How high-performing businesses can adjust to 'slowbalisation'

In the very recent past, just six years ago, just-in-time manufacturing and inventory systems were the toast of the town.

Supply chains were long, transport was cheap, interest rates were low and international relations had enjoyed a decade of calm.

What a difference a pandemic makes. Its lingering effects – coupled with growing protectionism, geo‑political instability and worsening effects of climate change, among other factors – have created a business environment radically different from globalisation’s heyday.

Now, the momentum that has been building since the close of World War II seems to be unravelling.

A World Economic Forum report tracks the dramatic increase in trade openness between nations from 1945 to the mid‑2010s.

This includes a so-called “hyper‑globalisation” period from 1990 to 2005.

The reversal in recent years has instead been referred to as “slowbalisation”, indicating a steady downwards trend.

“Today, ‘slowbalisation’ appears to be moving towards deglobalisation,” the report says.

Deglobalisation – or localisation of supply chains and re-onshoring of manufacturing skills and capabilities – offers a solution, but it is not without its costs and risks.

The cost of localisation

“Cost is becoming an overwhelming concern for most of my clients, and deglobalisation can be very expensive,” says Chris Coldrick, supply chain and procurement practice consulting partner at Deloitte Australia.

“Most manufacturing is premised on the kind of economies of scale that you can’t easily achieve locally, particularly if you have a small population and are remote.”

Coldrick has observed what he calls “selective deglobalisation” or “meaningful hedging” among his client groups.

Certain aspects of specific industries in particular territories are deglobalising, but most are still looking to strike a careful balance – for good reason.

“If you’re in the US, you are almost certainly seeing deglobalisation, because you can sustain a local industry,” he says.

“You can make your own semiconductors, for example. You can source them locally, and it is more or less financially viable. It won’t blow up the price of your product by incorporating a US-made semiconductor.”

 

"The goal is to have a resilient supply chain that is also cost-effective, that you’re not compounding with wage increases, energy price increases and massive increases in the price of raw materials."

 

Coldrick works with clients to map out their supply chains. This involves analysis of not only of their suppliers, but also who supplies their suppliers. This process can even extend to looking at fourth and fifth-party suppliers.

This “fanning out” process of suppliers often reveals a point where they meet up. “Perhaps in the same hole in the ground in Western Australia where all the iron ore comes from,” Coldrick says.

“Even before you get to that point, they typically start to reconvene,” he adds. “What looks like hedging could turn out to not be hedging at all. Companies are having to put a lot more due diligence into who their secondary supply sources are.”

Businesses need to think about other ways to achieve the same goal, while understanding with absolute clarity that buying everything locally is not the goal, Coldrick says.

“The goal is to have a resilient supply chain that is also cost-effective, that you’re not compounding with wage increases, energy price increases and massive increases in the price of raw materials,” he says.

In today’s selectively deglobalised business environment, organisations must mitigate the risk of a potential source of failure in their supply chain. Turning that single risk area into two less problematic ones without dramatically increasing the cost of the product or service is a challenge.

Understanding 'meaningful hedging'

Coldrick’s clients often look for “meaningful” hedging – and the meaningful aspect is important.

“Oftentimes what looks like hedging – getting two suppliers of the same thing – ultimately has no hedging impact whatsoever, because both suppliers are subject to all the same pressures,” he says.

An organisation looking to manage its supply chain in the new business reality must first deeply understand their own suppliers, and the supply chain risks and opportunities suppliers face.

When an organisation has a detailed picture of its suppliers, the next step is to develop an understanding of the real alternatives, as opposed to the perceived alternatives.

“That understanding serves two purposes. It lets you know whether you really do have meaningful hedging. Then, with that knowledge, you can understand a whole universe of other risks in your supply chain,” Coldrick says.

For instance, if a natural disaster occurs in a particular part of the world, knowing that a supplier operates there can help a business to determine whether it will cause a disruption.

“A lot of folks have been blindsided by supply chain disruption, but if they had an intimate knowledge of the industry that was disrupted, it wouldn’t have blindsided them at all.

