Deglobalization through supply chain localization

Carbon management is the environmental issue of our time, just as acid rain was the environmental issue [successfully solved] in the 1980-1990s. While much has been said, and even more remains to be done with Scope 1 and 2 emissions, a more difficult challenge is handling Scope 3 emissions.

Controlling scope 3 emissions is the last and most elusive of the three scopes to manage and control for carbon footprint.? Accounting for and eliminating the carbon cost of transport of all goods and services in a complex, global supply chain forms an aspirational ceiling that many believe can never be practically achieved in a globally distributed society. So what might we see happen?

Four scenarios suggest themselves:

1.??????? Hyperlocal manufacturing of high quality, low quantity products, via technologies such as additive manufacturing (3D Printing) which has been available for more than 20 years but has yet to reach market scale via a new business model.

a.??????? In a digitally transformed society where 1s and 0s move as easily as electrons, hyperlocal micromanufacturing becomes possible with new business models (and taxation schemes) that replace centralized, batch based manufacturing and concomitant large scale transport

b.?????? This, coupled with recycling and reuse of materials, makes a new kind of circular manufacturing possible with very different enabling business models

c.??????? Megacity (>10M in population) formation accelerates, decreasing transport costs and time to delivery in hyperconnected, hyperspeed fashion

?2.??????? Hypervertical integration of supply chain where raw materials to basic chemicals to intermediates to product are processed at a single site

a.??????? As brand owners put increasing pressure on their supply chain partners to decarbonize, many of whom embraced globalization to decrease operations cost (even with increased transport costs), the need to find ways to reshore these operations increase dramatically

3.??????? Complete electrification of transport

a.??????? Via electricity procured through renewables

b.?????? A newish industry with its own Scope 1, 2, and 3 challenges to produce of course

????????? i.?But assuming you solve for (a) above, Scope 3 for transporters becomes de minimus [See General Motors and BrightDrop]

c.??????? With a possible place for low carbon fuels especially for air and maritime transport

4.??????? We continue to ignore Scope 3

Given that transportation accounts for 24% of global GHG emissions, 2 billion tons of CO2/year in the US alone, #4 cannot continue if we are truly serious about achieving a zero carbon global economy.? The challenge with zeroing out GHG emissions for transport is that it is an industry with an extremely long tail.

Today there are roughly:

1.??????? 1.48 billion cars and trucks on the road

2.??????? 106,700 merchant cargo ships on the seas

3.??????? 28,000 passenger and cargo planes

4.??????? 1.7 million freight railroad cars

5.??????? 1 billion SKUs

Decarbonizing carbon and carbon in transport by 2050 [or any other date] is a daunting task; comprised of behaviors and patterns that took well over a century to put in place that now need rethinking and replacing.

My bet is that we’ll see #s 1 and 2 begin to form.? #1 I believe belongs in the further future because much of our business thinking today still focuses on achieving massive scale vs distributed scale, i.e., how to make money from one large facility vs say, thousands of facilities.? We haven’t yet figured out how to build long tail business models in the physical world, unlike digital, where physical assets like music records that cost dollars to deliver are now delivered for pennies and a few keystrokes.? The one exception is restaurant chains; but these rely on assembling commodity technologies under variants of a singular business model of servicing customers.

That leaves #2.? The fastest way for a big, branded company today to reduce Scope 3 emissions is to begin vertical integration of their supply chain.? A simple example would be a company that produces monomers converting these to polymers, and thence to products.? Bringing all these activities under a single roof effectively eliminates Scope 3 for all these handoffs.?

Today FSX sees brands putting this kind of pressure on their suppliers.? But growing regulations [see graph above] and consumer sentiment compress market patience and timeframe for action. ?The challenge is compounded by the globalization movement of the last few decades outsourcing manufacturing; saving on manufacturing costs but giving up control of Scope 3 before it was an issue.? Reclaiming this scope will require extensive reshoring, which in turn will drive up near term costs but also increase the need for innovation to drive down those costs.? This has the potential to drive value creation and M/A as nimble players, midstream and downstream will lever this into vertical integration plays between the physical and digital.

Will brand players want to participate?? Eventually and ultimately, yes.? And from the upstream side, the traditional monomer producers, i.e., the oil and gas crackers, looking to provide a more integrated, lower Scope 3 emission product suite to downstream customers, we should eventually see this happening as well.

Some predictions:

a.??????? Increasing regional specific supply chain strategies and integration with multinationals

b.?????? Manufacturers acquiring mining assets for access to critical materials

c.??????? Polymer manufacturers securing local monomer providers

d.?????? Brand owners acquiring key materials providers

e.??????? Automation innovation to obviate reshoring costs

f.????????Acquisition of predictive analytics companies to provide end to end supply chain visibility to end product owners

g.??????? Finally, manufacturers will increase investment in modular carbon capture technologies that are available today but need lower Capex and Opex to make feasible in the absence of any green premium on output goods and services

h.??????? Massive growth in carbon credit trading and financial instruments through interplay between cap-and-trade systems, CBAM, and the voluntary carbon credit markets

Some signals:

1.??????? Burberry’s acquisition of Pattern SpA to acquire technical outerwear capabilities and boost sustainability goals and help achieve targeted Scope 3 reduction by 46% by 2030.

2.??????? Blue Yonder acquires One Network Enterprises to unite information “from customers to carriers to suppliers to the suppliers’ suppliers.”

3.??????? Mobility company ZF signs supply deal with H2 Green Steel to decarbonize products

4.??????? Adidas requiring all Tier 1 and 2 suppliers to phase out coal based energy by 2025

5.??????? Mars sets aside $1B to reduce emissions by 50% by 2030, 90% of which is Scope 3; from their extended value chain

Industrial transformation will take place through a combination of technology and engineering implementation, invention and innovation, and good old fashioned M&A.

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