How the war in Ukraine is further affecting global supply chains

Russia’s attack on Ukraine is adding to global supply chain woes. It is affecting industries from semiconductors to cars to food. This will almost certainly accelerate the shift from global to regional sourcing that was already underway due to the Sino-US trade war and pandemic and climate-related events. But given China’s dominance in many sectors, change will only be gradual and will require government support.

Russia’s invasion of Ukraine and sanctions for doing so New pandemic-related shutdowns in China are the latest events to shake up global supply chains. Combined with the Sino-US trade war and other pandemic and climate-related disruptions, it is certain that Western companies will turn to China for parts and finished goods and to Russia for transportation and raw materials. The movement to reduce dependency is sure to accelerate. For more local, or regional, sourcing strategies. If China decides to back Russia in the Ukraine conflict, it will only fuel this movement.

In the 1990s, companies pursued strategies such as outsourcing, offshoring, and lean manufacturing to reduce costs, maintain market position, or gain competitive advantage. China emerged as a major manufacturing hub to serve global markets, including many emerging Asian economies.

After the 2008 financial crisis, things started to change. With the significant increase in the price of oil in 2008 and a variety of natural disasters, from the 2003 SARS epidemic to the 2011 tsunami in Japan and floods in Thailand, industry leaders acknowledged that strategies adopted in the 1990s It can increase their exposure to operational problems and compromise their ability to respond effectively to natural disasters. This led many companies to increase local manufacturing to reduce their exposure to global risks and to be able to respond more quickly to local demand.

Still, given the advantages of relying on China and other Asian countries for manufacturing and growing Asian markets, the change was not radical. In fact, between 2014 and 2018, China’s manufacturing output grew by 21 percent while U.S. output grew by 13 percent. In 2019, just before the pandemic, China accounted for 28.7 percent of global manufacturing output compared to 16.8 percent for the United States.

However, over the past four years, the pace of supply chain localization has increased significantly due to the Sino-US trade war and supply chain disruptions caused by pandemics and climate-related events. Actually, one January 2020 Survey Of the 3,000 firms affected by the Sino-US trade war, it found that companies in a variety of industries — including semiconductors, autos, and medical devices — have shifted at least part of their supply chains from existing locations. or plan to move. Almost half of all global sector companies in North America announced their intention to “restore”.

This is already happening. Consider the A recent decision by Schneider Electric To build three new manufacturing facilities in North America, including one in El Paso, Texas, and plans for automakers and battery manufacturers Established 13 new electric vehicle battery factories. In the US over the next five years. Similar announcements have been made recently. Solar, semiconductor and biotech industries. The war in Ukraine and the closer alignment of China and Russia will profoundly alter the exchange of energy, raw materials, industrial components and goods between the Western world, China and Russia, and promise to accelerate the recovery trend. .

With oil and gas prices rising due to war, transportation costs will follow suit. What is less obvious but equally important are the constraints imposed by the war on the ability to use Russian transportation infrastructure to support manufacturing in Asia. In fact, many companies are making parts and finished goods in China and using Russian railways to transport these goods to Eastern and Western Europe. Of course, it is possible to ship some of these items by air, but it is significantly more expensive, especially now that airlines need to bypass Russia.

Equally important, supplies about Ukraine 50% of the world’s neon gas, which is used to make semiconductor chips. Governments and large corporations are now scrambling to find alternative supplies, but supplies are tightening and prices have risen dramatically. Russia and Ukraine are major exporters of grains such as corn, barley and wheat, as well as fertilizers. While the full impact of the war on the global food supply is still unclear, Prices are already skyrocketing..

These factors are increasing interest in local supply chain strategies. gave Recent contract The move by Électricité de France (EDF) to buy part of GE’s nuclear power business, which GE bought from Alstom in 2015, exemplifies this swing from globalization to localization. France Increasing reliance on nuclear power plants.which is already generating 70% of its electricity. He decided that to do this, the entire supply chain for such plants needed to be better controlled. Another example is semiconductor manufacturing equipment. American and Dutch governments ASML is blocked.The world’s largest producer of lithography equipment used to make computer chips, from the sale of its state-of-the-art machines to China.

Finally, the surprisingly large impact of the war in Ukraine on European car manufacturing has highlighted the risk associated with existing global supply chains. For example, Volkswagen and BMW have been closed Assembly lines in Germany due to a shortage of wiring harnesses manufactured in Ukraine by the German company Leoni. and tire manufacturer Michelin Recently announced It may close some plants in Europe due to logistics problems caused by Russia’s invasion of Ukraine. There is no doubt that European car companies will take a hard look at the risks associated with international suppliers and consider sourcing more locally, even if this requires additional price increases. This could provide an opportunity for Europe to strengthen its domestic manufacturing sector.

But as one of us (David Simchi-Levi) and others have observed, the localization approach is not a panacea. Since China is now a dominant, if not the only, source of thousands of components, in many cases it will take considerable investment and time to reduce dependence on it. A case in point is this. Intel’s recently announced plan Ohio will spend $20 billion to build two semiconductor factories. The first plant won’t start production until 2025.

Moreover, industry alone will not be able to address many of today’s supply chain challenges. Governments have to get involved. in the United States, Federal And condition Governments are increasing investment in ports, airports and other infrastructure. gave US CHIPS ACT (which Congress has yet to fund) and European Chips Act Examples are government efforts to reduce dependence on Taiwan and South Korea for semiconductors. The conflict in Ukraine is also likely to reinforce this. European Battery Alliancewhich was created by the European Union in 2017 to make Europe a leader in the innovative battery industry.

Until infrastructure investments are made in local areas, companies should emphasize examining their supply chains and implementing strategies to make them more resilient to risks. About the only thing that is certain right now is that the challenges facing global supply chains are going to increase in the near future.

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