Supply chains could be shorter and more “regional,” says McKinsey in a new report
Over the past two years, trade has shifted due to struggling supply chains amid the pandemic, Russia’s invasion of Ukraine and rising tensions between the US and China. The disruption has sparked speculation that trade will be less global in the future, making the world less connected.
But there’s another possibility: What’s happening now is that global connections are merely “reconfiguring,” management and consulting firm McKinsey said in a new report.
And that means some supply chains could “shorten and become more regional” in the coming years to better protect against disruptions and better respond to fluctuations in demand.
The international supply system is under significant strain and relying on one market alone is risky, the report said. Still, the world is more connected than ever, and no region comes close to being completely self-sufficient.
“The challenge is to reap the benefits of connectivity while managing the risks of interdependence,” the report says. “Disruptions to flows can have disproportionate downstream impacts on economies and businesses ranging from the largest multinationals to the smallest micro-enterprises.”
Any advancements or changes to the system could take years, but that doesn’t mean they aren’t starting to happen.
China exports more than half of electronics and textile products, the report said. But in recent weeks, US companies have increasingly gone public with their transitions away from China as part of an effort to avoid that country’s COVID lockdowns and policies that sometimes wreak havoc in the supply chain.
After production delays due to the lockdown in China, Apple is trying to source chips for its devices from a plant under construction in Arizona, Bloomberg reported, citing comments from the company’s CEO Tim Cook at an internal meeting.
Meanwhile, Ford and Boeing are two companies that have moved some of their overseas operations closer to the US, known as nearshoring, to limit supply chain challenges. Bank of America analysts have described this as a “lifetime opportunity” for Mexico, which could become a big beneficiary of the postponement.
Additionally, in terms of semiconductors, some countries (including the US, which enacted the CHIPS Act to boost the country’s semiconductor research and development) have announced measures to strengthen their domestic chip supply – representative of the gradual shifts in supply chains. These shifts typically occur when there are broader economic changes, such as new production centers, technological advances, and/or trade barriers.
“New forces are emerging that could shape and accelerate the next evolution of some value chains,” the report said.
Nonetheless, McKinsey notes that multinationals, which account for two-thirds of world exports, are key to managing global trade flows because of their “disproportionate influence” at the heart of the system. It “puts them in the eye of the current storm, but also in pole position to shape the future in favor of growth and prosperity,” the report said.
That means they should try to strengthen their own supply chains and expand their ability to enter foreign markets.
“Companies that reinvent themselves, rather than decommissioning, can transform value chains to contribute to both growth and resilience,” the report states.
McKinsey did not immediately respond assets Request for comments.
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