Are the days of global supply chains numbered?

By Staff | June 24, 2015

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Automation, sustainability, and risk management efforts may influence companies to create more regional supply chains, according to a report by Standard Chartered Bank.

After decades of fast growth, the trend toward increasingly global supply chains may be slowing down, according to a report by Standard Chartered Bank, which is based in the United Kingdom.

In Global Supply Chains: New Directions, the Standard Chartered Bank acknowledges that several macroeconomic trends, such as increasing urbanization, more sophisticated communications technology, and lower oil prices, continue to support the growth of global supply chains. Yet at the same time, other trends are creating a sort of headwind that is slowing the pace of growth. For example, automation and robotics are improving, making it easier for companies to stop chasing low-cost labor abroad and bring their manufacturing operations back to local markets. Increasing concerns about sustainability and the high carbon footprint of global supply chains may also be dampening global supply chain growth. Some companies are interested in shortening their supply chains to avoid the risk of disruptions due to a natural disaster or civil unrest half a world away.

Taking these gathering forces into consideration, Standard Chartered Bank asserts that while global supply chains will continue to expand, they will do so at a rate much slower than in the 1990s and early 2000s, when world trade grew at about twice the pace of gross domestic product. Furthermore, that growth will occur in a different fashion than in the past. The bank identified three new directions for global supply chains:

1. Low-cost manufacturing will head west. As wages rise in the coastal areas of China, low-cost manufacturing will move westward, not only to parts of inland China but also into Southeast Asian nations, India, and eventually Africa. As basic manufacturing operations spread westward, the report's authors say, China is likely to evolve into a "megatrader," directing the expansion of supply chains internationally through programs such as its Silk Road initiative, which aims to increase trade across Eurasia, and trade agreements with Southeast Asian countries, Australia, India, Japan, Korea, and New Zealand.
2. Service supply chains will increase. In the past, global supply chain growth has been driven mostly by the expansion of offshore manufacturing, while services remained primarily local. Now, however, new business services such as information and communications technology, finance, and business process outsourcing are being traded across geographies. Additionally, the line between manufacturing and services is becoming blurred as more services (such as design, research, and marketing) are embedded in goods. The report estimates that services likely already constitute more than half of the value of global trade and will grow even more, particularly as communications technology improves.
3. "Horizontal trade" will expand. During the rapid rise of global supply chains in the 1990s and early 2000s, most of the focus was on "vertical trade" or "vertical supply chains," which the report defines as handling simpler manufacturing tasks in low-wage countries and then selling the resulting goods in developed countries. Vertical trade contributed to the rapid economic development seen in many emerging markets during the past decades. At the same time, however, there was an expansion in "horizontal trade" among developed markets. The report defines "horizontal trade" as the trade of similar goods between countries at similar wage levels. Examples of such goods include electrical machinery, automobiles, and aircraft. Now, the report predicts, as emerging market economies become stronger we will see more horizontal trade among them. For example, the Regional Comprehensive Economic Partnership may encourage more trade between India and the Philippines or between China and Malaysia.