Change in supply chains driven by sustainability, digitalisation, not trade war, say business leaders at Beijing forum

Date: Monday, November 25, 2019
Source: South China Morning Post

  • Big multinationals are increasingly ‘regionalising’ their supply chains, say panellists at Bloomberg’s New Economy Forum
  • Shift of factories away from China to avoid tariffs imposed by US is more of a ‘short-term tactical change’

Global supply chains are changing. But that has more to do with digitalisation, sustainability and the need for factories to be close to growing consumer markets than it does the US-China trade war, according to business leaders at Bloomberg’s New Economy Forum in Beijing.

Big multinationals are adopting a more “regionalised” approach to their supply chains, keeping them contained as much as possible within each geographical market and minimising the distances between suppliers, factories, vendors and consumers.

That has been a bigger driver of change than the tariffs imposed by Washington on Chinese goods, which have led many companies to shift their production facilities away from China, said the panellists at a session called “supply chains go global” on Friday.

“There are some very long-term shifts taking place and we are getting much more regional in the supply chain so you are closer to the customer,” said Noel Quinn, interim Group chief executive officer at HSBC.

“Companies do want to shorten their supply chain, they do need a response to changing business models, emergence of digital business models, [which] are making a fundamental change happen in the supply chains.

“There are also the tactical changes taking place of course because of the trade tensions.

“That is definitely happening as well, but I would put more emphasis on the long-term shifts, rather than the short-term tactical changes that are taking place.”

Digital models, the panellists said, made it cheaper for companies to enter new markets, and to communicate once there.

For more than a year the US and China have been mired in a standoff over trade, which has seen Washington slap some US$300 billion of tariffs on Chinese imported goods.

As shipping goods from China to the US has become more expensive, companies have moved their factories to cheaper export destinations in Asia, with Vietnam widely seen as the biggest gainer. A report by Japanese investment bank Nomura in June said Vietnam’s economy has been boosted by almost 8 per cent by the shift in production which has come as a result of the tensions.

Though companies are reacting to global trade tensions, the wider focus is on creating regionalised supply chains that are sustainable in the longer term, argued Daniel Martinez-Valle, chief executive officer of Orbia, a Mexican pipe and chemicals company.

“We are really focused on having very efficient, very secure, very reliable supply chains in terms of making them as regional as possible,” he said.

“We are starting to build much smaller plants in different parts of the world, and building those regional hubs and supply chains.”

Such changes ensure companies can be self-sufficient in different areas of the world, making communication and the time from production to delivery more efficient. This is only heightened by digital innovation, said Mike Roman, chief executive officer of manufacturing giant 3M.

“There is a physical time [aspect] of it – more efficient cycle time and supply chains – and digitising supply chains also enables them to reduce cycle time,” he said.

Even amid the geopolitical tensions, China will continue to be a huge production centre in years to come, said Quinn.

“Short term adaptations to manage the trade tensions are definitely taking place,” said Quinn. “But I think we have got to be cognitive of the fact that there is a significant production capacity that is difficult to replicate.

“I do think Asia is a regional hub for supply chains, [and it] will become even more important to be close to that consumer market that is emerging in Asia.”

 

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