De-Risk, De-Couple, De-Camp … De-Cide
Gartner for Supply Chain
Gartner delivers actionable, objective insight to CSCOs, supply chain leaders and their teams.
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By?Wade McDaniel, Distinguished VP Advisor
The No. 1 risk voiced by the Gartner chief supply chain officer (CSCO) community is geopolitical. If we think back about five years ago most CSCOs wouldn’t even say the word, let alone believe it could be the biggest threat facing supply chains today.
In May 2023, we asked the community who is planning to move operations to other regions due to trade or political uncertainties. Almost 80% said they are planning to move, or have already begun moving, up significantly from 2022. In a less rigorous poll in June of 2023, I asked for a show of hands in a room filled with 65 CSCOs in Barcelona who was moving for those reasons. The response was 100% yes.
On July 3, China?announced?unspecified export controls on gallium and germanium along with three dozen other metals and materials used in the tech industry. A wide range of industries are affected, including semiconductors, solar cells and defense. This was seen by analysts as a response to the restrictions the U.S. government placed on capital equipment used in advanced semiconductor manufacturing in China. We can expect more escalating tit-for-tat between the United States and China.
Safe and Secure
And it’s not just about China and the United States, it’s about the overall security in the supply chain. Countries have been positioning their supply chain investments as a potential defense, or weapon, for years. And now they are starting to execute those plans across multiple areas including infrastructure, semiconductor manufacturing, mining and?cloud computing.
CSCOs are moving their operations to make them more secure, and it shouldn’t stop there. Suppliers, along with?their?suppliers, will need to be extended, developed or moved to new regions. Which then brings up the question: Just how secure can a supply chain be after decades of globalization?
The answer is, of course, it depends.
Some industries will fare better than others. We did notice a significant shift in the life sciences industry where the number of companies that are moving has jumped from about 50% to 100% between 2022 and 2023. From what we’ve heard, they are feeling a higher level of confidence than many other industries.
Where are companies moving?
From a western CSCO community perspective, they are primarily headed to Europe and North America. And from a China perspective, they are headed to the same places along with southeast Asia. Many think that western companies are leaving China altogether, but this is not the case. They are diversifying locations closer to their end markets in less risky countries. Many Chinese companies feel the risk to too great to concentrate operations in China and are moving as well.
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Not a Question of ‘If’ …
So, it’s not a question of “if.” It’s a question of where to move and how much to move.
First, let’s consider an often-overlooked element in a country move: trade agreements. These might be skimmed over by many supply chain network design teams, but they are not overlooked by governments. The United States, China and the European Union have been racing to put them in place over the past decade, and the race continues. China alone has more than 100 bilateral investment agreements according to the World Trade Organization. These agreements can also be used as geopolitical defense or weaponized.
Second, supply chain leaders should incorporate the enterprise’s willingness to accept risk in pursuit of its strategic objectives. In other words, what’s the company’s?risk appetite? This is the classic risk/reward model that every company should understand about itself, but often doesn’t.
Third, incorporate scenario planning in the move. I know, this sounds so simple, and that every company does it, but they don’t. Almost 60% of the CSCOs we asked in a recent live event said they do not have a formal scenario planning process.
Risky countries can also be growth opportunities, and that’s why we see companies only moving 35% or less of their existing operations. This conservative approach is not surprising as companies hedge their bets. There will be practical limitations on the moves as supply networks can be deeply concentrated in only a couple of countries.
Geopolitical and trade risks are nothing new, but the current environment is buzzing with them and there’s no plateau insight. This will keep network design teams on their toes as optimization is no longer the primary driver for making changes, security and continuity of the business is.
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This newsletter provides an opportunity for Gartner analysts to test ideas and move research forward. Some comments or opinions expressed hereunder are those of individual analysts and do not always represent the views of Gartner, Inc. or its management.