More than two years in, the pandemic continues to upend global supply chains. Nearly half of survey respondents experienced disruption from logistics-related delays (45%) and production input shortages or delays (48%), and more than half (56%) saw disruption from production input price increases.
Despite cautious optimism in early 2022, this spring’s ongoing lockdowns in key Chinese industrial hubs underscore that uncertainty and risk associated with the virus – and related government policies – are unlikely to abate in the near term, heightening the imperative for companies to act.
Beyond the pandemic, global supply chains face risks from government policies encouraging domestic industries and impeding cross-border goods and capital flows. Definitions of nationally sensitive industries and technologies have also been expanded in multiple countries, increasing limits on foreign direct investment.
Nearly a quarter (24%) of survey respondents said their company’s operations or supply chains were significantly disrupted over the past 24 months by new tariffs or other government-driven trade regulations or restrictions, maintaining pressure on companies to optimize the locations of their operations and suppliers. This increasingly means a shift closer to home, dovetailing with the increasing benefits of shortened supply chains amid the pandemic’s logistics snarls.
The war in Ukraine
Beyond its horrific human cost, the war in Ukraine has had direct implications for global supply chains: increased energy and raw material costs; devastated regional industry; raised cyberattack fears; and increased operational complexity as companies navigate new sanctions and heightened scrutiny of existing business relationships.
Indirectly, the range of policy measures deployed against Russia, and the potential for secondary sanctions against countries maintaining more normal relations (e.g., China or India), may lead countries to inoculate themselves and their domestic industries against similar measures by selectively decoupling their existing supply chains. Similarly, foreign companies with operations or suppliers in such countries must engage in contingency planning that considers the sudden and potentially protracted loss of these assets or relationships.
Wage inflation in lower-cost countries
For years, wages in certain lower-cost countries have been rising faster than in other regions. In 2020, industrial companies experienced surging labor cost growth in places like China, compared with more modest changes in Europe and the US. The trend in China is expected to continue for the foreseeable future as multiple Chinese provinces increase their minimum wages and the yuan remains relatively strong. As a result, some industrial companies operating in China have relocated production, a development that may continue if not sufficiently counterbalanced by other factors.