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Monday, 10 August 2020

Over a quarter of global product sourcing will move to new countries, study finds

Good news if you’re looking to integrate your company into the global supply chain — a “reordering” of the system could open up new windows: More than a quarter of global product procurement could shift to new countries over the next five years, a new study by McKinsey Global Institute shows. Products worth up to USD 4.6 tn are at stake due to cost considerations and state pressure on manufacturers to become more self-reliant, the research arm of the global consulting firm said in a report. The findings highlight the pandemic-induced shift from long supply chains to “resilience and regionalization,” which were building [up even] before the pandemic hit, says the Financial Times.

The need for resilience: According to MGI’s report, companies can expect a major disruption to their supply chains every 3.7 years, leading to a loss of over 40% of a year’s worth of profits every decade. This is a result of trade tensions, cyber threats, and environmental risk subjecting businesses to “costly interruptions,” said MGI partner Susan Lund.

The take-home lesson: Diversify and keep it in your neighborhood. Companies need to have options and also bring their supply chains closer to home, Lund said. “You can invest in supply chain resilience and still come out ahead.”

Analysts are split on whether we’re going to see a reversal of globalization. Although Boston Consulting Group recently said that US-China trade could shrink by up to 15% from 2019 levels come 2023, S&P Global Ratings analysts say US companies may still be hesitant to lose access to the world’s second-largest economy (and largest manufacturing hub). Many in the US have, however, admitted that their supply chains are becoming overdrawn and complex, Lund said. On the flipside, markets sage Mohamed El Erian had said back in May that we’re entering an era of deglobalization, which will be driven largely by changing company behavior. Businesses will move away from relying on “just-in-time” models as resilience and sustainability become watchwords. That means they will begin localizing supply chains, and that also means there will be an increased intertwining of the public and private sectors in developed markets.

Want more? Go read The great trade unwinding, by the FT’s Rana Foroohar for how this fits into the “dramatic” change we’re about to see in global commerce patterns.

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