Pace for Global Supply Chain Growth May Slow Down, Says Study

According to a report from Hong Kong's Standard Chartered Bank, world trade growth has been weak recently and the expansion of Global Supply Chains (GSCs) has lost momentum.

Some of this slowdown is likely cyclical but rising wages in China and new automation technologies are challenging the low-wage model, prompting companies to consider re-shoring, i.e. bringing production home.

The study mirrors conclusions made in recent editions of Supply Chain Management Review.

“Global supply chains have transformed trade and the world economy over the last 30 years,” says John Calverley, Head, Global Thematic Research. “We think they will continue to expand but will be increasingly driven by services and by horizontal trade. Meanwhile the center of gravity for low-cost manufacturing will shift westwards as ASEAN and India become more important.”

Researchers believe eight drivers will shape the evolution of supply chains:
1. Increasing incomes and growing labor forces in emerging markets will continue to support the growth of GSCs. Rising GDP, more urbanization, expanding middle classes and growing labor forces offering cheap labor should continue to support supply chain expansion.

2. Better communications technologies will boost both manufacturing and services supply chains. Improved communications technologies including cheaper broadband, the cloud, smart phones, virtual reality systems, computer translation, the Internet of things (IoT) and big data will further support the growth of supply chains by making collaboration easier for manufacturing chains and enabling more services trade.

3. New automation technologies will be a constraint. Improving automation and robotics will likely compete with some low-skill tasks, making re-shoring easier and potentially unwinding some manufacturing chains. Meanwhile 3D printing could lead to a big trend towards customized goods, ‘printed' locally.

4. New trade pacts could be a major boost. There is a good chance that the Trans-Pacific Partnership (TPP) and China's Regional Comprehensive Economic Partnership (RCEP) will be agreed this year, with the TransAtlantic Trade and Investment Partnership (TTIP) following. These new trade agreements are going “behind the border” to address obstacles to supply chains, with a particular focus on facilitating services trade.

Philip Sutter, Director, Government Policy at the international trade compliance company, Livingston International, told SCMR in an interview that he believes TPP will eventually win Congressional approval.
“For that to happen,” he allows, “the President will first have to be given Trade Promotion Authority.”

5. Geopolitical tensions are a threat, though also are helping to encourage new trade pacts. Rivalries are likely one of the drivers of new trade agreements, but geopolitical tensions are also a potential threat to the growth of GSCs as firms fear that conflicts or sanctions could interrupt supplies.

6. Trade costs are falling, providing a significant boost. In our view improving infrastructure and streamlining customs procedures, as agreed in the recent Bali package, will lower costs and boost GSCs. According to the Organization for Economic Co-operation and Development (OECD), every extra day needed to ready goods for export and import could reduce trade flows by up to 4 per cent.

7. Sustainability issues are a potential constraint. Concerns over the impact of natural disasters such as Japan's earthquake or Thailand's floods have led some companies to think of shortening supply chains or even re-shoring. For most companies the response is to increase resiliency by identifying potential risks and diversifying suppliers and holding higher inventories of key components.

8. Relative wage costs will be crucial. As China's wage costs rise, new low-cost centers are stepping up including among ASEAN countries, India and Bangladesh. The re-shoring trend in the U.S. is partly driven by narrowing wage differentials, though higher oil prices and a new focus on the potential costs of separating design from manufacturing have also been factors.

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