Forces that brought the world closer together and helped drive economic and enterprise growth for the past 30 years are waning, as protectionism and geopolitical conflict increase. The accepted logic of globalization—that lower barriers to the exchange of goods, investment, people, and ideas, would drive growth, reduce poverty, and foster international peace and cooperation—has been tempered by the realities of inequality, populism, and hard-power politics.
As global tensions increase, companies are rethinking their manufacturing footprints and supply chains, encouraged in that effort by government regulations and incentives. In the U.S., for example, the government this year earmarked $52 billion in subsidies for semiconductor manufacturers to build domestic fabrication plants, while also banning the export of advanced technology to China. In Europe, all eyes have turned to securing alternative and reliable supplies of energy following Russia’s invasion of Ukraine.
These realignments have been underway for some time, driven by a range of technological and geopolitical factors. Trade as a percentage of global economic activity peaked in 2008. The Trump Administration’s tit-for-tat trade wars accelerated this process, as have the one-two punch of the pandemic and the war in Ukraine. The Biden administration, if anything, has been even tougher in its trade policy toward China, while Brexit has added to trade friction in Europe. Other factors, such as the declining share of manufacturing in global output and commodity price fluctuations, may also have contributed to these trends.
Trade is only one measure of globalization. After the end of the Cold War, barriers to the movement of capital, information, and people across borders also fell.
But barriers in technology and communications are increasing as well. While 60% of the world’s population has access to the internet, censorship is growing. According to a recent study1, 27 countries have increased their censorship of media, including the internet, in the past year.
A realignment of global supply chains doesn’t mean an end to globalization, of course. A complete uncoupling seems neither likely nor desirable. More than 70,000 U.S. corporations do business in China, for example. China is no longer merely a manufacturing giant–it represents a major market for international companies across almost every industry, from Apple (19% of revenue) to Volkswagen (37%).
What this does mean is that business must prepare for a future of generally higher barriers to trade, higher costs, and greater uncertainty. During periods of trust and cooperation, cross-border trade and investment tend to grow. The opposite is also true.
As global tensions increase, companies are rethinking their manufacturing footprints and supply chains, encouraged in that effort by government regulations and incentives. In the U.S., for example, the government this year earmarked $52 billion in subsidies for semiconductor manufacturers to build domestic fabrication plants, while also banning the export of advanced technology to China. In Europe, all eyes have turned to securing alternative and reliable supplies of energy following Russia’s invasion of Ukraine.
These realignments have been underway for some time, driven by a range of technological and geopolitical factors. Trade as a percentage of global economic activity peaked in 2008. The Trump Administration’s tit-for-tat trade wars accelerated this process, as have the one-two punch of the pandemic and the war in Ukraine. The Biden administration, if anything, has been even tougher in its trade policy toward China, while Brexit has added to trade friction in Europe. Other factors, such as the declining share of manufacturing in global output and commodity price fluctuations, may also have contributed to these trends.
Trade is only one measure of globalization. After the end of the Cold War, barriers to the movement of capital, information, and people across borders also fell.
But barriers in technology and communications are increasing as well. While 60% of the world’s population has access to the internet, censorship is growing. According to a recent study1, 27 countries have increased their censorship of media, including the internet, in the past year.
A realignment of global supply chains doesn’t mean an end to globalization, of course. A complete uncoupling seems neither likely nor desirable. More than 70,000 U.S. corporations do business in China, for example. China is no longer merely a manufacturing giant–it represents a major market for international companies across almost every industry, from Apple (19% of revenue) to Volkswagen (37%).
What this does mean is that business must prepare for a future of generally higher barriers to trade, higher costs, and greater uncertainty. During periods of trust and cooperation, cross-border trade and investment tend to grow. The opposite is also true.
SUPPLY CHAIN IMPLICATIONS
Today’s supply chains were built over three unusually benign decades: Supply chains faced almost no stress, interest rates were trending down, the world economy was growing, and global trade was reasonably unfettered. Most enterprise resource planning (ERP) systems, for example, were built to optimize normal production.
Unfortunately, we can’t return to that benign environment. The pandemic shone a spotlight on the need to build resilience into supply chains.
Today, many of 2021’s supply chain problems appear to be in the rearview mirror. Ocean shipping costs are down. Many raw material prices are falling; there’s more deflation than inflation in commodity prices, though there are plenty of exceptions. Fewer components and materials just can’t be had—again, with significant exceptions. The New York Fed’s Global Supply Chain Pressure Index2, while high by historical measures, is dropping toward historical norms.
In our survey this year, executives foresee supply chain pressures easing in 2023, following two years of dramatic disruption. But that doesn’t mean they plan to go back to what they had before.
Despite these positive signals, the next year may present companies with supply chain problems that are every bit as messy and profit-threatening as last year’s, as cyclical issues collide with structural problems that are still unaddressed and increasingly unsustainable.
Today a supply chain needs to solve three problems simultaneously and quickly: It must be able to resolve shortages immediately when they appear. It must defend against inflation and price volatility generally. And it must be resilient by design.
Designing for resilience is particularly critical. Resilience is more than a second source of supply. It may mean localizing or nearshoring to reduce transportation and political risk. It means mapping suppliers–all suppliers, not just tier one–in terms of risk, health, and performance in real time, and creating advanced forecasting and pricing capabilities. It also entails taking into account environmental, social, and governance factors that might affect suppliers or distributors.
While globalization may not be dead, a deglobalizing world, with the potential for increased geopolitical conflict and structural barriers to commerce, will likely prove one of the most significant challenges business leaders and indeed the broader international community will have to face. In a world as intertwined as ours has become, there are no
simple answers.
BACK TO THE FINDINGS REPORT
AlixPartners Disruption Index 2023
The world keeps getting more complex. Myriad disruptions arise, feed off one another, and cascade around the world at an accelerated pace. The leadership challenge is unprecedented: Amid so many formidable issues—daunting long-term disruptions and difficult short-term demands—how should we focus our all-too-finite resources of capital and time? As leaders focus on rising to the challenge of disruption, AlixPartners believes leaders who seize its opportunities will be positioned for success. View the findings report, here.
Built with Shorthand