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Supply Chain Ship

Shifting Supply Chain Winds Favor Regionalism, Restructuring

Feb. 21, 2023
Those who are willing to adapt will reap the benefits.

The world economy is undergoing significant changes as we shift from a global approach to one focused on regional and national production. Demographic, geographic and political factors are reshaping our world and driving the change. Going forward, companies will need to continue to navigate supply chain disruptions, China risk and concerns about capital outlays in a rising interest-rate environment.

The new paradigm will not be defined by the globalization that dominated the last half-century. While this transition presents challenges, it also opens up exciting new opportunities for those who are willing to adapt. 2023 is an opportunity for companies to work together to restructure and regionalize their manufacturing value chains.

Let’s take a look at some of these challenges and opportunities.

The American China Crisis and Taiwan

The post-COVID world has escalated tensions between the United States and China, with allies involved on both sides. Companies will continue to need to navigate supply chain disruptions, China risk and concerns about capital outlays in a rising-interest-rate environment.

China has reopened and will continue to deal with the impacts of COVID for many years. Official Chinese policy is that Taiwan is part of China, and therefore any action by China to bring Taiwan closer is an internal matter that other nations should refrain from attempting to influence.

While the rhetoric for breaking ties with China is strong, there are complicating factors. The U.S. trade deficit with China is again growing. Consumers want the low-cost products they can get through the Chinese manufacturing value chain. Meanwhile, higher interest rates and fear of a recession are driving caution among manufacturers around investment in regional production capacity outside of China.

Many companies are hoping the conflict cools, but hope is never a good strategy.

Looking deep into supply chains to understand what components originate in China is now more critical than ever. Executives and boards that ignore the post-China value chain plan are putting their companies' futures at risk with a clear, quantifiable and mitigatable situation.

Regional Industrial Labor and Skill Shortage

Companies are looking to low-cost manufacturing zones in North America and Europe in an effort to move higher-value production to the region. Much of the shift to date has been items where a logistics penalty supported a more rapid move. Challenges exist for smaller commodity components with low margins, which are currently manufactured in China. These parts, mostly taken for granted, will be those that likely stress supply chains in the near future.

Purchasing and supply-chain teams need to unite in their efforts to regionalize a value chain. Lobbying for government support to bring low-margin and -cost components will be necessary. Without subsidies, regionalization may not happen for these components, connectors, small handwork parts, etc. That would constitute a national security risk for the United States and European Union.

The West will pay the price if war breaks out with broader Europe. Eastern Europe, which has historically been the focus of low-cost labor for Germany and the wider European manufacturing base, is now seen as higher-risk as the conflict in Ukraine continues to escalate. Manufacturers in the region continue to re-evaluate sourcing decisions and need to have executable contingency plans with trigger events defined to rapidly relocate production.

Mexico continues to shine as the heart of the North American low-cost manufacturing engine. While the labor market remains tight in Mexico, universities continue to produce a record number of engineering graduates. This white-collar workforce has given the country a robust position as the center for regionalization in North America. Major cities including Mexico City, Monterey, Querétaro and Guadalajara are all experiencing direct labor constraints, but there are many areas with both facilities and labor that can be leveraged for rapid relocation.

There will be an increasing push to bring manufacturing back to the regions as tensions with China grow. If a conflict with China occurs, then it will become a crisis-driven imperative. Companies that move now will have a significant competitive advantage as the current globalization paradigm evolves.

Shifts in the Semiconductor Industry

The Biden administration has taken steps to engage allies and block further development of a Chinese semiconductor industry. These efforts have made it illegal for Americans to work with Chinese semiconductor companies. The Netherlands and other key allies in the value chain are supporting the Biden administration in this effort. This will open a short window to take advantage of capacity to expand and build more fabrication capacity in the West, but government subsidies, in the U.S. and elsewhere, are needed to make it happen.

The semiconductor lifecycle has historically been cyclical, and this time is no exception. COVID drove a rapid expansion and refresh in consumer electronics, pulling this cycle ahead. Automotive companies suffered, but availability is temporarily increasing. However, with the shift to electric and autonomous vehicles requiring a growing number of semiconductors per vehicle, we will see constraints re-emerge. The market will again tighten in 2024, and both automotive manufacturers and consumer electronic companies need to be prepared.

The Ongoing War in Ukraine

The Russian war in Ukraine continues to be a serious humanitarian crisis, and the ongoing escalation increases the risk of a land war in Europe. While we’ve not seen predictions that this will be equivalent to the world wars of the previous century, there continue to be disruptions across Europe. Neon gas supplies remain tight, impacting semiconductor production, and both food and energy prices will stay high because of the Ukraine conflict. 

Companies should be evaluating a shift to military and government production if the Ukraine war breaks out to a larger conflict in Europe. Understanding what products your team could manufacture and having a contingency plan in place is a good risk mitigation strategy. The global manufacturing value chain will continue to transform as geopolitical tensions re-emerge and dominate the risk landscape. Based on the extent of the risks, there is a short window for companies to re-engineer value chains for risk mitigation and regional optimization.

Ambrose Conroy is founder and CEO of  Seraph, a global enterprise consulting firm that partners with business leaders to handle their most complex supply chain, operations and manufacturing challenges, delivering long-term operational and leadership improvements. Prior to Seraph, Ambrose was the vice president of supply chain Solutions at NAI Global. His areas of expertise include M&A, crisis management, restructuring and turnaround.

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