Global supply chains: New directions

As much as 80 per cent of global trade is now reckoned to be part of global supply chains (GSCs), according to a new special report from Standard Chartered Global Research, and participation in GSCs has boosted growth and incomes in both developed and especially emerging markets (EM).

Read the full report here >

World trade growth has been weak recently and the expansion of GSCs has lost momentum. Some of this slowdown is likely cyclical but rising wages in China and new automation technologies are challenging the low-wage model, prompting companies to consider re-shoring, i.e. bringing production home. We believe eight drivers will shape the evolution of supply chains:

1. Increasing incomes and growing labour forces in emerging markets will continue to support the growth of GSCs. Rising GDP, more urbanisation, expanding middle classes and growing labour forces offering cheap labour should continue to support supply chain expansion.
2. Better communications technologies will boost both manufacturing and services supply chains. Improved communications technologies including cheaper broadband, the cloud, smartphones, virtual reality systems, computer translation, the Internet of things (IoT) and big data will further support the growth of supply chains by making collaboration easier for manufacturing chains and enabling more services trade.
3. New automation technologies will be a constraint. Improving automation and robotics will likely compete with some low-skill tasks, making re-shoring easier and potentially unwinding some manufacturing chains. Meanwhile 3D printing could lead to a big trend towards customised goods, ‘printed’ locally.
4. New trade pacts could be a major boost. There is a good chance that the Trans-Pacific Partnership (TPP) and China’s Regional Comprehensive Economic Partnership (RCEP) will be agreed this year, with the TransAtlantic Trade and Investment Partnership (TTIP) following. These new trade agreements are going ‘behind the border’ to address obstacles to supply chains, with a particular focus on facilitating services trade.
5. Geopolitical tensions are a threat, though also are helping to encourage new trade pacts. Rivalries are likely one of the drivers of new trade agreements, but geopolitical tensions are also a potential threat to the growth of GSCs as firms fear that conflicts or sanctions could interrupt supplies.
6. Trade costs are falling, providing a significant boost. In our view improving infrastructure and streamlining customs procedures, as agreed in the recent Bali package, will lower costs and boost GSCs. According to the Organisation for Economic Co-operation and Development (OECD), every extra day needed to ready goods for export and import could reduce trade flows by up to 4 per cent.
7. Sustainability issues are a potential constraint. Concerns over the impact of natural disasters such as Japan’s earthquake or Thailand’s floods have led some companies to think of shortening supply chains or even re-shoring. For most companies the response is to increase resiliency by identifying potential risks and diversifying suppliers and holding higher inventories of key components.
8. Relative wage costs will be crucial. As China’s wage costs rise, new low-cost centres are stepping up including among ASEAN countries, India and Bangladesh. The re-shoring trend in the US is partly driven by narrowing wage differentials, though higher oil prices and a new focus on the potential costs of separating design from manufacturing have also been factors.  

In our view the balance of these eight factors means that global supply chains will continue to expand. We see three trends in global supply chains which will help create this growth but also take them in new directions:

1. A shift from China to lower-cost countries. This shift will likely be gradual as China still has lower-wage areas inland which, together with fast-growing productivity, including the rapid adoption of automation and robotics, can keep China competitive. Nevertheless, the centre of gravity will likely trend westward, towards ASEAN and India in particular. Meanwhile, we expect China to cement its role as a ‘megatrader’ by leading the expansion of supply chains through international programmes such as the new Silk Road initiative.
2. Increasing services in supply chains. Measured in value-added terms, services likely already constitute more than half of the value of trade even though direct services trade is only about 20%. New technologies as well as new trade agreements are likely to boost the role of services in goods supply chains as well as direct services trade.
3. Expanding horizontal trade. Horizontal trade, based on firm-level excellence rather than differing wage costs, is prevalent in developed countries and should get a boost from the TTIP and TPP. Firms in developed countries routinely source parts from suppliers in other countries, based on quality rather than low-cost production, while consumers choose products based on a range of factors, often blind to country of origin. Such trade is still much less common among emerging countries due to tariffs and other barriers. We believe it has enormous potential for expansion, with the help of new trade pacts and growing incomes.
4. John Calverley, Head, Global Thematic Research, commented: “Global supply chains have transformed trade and the world economy over the last 30 years. We think they will continue to expand but will be increasingly driven by services and by horizontal trade. Meanwhile the centre of gravity for low-cost manufacturing will shift westwards as ASEAN and India become more important.”
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For further information please contact:

Shaun Gamble
Senior Manager, External Communications
Standard Chartered Bank
+44 20 7885 5934
shaun.gamble@sc.com

John Calverley
Head of Global Thematic Research
Standard Chartered Bank
+1 905 534 0763
john.calverley@sc.com