Global Supply Chain Changes Pick Up Pace to Yield New Opportunities

There had been some tempering of globalization fervour even before COVID-19 severely curtailed the movement of goods and people.

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Global supply chains are undergoing fundamental and accelerated restructuring, the latest Swiss Re Institute sigma study, “De-risking global supply chains: rebalancing to strengthen resilience“, says. The disruption to the flow of intermediate goods and services during the COVID-19 lockdowns has made governments and manufacturers ever more aware of the risks inherent in today’s increasingly complex, specialized and global production processes. Manufacturers, meanwhile, are speeding up their development of parallel supply chain operations in new host markets alongside existing production bases as a means to diversify and strengthen their operational resilience. Markets in Southeast Asia will be the preferred destinations as new host locations. There will also be some re-shoring of activities back to the US, the euro area and advanced markets in Asia.

“Global supply chain restructuring has become a key macroeconomic trend and the COVID-19 experience has accelerated changes, “ Jerome Jean Haegeli, Swiss Re Group Chief Economist, said. “During the pandemic, lockdowns brought international exchange to a near halt, making businesses, and governments increasingly aware of the impacts that disruptions in today’s very complex and specialized global supply chains can have.“

There had been some tempering of globalization fervour even before COVID-19 severely curtailed the movement of goods and people. A number of natural catastrophes over the last decade, such as the earthquake and tsunami in Japan in 2011, and widespread flooding in Thailand in the same year, inflicted costly supply chain interruptions across different industries. Rising political risks, such as new tariffs and a looming threat of global trade war, also prompted manufacturers to rethink their globalized production and sourcing strategies.

Parallel supply chains and duplicate sourcing strategies

Supply chain restructuring is also a question of national resilience. For example, the COVID-19 crisis immediately exposed vulnerabilities in the medical manufacturing supply chain. Government responses to the pandemic globally show that in times of crisis, international cooperation can be interrupted as countries prioritize according to their domestic needs, in particular to ensure fail-safe access to vital supplies.

From a business perspective, the driving force for accelerated restructuring of global supply chains is manufacturers seeking to de-risk their operations. In the 20 largest economies, 40–80% of exports are integrated into the global supply chain1 and, within this, China is the world’s largest production hub. Parallel supply chains will form as firms diversify their manufacturing presence across new locations alongside existing operations in China and elsewhere, in an effort to strengthen operational resilience.

Markets in Southeast Asia will likely be the preferred destination as new host locations, given their strong growth potential and competitive labor costs. Vietnam tops the list as an alternative manufacturing location. Countries with similar industry composition to China’s export sector and/or free trade agreements with the US, the EU and Japan also stand to gain. In this vein, Mexico and Brazil will benefit as suppliers to the US.

The healthcare, technology, consumer staples, textiles, and electronic sectors will be at the forefront of supply chain restructuring, which will also include some re-shoring of production activities back to advanced markets. New technologies such as robotics can simplify and shorten supply chains. For example, advances in industrial 3D printers can handle rapid prototyping and small-scale orders without sacrificing on quality. This allows for easier product differentiation and manufacturing that is closer to the customer. The US, euro area and markets in advanced Asia will benefit most from re-shoring.

Assuming a five-year transition period for these changes to take effect, Swiss Re Institute estimates that gross domestic product (GDP) growth in the alternative host markets for production processes will be boosted by 0.7% annually. In the re-shore markets, growth will increase by 0.2% annually.

Global and China growth impacts

The sigma study estimates the changes to global supply chains will generate combined export and investment value of close to $1 trillion in the alternative production locations over the five-year transition period. Global growth will gain by an estimated aggregate 0.2% each year in that period. In China, the government will likely enact additional fiscal stimulus to boost demand at home to compensate for the loss of some production activities to alternative markets, and to further the desired transition from an export-oriented to a domestic demand-led growth strategy.

Swiss Re Institute forecasts that after a slump in the first quarter due to lockdown, GDP growth in China will recover strongly. Full-year real growth is forecast to remain in positive territory at 2.7% in 2020, and to rebound to 7% next year. In contrast, growth in the US and euro area is expected to remain in negative territory this year, given the later easing of lockdown measures in these markets. The post COVID-19 recovery is forecast to push growth back up to 4.2% in the US and to 4.8% in the euro area in 2021.

Insurance to facilitate stronger supply chain resilience

Supply chain restructuring will have important implications for insurers, by generating new demand for risk protection covers and providing new opportunities for the industry to underpin global economic resilience. Insurance plays a key role in supply chain risk management. Supply chain, contingent business interruption and non-physical damage covers can compensate for losses resulting from incidents at suppliers.

“For insurers seeking to cover business disruption exposures, the more transparency there is on supply chain flows, the more insurable the risk becomes,“ Gianfranco Lot, Head of Globals Reinsurance at Swiss Re, says. “To this end, the industry is extending its digital technology capabilities, to better process and understand all the structured and unstructured data out there. The idea behind the Swiss Re Digital Market Center is to develop large-scale tools to predict and manage exposures, to facilitate the development of innovative risk protection solutions.“

The sigma report estimates the overall income effect from the higher growth created by supply chain restructuring will generate additional global premium volumes of around $63 billion cumulatively during the five-year transition period. This includes a one-time boost of $1.2 billion arising out of new demand for engineering covers during the construction phase of manufacturing facilities and associated infrastructure, and $9 billion for commercial insurance in the operational phase of the new facilities.