How to advance Europe’s strategic autonomy by pairing liquidity with data to make supply chains more transparent, resilient and sustainable.
The COVID-19 pandemic has brought to the fore the inability of nations to assure the provision of critical goods, such as personal protective equipment, in times of crisis. This has been a brutal wake-up call for European citizens and political decision-makers alike that have come to expect instant availability of everything that is required. As a result, there is a growing political demand to shore up national production and reserve capacities and to develop more resilient global supply chains. In most cases, this demand is a call to bring production back to industrial countries from emerging economies. However, the demand for more resilient supply chains hits a raw nerve: Precisely what benchmark is used to define supply chain resilience? What degree of self-sufficiency is adequate and how is self-sufficiency measured? Moreover, who will bear the costs of redesigning supply chains in order to increase supply security and ensure that nations are better prepared?
At present, the complexity of supply chains is not well understood. The idea of reorganizing supply chains amid growing demands for national self-sufficiency presupposes transparency with regard to the partners involved in global supply chains as well as individual and collective contributions at each stage of developing, producing and marketing a product. However, this belief is false. In general, companies know their immediate upstream and downstream partners, and these partners are also familiar with their immediate interlocutors. Beyond these immediate relationships, however, darkness prevails. Full transparency is difficult to provide and and causes disproportionately high cost. This poses a problem and explains why different initiatives aimed at strengthening corporate social responsibility by advancing supply chain transparency almost always fail.
Corporate supply chains are the center of gravity of geo-economic competition
Understanding contemporary supply chain complexity is all the more important since corporate supply chains have become the center of gravity of a new geo-economic game. Until now, globalization has been all about the unrestricted flow of goods, services, capital, and information as well as the free movement of people. These flows provide connectedness and ensure prosperity. Therefore, those who have control over what is required to ensure the smooth running of these flows are in a position of power in the 21st century. This is the reason why access to supply chains, supply corridors and means of transportation is increasingly considered to be more than just a functional tool, but rather an instrument of political and economic power. It is this drive for combined political and economic power that shapes China’s Belt and Road Initiative, the "Connecting Europe and Asia" strategy of the European Union as well as the most recent idea of the US government to establish an “Economic Prosperity Network” with like-minded partners.
This geo-economic dynamic significantly affects supply chain management by way of shaping the availability of technologies and funding. Cooperative technology development has been the key driver of globalization as we know it, but it is increasingly pushed aside by a zero-sum logic. This logic portends that nations with access to and power over key strategic technologies are unwilling to share them if this means losing the edge over strategic competitors. Digital technologies, which constitute the foundation of today’s supply chain management, are at the center of this unfolding logic. As a consequence, it is becoming increasingly difficult to gain access to the respective technologies, including artificial intelligence, robotics, high-power computing, financial technologies and quantum computing, since stricter dual-use export control regimes are being introduced in order to limit the availability of these technologies.
This also affects supply chain finance. Financial technologies are digital technologies. For this reason, the new geo-economic logic also applies to them. Control over financial technologies means power and influence because financial technologies provide transparency on financial flows. This is the reason why China and Russia are working together to develop their own financial technology stack and establish independent payment systems. By deviating from existing financial technology, which is primarily developed in the West, both nations strive for financial cocooning of economic relationships with their partners by redirecting financial flows into systems that are controlled by them, not by the West. This creates a major new challenge for supply chain finance, which emerges from competitive ambitions and manifests itself in the intersection of the geospatial, technological and financial dimensions of supply chain management.
The European Commission has made supply chain resilience a top strategic priority
All of this suggests that systemic instability is growing and thus reinforcing the vulnerability of supply chains due to technical and environmental risks, man-made dangers and the consequences of political decisions. This makes the new Strategic Investment Facility, which was proposed by the European Commission in May 2020 and aims to support cross-border investments in order to help strengthen and build supply chains that are of strategic importance for Europe, all the more relevant. This proposal pushes supply chain management right to the top of Europe’s strategic agenda; no EU member state will be able to avoid questions on how to contribute to this European endeavor and how to deal with supply chain management at national levels. A smart European way to implement the Strategic Investment Facility should combine the provision of liquidity as the premier corporate incentive with informed political guidance on how to adjust supply chains to ensure that they can withstand intensifying geo-economic rivalry.
Supply chains are embedded in a triangle formed by contracts, payments (thus liquidity) and data. Liquidity is the glue that binds everything together. So far, however, there has been liquidity asymmetry on the market. Smaller supply chain partners lack broad access to liquidity on favorable terms, whereas big companies, the public sector, multinational organizations and investors have access to liquidity on beneficial terms.
Rebalancing this liquidity asymmetry is the key to advancing supply chain transparency, resilience and sustainability. Based on the weakest link in the supply chain, liquidity needs to be reorganized in a way which ensures that supply chain finance does not only cover the top tier of the supply chain, but functions smoothly across every supply chain level. This requires an incentive-based approach that uses the contract between supply chain partners as an umbrella and combines liquidity with the value of data. Liquidity flows among partners in return for the accomplishment of specific tasks and the exchange of comprehensive data sets. Thus, liquidity pairs with data in a hitherto underexploited way. This helps to get data out of existing data silos, thereby significantly increasing transparency. At present, there is no incentive to share data in view of advancing supply chain transparency. Instant access to liquidity on favorable terms, by contrast, provides the incentive to do so.
Projecting prosperity and stability via supply chains to advance Europe’s strategic autonomy
COVID-19 and brewing geo-economic antagonisms between different countries and regions darken the outlook for Europe. Europe wants to strengthen its strategic autonomy while preserving the benefits of an open economy. In this regard, cooperation with partners is key. However, today’s predominant economic model has not been built to withstand grand strategic decoupling. Even adjusting global supply chains for the benefit of more regional or national supply security will prove difficult amid the increasing efforts to achieve flow control as a strategic currency. In this context, Europe could strike a balance by interpreting corporate supply chains as the ultimate instrument to combine liquidity and data with informed political guidance on supply chain design grounded in Europe’s liberal and rules-based worldview. Using market-based incentives alongside a new liquidity and data-based approach to supply chain management would turn Europe into a stabilizing force, which is now urgently required.