“The linkages are very clear. A reduction in fertiliser production, resulting in a shortage in carbon dioxide, creates a bottleneck in the production of chickens. This creates a shortage of fast food that is clear to those who know the poultry industry,” he explains.

Without that intimate knowledge, those relationships are not obvious.

It also remains to be seen if meaningful hedging can exist in a localised supply chain environment.

Suppliers in the same region often share the same supply base, Coldrick says, but this is not a given. Hedging can also be affected by geo‑political stability and various other issues.

“There are a few different ways to think about the challenge, including close political affiliations and free trade agreements,” Coldrick says.

“There are also certain suppliers where service is far more important than cost, and, generally speaking, a shorter supply chain can achieve higher service levels.”

The idea of selective deglobalisation or meaningful hedging will be different according to where the business, and its manufacturing facilities, is located, says Simon Ringer, pro vice-chancellor, research infrastructure and professor of materials science and engineering at the University of Sydney.

“In Australia, we’re hearing about the National Reconstruction Fund being set up to diversify and transform industry,” Ringer says.

“Other countries are doing similar things and are much further ahead. The onshoring exercise going on in the US right now is incredible, particularly in additive manufacturing. Many hundreds of billions of dollars have been put into what the US is calling the AM Forward [Additive Manufacturing Forward] program. We also know about the CHIPS and Science Act 2022, which is around their onshoring of semiconductor manufacturing capability.

“We also see what Japan is doing, what Korea is doing, and what various countries in Europe are doing. This is all happening in Australia, too, but even with all of this, saying globalisation is coming to an end is too much of a simplification,” Ringer explains.

 

"Building or rebuilding sovereign capability in certain industries like pharmaceuticals, national security and renewable energy is something many governments are pursuing, or pursuing with greater vigour."

 

Gavan Ord, business investment policy manager at CPA Australia, agrees that there has not yet been a full U-turn towards deglobalisation, but that nations are clearly showing greater self-interest than they did in the recent past.

“Building or rebuilding sovereign capability in certain industries like pharmaceuticals, national security and renewable energy is something many governments are pursuing, or pursuing with greater vigour,” Ord says.

“One prominent example of this is the US Inflation Reduction Act 2022.

The law authorises nearly US$400 billion (A$619 billion) in support for renewable energy and climate change initiatives in the US over the next decade. The support is designed to encourage private investment

into renewable energy, transport and manufacturing in the US.

“The sheer size and scale of this policy is attracting capital, people and expertise to the US manufacturing sector and away from other places.”

With change comes opportunity

High-performing businesses will be considering how to take advantage of various government decisions, policies and incentives, Ord says.

“That could involve moving part of their production to those markets,” he says. “For suppliers of materials essential to the success of such policies, such as lithium, which is used in batteries, it’s a significant opportunity to grow.”

Businesses must also keep in mind the risks along the way. Incentives can be removed as quickly as they were introduced, particularly with change of leadership or government.

Ringer believes certain aspects of free trade agreements, which are far more difficult to repeal, will be leveraged strongly as organisations and governments play to their own strengths. Each must be careful and nuanced as they go about the onshoring of certain skills and capabilities. Relationships will develop or potentially be damaged around those decisions, he says.

“Thinking of the climate piece, that opens up opportunities around new energy,” Ringer says. “Australia is wanting to play there, and you see many reports about how Australia could be a great energy exporter. Globally, people are looking at all sorts of new mixes of energy, including nuclear, hydrogen, renewables and so on.”

“Similarly, when you look at the geopolitical uncertainty, there’s an amazing amount of defence spending going on right now across Europe, Asia and North America, and among the global defence ‘primes’. Their order books are fairly full.

“Finally, having just come out of a pandemic, as we’re all fairly certain another health catastrophe will be around the corner, opportunities are created around health research and mRNA.

“There are opportunities everywhere, but they require a shift in how organisations do business and a shift in how well they know their supply chains.”

Coldrick agrees, saying that in every sector outside of food and beverage there is an excellent chance that most components will come from overseas. Even if the business has a local supplier, that supplier is likely sourcing their parts or materials offshore.

“You can’t sell something for which you only have eight out of 10 components,” Coldrick says. “So there’s no longer an excuse to not know every detail about every one of your suppliers.”