In recent articles, Mark has explored some key shifts in globalisation trends, including how companies are implementing near-shoring strategies, and the resulting movement towards more regional supply chains.
This month, Mark examines how the globalisation landscape is changing – looking at some of the broader influences that are altering global trade patterns – and the implications for related freight flows and global supply chains.
For many years, greater globalisation has seen producers chasing the next low-cost manufacturing location, leading to increasingly convoluted and complex global supply chain ecosystems.
Out-sourcing and off-shoring initiatives originally fuelled the growth of low-cost labour-intensive manufacturing in Asia, resulting in China becoming known as the ‘Factory of the World’. As production was unbundled on a large scale, supply chains evolved to support this shift – expanding geographically and becoming ever more complex in the process.
But more recently, the increasing cost burden of managing global supply chains, intensified by rising labour rates in China and elsewhere in Asia, has led many companies to pursue near-shoring and on-shoring strategies, leading to regional supply chains where goods are produced in – and distributed from – locations that are closer to the end consumer market.
This shift – beyond global, to a more regional approach – is a key driver in the changing landscape of globalisation, with important implications for every company involved in global trade.
Protectionism accelerating at a time when global trade growth is slowing
A number of factors have combined to produce a perfect storm for globalisation – resulting in an ever-evolving and more complex landscape for producers.
Growth rates for both GDP and trade volumes have slowed considerably; the World Trade Organisation expects 2017 volume growth in global trade of just 2.4% for the year, well below GDP growth expectations of around 3.0%.
A rise in populism and protectionism, as witnessed through the Brexit and Trump electoral outcomes, is also being reflected in more and more protectionist trade policy measures. Governments are increasingly introducing barriers to international trade – such as tariffs – to protect their domestic industries. According to Global Trade Alert, more than 800 new discriminatory trade measures were introduced worldwide last year, compared to just 354 liberalising measures.
Many companies are also faced with the latest reality of ‘Emerging Markets Developing’; largely as a result of globalisation, many emerging markets in recent years have enjoyed increased economic prosperity across the board, resulting in expanding consuming classes and consumption markets.
As a result, many of these emerging markets are now growing faster than the developed markets – with many progressing to become developing markets themselves.
As these ‘new consumers’ gain access to better and more stable incomes, their increased spending drives expansion in the consumption markets, which in turn leads to growth in the amount of trade amongst and between emerging markets. This trend further augments the shift beyond globalisation of trade, towards a more regional landscape.
At the same time, wages in these formerly low-cost manufacturing hubs continue to increase, gradually eroding their cost advantage over developed market locations and leading producers to pursue lower-cost options elsewhere – often through near-shoring closer to their domestic markets. Additional costs that come with manufacturing far away from home – including transportation costs and management overheads – are also increasing. So the ‘total supply chain cost’ is now coming into play, leading to a far more balanced equation when producers are deciding where to locate their sourcing and manufacturing operations.
The advent of Industry 4.0 is also creating greater opportunities for automation, which in turn requires different skill sets throughout the work force. Instead of the low-cost labour widely available in emerging markets, producers adopting automation in their manufacturing operations will increasingly require highly skilled labour that is likely more readily available in the developed markets – often closer to their end consumers. After all, if you are going to automate your production, thereby significantly reducing the labour content, why would you do so in a low-cost labour environment? Surely automation and on-shoring (or near-shoring) go hand-in-hand?
All these factors are contributing towards the changing landscape of globalisation, resulting in a number of noteworthy supply chain trends that all businesses should consider…
1. Shorter supply chains, fewer cargo miles, more journeys
As trade shifts beyond the established global networks to more regional supply chain ecosystems, the related cargo movements and freight flows will also change. The result will be less long-haul transport and more short-haul carriage, potentially generating some significant benefits for shippers – through using less fuel, saving costs and reducing emissions. As intra-regional trade flows grow, cargo movements will tend to involve shorter transit distances, but are likely to generate a greater number of actual journeys.
2. Increased modal shift from reduced speed differential
With the continued growth in intra-regional trade, the shorter transit distances involved will reduce the relative speed-advantage of premium air freight over slower, cheaper modes of transport such as ocean freight.
For example, in a global supply chain, transporting cargo across the trans-Pacific route would have substantial differences in door-to-door transit times between the air and ocean freight options – for example, say 5-7 days by air freight, versus maybe 25-30 days by sea.
However, with the much shorter distances involved in a regional supply chain, the differential in transit time will be significantly less – for example, just 5-7 days by sea freight, compared with 3-4 days by air freight, thus making the lower cost sea freight a far more viable option.
Furthermore, many regional supply chains will involve large contiguous land masses – such as North America, western and eastern Europe and some of the Intra Asia region – in which case, cost-effective ground-based transportation options such as trucking and rail freight will come into play as competitive alternatives to air and sea freight.
3. Growth in domestic freight moves
The shifting globalisation landscape, towards more on-shoring and re-shoring, will also increase the amount of domestic freight movements.
According to logistics investment advisers Stifel, when products are imported into a country from production overseas, the number of domestic freight transport moves is an average of 2-3 movements.
However, when products are produced entirely within a single country or continent, the freight is typically touched 8-12 times domestically – some four times the amount of domestic transport movements – good news for the local transport providers!
Therefore, in the new regional landscape, localised production will generate many more domestic cargo movements, at the expense of long-haul international freight transport movements.
4. Customer proximity and local knowledge become increasingly important
One significant shift in the changing globalisation landscape is the increasing importance of customer proximity and local market knowledge.
With emerging markets developing and newly configured regional supply chains reaching ever closer into different consumption markets, companies will need to partner with suppliers and service providers who have local expertise, including the knowledge and networks to effectively navigate through the prevailing customs and practices in those markets.
GDP growth in emerging and developing economies is forecast to reach 4.8% next year, so many new consumer markets will emerge and expand across Asia, Africa and Latin America. As production moves closer to these new markets, specialist expertise on the ground will become more important than ever, rewarding those companies that are able to successfully plan and execute at a more local level.
The changing face of globalisation
Globalisation was originally spurred by growth in international trade and a shift in business models as companies rushed to take advantage of lower-cost overseas manufacturing by outsourcing, offshoring and unbundling. Now, the pendulum is shifting again.
Whether producers are responding to trade barriers resulting from populist domestic politics, seeking to avoid rising labour costs in China and elsewhere in Asia, or planning to benefit from increased automation, the shift towards regional supply chains is unmistakable.
But with established and complex global supply chain ecosystems already in place, multinational companies are not rushing to leave Asia. Where once they came for the workers, they now remain for the shoppers.
The next few years will present a huge amount of uncertainty for global supply chains. But one thing is certain. This evolution will never fail to be interesting, and will present both opportunities and challenges as companies grapple with the ever-changing landscape of globalisation.