Shifting Supply Chain Winds Favor Regionalism, Restructuring

Shifting Supply Chain Winds Favor Regionalism, Restructuring
By Ambrose Conroy

As we shift from a global approach to one that is focused on regional and national production, the world economy is going through significant transformations. Our world is changing as a result of demographic, geographic, and political factors. In an environment with rising interest rates, businesses will need to continue navigating supply chain disruptions, China risk, and concerns about capital expenditures.

Globalization, which has dominated the past 50 years, will not define the new paradigm. For those who are willing to adapt, this transition presents challenges as well as exciting new opportunities. The year 2023 presents an opportunity for businesses to collaborate on the reorganization and regionalization of their manufacturing value chains.

Let’s examine some of these opportunities and challenges.

The American Chinese Crisis and Taiwan In the wake of COVID, tensions between the United States and China have risen, with allies on both sides involved. In an environment with rising interest rates, businesses will continue to have to deal with supply chain disruptions, China risk, and concerns about capital expenditures.

China has reopened and will continue to deal with COVID’s effects for a long time. According to official Chinese policy, Taiwan is a part of China. As a result, any move by China to bring Taiwan closer together should not be influenced by other nations.

There are complicating factors, despite the persuasive rhetoric in favor of cutting ties with China. China’s trade deficit with the United States continues to rise. The low prices that can be obtained through the Chinese manufacturing value chain are desired by consumers. In the meantime, manufacturers are being cautious about investing in regional production capacity outside of China due to higher interest rates and the fear of a recession.

Although hope is never a good strategy, many businesses are hoping that the conflict will end. Understanding which components originate in China requires delving deeply into supply chains more than ever before. With a clear, quantifiable, and mitigate able situation, executives and boards who ignore the post-China value chain plan put their companies’ futures in jeopardy.

In an effort to move higher-value production to the region, regional industrial labor and skill shortage businesses are looking to low-cost manufacturing zones in North America and Europe. Until now, the majority of the shift has been in areas where a logistics penalty supported a faster move. Small commodity components with low margins, which are currently manufactured in China, face difficulties. These parts, which are usually taken for granted, will probably put stress on supply chains soon.

In order to regionalize a value chain, purchasing and supply chain teams must work together. It will be necessary to advocate for government support in order to introduce components with low margins and low costs. Regionalization may not occur for these components, connectors, small handwork parts, etc. without subsidies. The United States and the European Union would face a threat to their national security as a result of this.

If war breaks out with Europe as a whole, the West will pay the price. As the conflict in Ukraine continues to escalate, Eastern Europe, which has historically been the focus of low-cost labor for Germany and the European manufacturing base as a whole, is now considered to be at greater risk. In order to quickly relocate production, manufacturers in the region need to have executable contingency plans with defined trigger events as they continue to reevaluate sourcing decisions.

As the heart of the North American low-cost manufacturing engine, Mexico continues to shine. Universities continue to produce a record number of engineering graduates despite the tight labor market in Mexico. The nation has solidified its position as North America’s center for regionalization thanks to its white-collar workforce. Direct labor shortages affect major cities like Monterey, Guadalajara, Mexico City, and Querétaro, but many areas have both facilities and labor that can be used for quick relocation.

As tensions with China rise, there will be a growing push to bring manufacturing back to the region. A conflict with China will become a crisis-driven necessity if it occurs. As the current paradigm of globalization changes, businesses that act now will have a significant competitive advantage.

Changes in the Semiconductor Industry The Biden administration has taken steps to get allies involved and stop the Chinese semiconductor industry from growing any further. Americans are now prohibited from working with Chinese semiconductor companies as a result of these efforts. The Biden administration is receiving support for this endeavor from the Netherlands and other significant value chain allies. This will provide a brief window for utilizing the West’s capacity to expand and construct additional fabrication capacity; however, in order for this to occur, government subsidies—both in the United States and elsewhere—are required.

The semiconductor lifecycle has a long history of cycles, and this one is no different. This cycle advanced thanks to COVID’s rapid expansion and modernization of consumer electronics. Companies in the automotive industry suffered, but availability is temporarily rising. However, constraints will reappear as the transition to electric and autonomous vehicles necessitates an increasing number of semiconductors per vehicle. In 2024, the market will tighten once more, and companies that make consumer electronics and automobiles need to be ready.

The Russian war in Ukraine continues to be a serious humanitarian crisis, and the escalation of the conflict raises the possibility of a land war in Europe. Even though there haven’t been any predictions that this will be as bad as the world wars of the previous century, there are still problems all over Europe. The shortage of neon gas will continue to have an effect on the production of semiconductors, and the conflict in Ukraine will continue to drive up the cost of both food and energy.

If the conflict in Ukraine escalates into a larger conflict in Europe, businesses ought to think about shifting production to the military and the government. A good risk-minimization strategy is to know what products your team could make and have a backup plan in place. Geopolitical tensions will continue to dominate the risk landscape as the global manufacturing value chain continues to change. Companies have a limited window of opportunity to re-engineer value chains for risk mitigation and regional optimization in light of the severity of the threats.