How can companies meet the challenge of supply chain disruption?
This week’s blog comes from Mats Persson, Head of EY’s International Trade, Economics and Policy Unit
Geopolitical uncertainty, new tariffs and even the threat of war in the Middle East dominate the headlines. As we’ve discussed previously, EY’s latest Capital Confidence Barometer Survey (CCB20), shows that almost three quarters of UK executives said that geopolitics is fundamental or influential to their deal strategy – equal to the number citing technological innovation.
Geopolitics is, however, a blurry concept often associated with single events, like coups or wars. A far better way to look at the disruption currently striking deep into supply chains across the globe is a series of often mutually reinforcing trends at the intersection of business, consumers and politics.
In this week’s blog, I want to explore how businesses can keep their supply chains on the right side of these trends. I believe that transactions could be a significant part of this process – and it seems that many UK executives agree.
Supply chains have grown longer and more complex
There are many reasons why supply chains are now subject to so much pressure and attention.
Firstly, the challenge to the increasing global trade interdependence that we have seen over the last three decades. In the 1980s trade between China and the US was worth $4bn a year. Today, it’s worth $4bn a day, with the Sino-American trade and tech battle unveiling some incredibly integrated supply chains, particularly in the tech sector. According to logistics company, Geodis, aerospace companies typically contend with a supply chain that has an average of average of 3 million parts by plane and four levels of suppliers ranging from raw materials to aircraft manufacturers.
The rise of protectionism does come with nuances, however. There are more free trade agreements in force today than at any other point in history. So whilst trade integration is being challenged on some trade routes, it’s accelerated on others.
Secondly, despite this complexity, I’m constantly surprised by how little visibility companies have over their supply chains. We’re often told at the start of a conversation with a company that they have little exposure to, for example, new tariffs, tech blacklists, sanctions or Brexit, only to find out after a deep scan that their products criss-cross the English Channel multiple times or a key SKU is in fact made in China. Indeed, the Geodis survey shows that 6% of companies surveyed have ‘complete visibility’ over their supply chains.
Thirdly, the pace of change is picking up significantly as social media acts as a trend accelerator – be it in consumer or political trends – and as new technology is rolled out. Consider the “green wave” sweeping Europe, in which consumer preferences for the sustainable and local and government interventions are feeding off each other. After the BBC’s Blue Planet episode on plastic use went viral, retailers reported a 500% increase in the sale of reusable coffee cups. Meanwhile, plastic straws virtually disappeared from restaurants and cafes overnight, causing a UK-wide shortage of paper straws. The UK Government’s 5p charge on plastic bags saw an equally fast 85% drop in sales.
Technology is also being adopted quicker. It took almost 100 years for landlines to be adopted by over 80% of US households; the equivalent time for cell-phones was 14 years. This development is blurring the line between trade in goods, services, data and – with digital currencies in the starting blocks – finance. This acceleration may pick up further as the second half of the world’s population come online over the next decade. Direct-to-consumer is, in this context, on the rise, which requires a different supply chain infrastructure to traditional retail.
There are of course more traditional supply chains considerations, like increasing labour cost in historically low-cost countries, but the point should be obvious: businesses who understand these trends and end up on their right side can simultaneously manage cost, spot new trading lanes and win new consumers, while also boosting brand and reputation. Alarmingly for some businesses, the reverse is of course true – and it can go fast.
Where does it make sense to buy versus to build?
To address these supply chain challenges, companies have a few different options including divest, buy or build. Building from scratch clearly has its advantages but it takes time.
Given the speed of events, buying can be a more appropriate way to leapfrog trends. Indeed, 47% of UK executives in the CCB said they have or are considering an acquisition to secure their supply chain. It will be a lot quicker to buy a health snack brand or a paper straw manufacturer than to build that production from scratch.
Many in our CCB survey report trying to secure their supply chain are buying warehousing and logistics capacity. But we’re also seeing companies making bolder moves to get ahead of the trend and change trading lanes. My colleagues have spoken here before about how oil companies are buying companies in the low-carbon supply chain that have the potential to disrupt their core and end-markets. Saudi Aramco moved down the supply chain, by buying 70% stake in petrochemical giant, Saudi Basic Industries Corporation for US$69b. Oil major Total bought a majority stake (74.3%) in French electricity retailer Direct Energie in a €1.4b (US$1.7b) deal. Several companies we work with have bought production capability to end up on the inside of an existing or potential tariff wall in the EU, US and India.
However, there’s another important consideration for those who are considering transacting in an uncertain environment: spotting the difference between a one-off event and more long-term trends. Looking purely from a trading point of view, Brexit wasn’t a vote against free trade. Ignoring the current myopia of UK politics for a moment, Brexit trade friction is an event, with the long-term trend pointing to the UK remaining a free-trading country. The US-China stand-off, in contrast, is fundamentally a clash between two economic models, where the long-term trend points towards ongoing tensions, even if there’s a short-term deal on tariffs.
Ending on the wrong side of an event can be bad. Ending up on the wrong side of a trend can be existential. Even if these trends aren’t themselves a trigger point for transactions, any transaction in almost any sector, must take them into account to avoid surprises down the road.
What’s clear is that these trends – and the challenges and opportunities they bring – will be with us for years to come.