Large companies will once again seek regional suppliers
The crisis in the supply of products caused by the pandemic and now the threat of cutting European gas and supplies from Ukraine are setting in motion a global rearrangement of supply chains.
This is a process of reversing the so-called globalization, which in the last decade has made China the world’s manufacturing base, with companies outsourcing a large part of their inputs there and, to a lesser extent, to other parts of Asia.
The cost competitiveness and efficiency gains offered by the move to China have meant that many items, formerly manufactured in the US, Europe and Latin America, or even countries like India, have moved to the Asian giant. Pharmaceuticals and electronics are the best examples of this.
Covid-19 exposed the risk of this excessive concentration and dependence. With the closure of China, followed by slowdowns in shipping, transportation and logistics, businesses across the world have been hit. The shortage of basic supplies to face the pandemic made evident the need for geographical displacement of world production.
The war will catalyze this picture. The conflict in Ukraine now brings up the issue of strategic displacement, with greater emphasis on inventory and increasing the stock of essential goods in the short and medium term. Companies will geographically and strategically bring their supply chains closer together, whether in the same country, or at least within the same continent.
Is it safe to put all our eggs in one basket, even if this country is the cheapest supplier? Or is it strategically better to have alternatives? These are all questions that companies are facing right now. Those that have diversified their supplies are likely doing better in the current scenario.
This highlights the importance of monitoring the supply chain itself for all types of risks, particularly ESG (“Environmental, Social and corporate Governance”) risks.
Brazil has an opportunity in this scenario. As US and European companies look to diversify their supply chains, the country, with some notable experience in selected industries (oil and gas services, automobile manufacturing, aeronautical technology, etc.), can position itself as a more stable and safe for multinationals. Not to mention that Brazil is the 12th largest economy in the world and has its own domestic demand.
Brazilian companies must also look at their supply chains and seek alternatives closer to home. Of course, given the tremendous advances China has made in the industry, it will take time and resources to compete with the speed, efficiency and prices of manufacturers there — but it can be done. The Brazilian industry needs to identify these competitive opportunities. Even if it is a little more expensive to produce in Brazil, it is a solid alternative for strategic reasons: the country offers more stability and productive capacity compared to many other nations in this new and fragile global order.
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By Ram Mahidhara – Former Senior Executive of International Finance Corporation (IFC/World Bank) and Co-founder and COO (Chief Operating Officer) of arara.io – on 02/04/2022