Supply Chain Matters commentary focuses on last week’s annual gathering of the World Economic Forum held in Davos. We contrast the various takeaway messages from this gathering, especially as it relates to industry supply chain efforts in the coming year.
The Annual World Economic Forum held in Davos, Switzerland last week once again brought together the termed “elite” of senior business, banking and economic leaders, and of course, the billionaire class. This was the first time in two years that this conference could be held in person.
The overall themes of the 2023 gathering was appropriately termed: Cooperation in a Fragmented World.” Besides the opportunities to be seen and photographed among noted attendees, the forum has its usual areas of debate, expressed concerns and optimism.
The takeaways from the 2023 gathering were many, and often varied in perspective and viewpoints. An area of common discussion was that of where globalization might be headed, and what that implies for industry and global supply chains. That is of little surprise since as columnists have noted over the years, this a forum that has often celebrated the benefits of globalization.
One of the better summaries of the takeaways related to globalization was shared in the Reuters published report: Davos 2023- Global trade rethink: ‘race of the big pockets’?
The report begins as follows: “The United States pitched its vision of “worker-centric” trade. China promised an “all-round opening up”. Europe spoke of its quest for strategic autonomy. And industrial policy – backed with lots of state cash – is no longer a dirty word.”
Noted was estimates by the International Monetary Fund (IMF) that three decades of global trade have lifted more than a billion people out of extreme poverty. “In rich countries, it provided consumers with a seemingly endless supply of cheap goods.” We interpret that to be the sourcing of products among retailers and manufacturers within countries of lowest cost manufacturing that has occurred in this same period.
But, the global wide Covid-19 pandemic that began in 2020, and drove a significant spike in demand for pandemic related goods in 2021, exposed the vulnerabilities of global wide sourcing under a just-in-time inventory management premise. This report notes: “Add to that the more recent up-ending of the world’s supply chains by the COVID-19 pandemic and the Ukraine war and a consensus has emerged that the world must do globalisation differently.”
There was apparently a lot of discussion relative to the term “friend shoring” being pitched by U.S. political leaders, and what that implies for future trading relationships. U.S. Trade Representative Katherine Tai reportedly indicated to delegates that the U.S. wants to lead a conversation on this new model of globalization or friend shoring. The newly passed Inflation Reduction Act U.S. legislation reportedly garnered a lot of what was described by Reuters as griping among European leaders.
The Director General of the World Trade Organization, Ngozi Okonjo-Iweala, warned Davos participants to be careful of freindshoring in the midst of the big trading partners, China, Europe and the U.S. each positioning their own forms of industrial policies.
In its coverage of the event, The Wall Street Journal called attention to interview remarks with Gita Gopinath, the number two official of the IMF who stated: “We are very concerned about geopolitical fragmentation. The effects haven’t shown up in trade numbers, which are relatively healthy. But they can be seen in the technology decoupling between the U.S. and China, tensions between Europe and the U.S. over industrial policy such as electric vehicle subsidies and war induced disruptions and inefficiencies in oil and gas markets.”
A separate WSJ report focused solely on CEO perspectives, the headline being: For CEOs at Davos, Efficient, Profitable Operations Take Center Stage. (Paid subscription required) This piece begins: “Companies say they are giving priority to profitability and efficiency amid concerns about macroeconomic conditions, whether it is to reach their strategic goals, slim down their workforces or streamline operations.” If some of this phraseology has familiarity, it is likely because many recent reports of layoffs occurring across the technology industry repeat the same “macroeconomic conditions” causation for cutbacks.
Specific mention was made of Microsoft CEO Satya Nadella’s remarks at Davos: “We in the tech industry will have to get more efficient- it’s not about everyone else doing more with less, we will have to do more with less. We will have to show our productivity gains.”
The WSJ quoted Ted Doheny, the CEO of packaging company Sealed Air Corp. indicating that whereas executives once thought about sourcing manufacturing in low cost countries, the goal now is to find “low-cost countries close to customers.”
Enterprise software provider SAP SE’s CEO Christian Klein told business broadcasting network CNBC that businesses are entering the “the next phase of globalization” with companies shifting their focus to building up resilient supply chains and improving their sustainability credentials. Rather than the message of doing more with less, Klein’s was a message of tech enablement: “That technology is the “solution” to making supply chains more resilient, as companies need a better handle on the data underpinning their businesses to make more effective decisions.”
Thus was the range of discussion, debate and discourse centered on changes in geopolitical dynamics, troubling inflation and needs for profitability and efficiency. The adoption of industry policy focused on economic security and more direct control of supply networks for deemed critical industries and materials seemed like a catalyst for a lot of discourse for and against.
By our lens, while much of the finger pointing was turned toward the perceived arrogance of the newly evolving U.S. industry policy, the reality is that all of the advanced nations have adopted forms of such policies, including China. The U.S. was the laggard, choosing to share its vast market with other nations in global trade. That is now obviously changing, and a readjustment period is evident.
In developing our ten 2023 Predictions for Industry and Global Chains, now available for complimentary downloading in our Research Center, we purposely tagged our themes for supply chains in 2023 to be a Year of Adaptation, Realignment and Response to economic and geopolitical forces. Judging from the discourse that came out of Davos last week, we believe our theme indeed has meaning.
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