Terror and Corruption Are Reshaping Global Supply Chains

Terror and Corruption Are Reshaping Global Supply Chains

“Business as unusual” is the new order of the day when it comes to global expansion.

Terrorism. Corruption. Supply chain disruptions. Property damage. Volatility in fuel prices and other commodities. Concerns over a slowing global economy. If you were anticipating a quiet and serene start to 2016, think again.

More than one-fourth (27%) of the respondents to a recent survey conducted by insurance provider Clements Worldwide say their organizations have delayed or canceled global investment and expansion over the past year due to one or more risk factors such as those named above. Cyber-terrorism (i.e., datahacking) was by far the most frequently cited threat, with roughly 62% naming cyber-terrorism as either their greatest concern or of high concern.

Twenty percent of respondents say they’ve reported losses in the past five years due to terrorism, and 24% have reported damages due to political or labor unrest.

“Business as usual is a thing of the past,” says Chris Beck, president of Clements Worldwide. A dramatic rise in instability and violence overseas has had an impact on individual safety, operational planning and organizational liability. “Ever increasing unpredictability is the new normal for which organizations need to be prepared,” he states, which includes proper planning and appropriate investment in sound strategies.

In a separate study of global markets, India has supplanted China as the country with the most growth potential, according to the Emerging Markets Logistics Index conducted by supply chain solutions provider Agility. India alone, among the five largest emerging markets, or BRICS (Brazil, Russia, India, China and South Africa), was a bright spot in 2015, a year which was “characterized by falling trade volumes, depressed commodity prices and geopolitical instability that combined to slow growth in emerging and developed markets alike,” says Essa Al-Saleh, CEO and president of Agility Global Integrated Logistics.

Indeed, according to Boston Consulting Group, manufacturing hourly wages in India are nearly a third of what China pays: $5.36 vs. $14.60.

Based on the study’s results, the majority (61%) of the supply chain executives polled say they are unclear on the direction of the world economy and expect to see more market turbulence. The two biggest problems associated with doing business in emerging markets, according to the study, are corruption and the lack of adequate transportation infrastructure.

The five countries with the most potential to grow as logistics markets over the next five years are:

  1. India
  2. China
  3. Brazil
  4. Indonesia
  5. Vietnam.

Conversely, the five least attractive emerging logistics markets are:

  1. Syria
  2. Iraq
  3. Ethiopia
  4. Libya
  5. Iran.

Interestingly, Brazil, China and India also made the list of the least attractive countries, ranking 17, 18 and 20, respectively.

“The world’s economy is still riven by instability, and emerging markets such as China and Brazil have not been immune,” notes John Manners-Bell, chief executive of logistics analyst firm Transport Intelligence. “However, others, such as Mexico, are in a far stronger position and will benefit from the economic growth experienced in the U.S. and Europe. More than ever, investors in emerging markets need to be discerning.”

As the report notes, economic turbulence and uncertainty in emerging markets are major factors in why supply chain executives prefer to do business in countries known for having fair, open and transparent legal and regulatory institutions. “The effects of corruption on business operations are clear,” the report states. “Whether it manifests at the highest levels, affecting contract awards or investment decisions, or lurks in day-to-day operations with payments required to process loads through ports or checkpoints, corruption fundamentally reduces the capacity [to] operate efficient and profitable businesses.”

And there’s always the traditional option: Don’t go global at all. According to a survey of large U.S. manufacturers conducted by Boston Consulting Group, 31% say they’re most likely to add production capacity in the U.S. for goods sold in the U.S., while 20% say they’d add capacity in China. That’s a shift from 2013, when only 26% said they’d add capacity in the U.S. and 30% said they’d offshore to China.

What could slow any sustained reshoring movement back to the U.S. are rising U.S. healthcare costs, federal and local regulatory uncertainty, increases in the U.S. minimum wage, and unclear progress on tax reform, the BCG survey notes.

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