chains:
Persistent Disruption: Geopolitical disruptions to global supply chains will continue to increase as international competition and tensions escalate.
China’s Evolving Role: Western multinational companies will gradually shift their production out of China, creating a manufacturing structure of “China + N.” India is poised to emerge as a competitive substitute and challenge China’s dominance.
Regionalization and Fragmentation: To counter supply chain disruptions, firms will diversify their sourcing by adopting reshoring, near-shoring, and “friend-shoring” strategies, leading to a new era of geoeconomic fragmentation.
Innovation and Modularization: While cost efficiency may be impacted, this fragmented form of supply chain globalization will drive innovation, particularly in areas such as manufacturing modularization and servitization. Smaller, creative groups within diverse networks will play a crucial role in driving these innovations forward.
As the global economy continues to navigate the aftermath of unprecedented shocks, CFOs must adapt their supply chains to maximize returns, minimize risk, and enhance resilience. By embracing emerging trends like “friend-shoring” and considering the evolving landscape of global supply chains, CFOs can position their organizations for success in the new economic order.