Trade Flows and Value Chains
There is little hard evidence to suggest significant de-globalization is underway. The pattern of global trade is an aggregation of the “value chains” of myriad individual businesses, which run all the way from conception and production to distribution. Predicting trade flows therefore requires some understanding of how these value chains are being restructured in response to economic, corporate, geopolitical, and environmental forces.
There is currently much debate about the longer-term impact of the pandemic on value chains and, by implication, global trade. According to World Bank data, the ratio of international trade to global GDP rose from 25% in 1970 to a peak of 61% in 2008, tracking the increasing globalization of value chains. Over the next nine years it remained at about 56%, before dropping to 51.5% in 2020 - partly due to COVID-19-related lockdowns.
The future course of this key indicator is being debated; its relative stability prior to the pandemic could be interpreted as meaning value chains were already fully extended, signalling an end to the long-term process of globalization. Alternatively, it could have been a temporary phenomenon resulting from trade taking longer than expected to recover from the 2008 financial crisis, amid a suspension of trade-liberalization efforts and growing protectionism.
Pressures to shorten and simplify value chains are mounting. During the pandemic, the speed and reliability of global transport services have sharply declined while their cost has escalated - according to the online international freight marketplace Freightos, average container freight rates increased seven-fold between April 2020 and February 2022.
As Chatham House has observed, governments in the US and Europe have harnessed “an array of public policy tools to protect strategic supply chains without sliding into protectionism,” using a mix of approaches “ranging from re-shoring production to establishing stockpiles of critical inputs, while collaborating at bilateral, regional and global levels to reinforce the international trade system.”
In reaction to record levels of supply chain disruption and product shortages, particularly of semiconductors, some companies have tried to increase their future resilience by near-shoring (bringing closer to home) production and the sourcing of materials.
There is still little hard evidence in global trade statistics and business survey data to suggest that significant de-globalization is underway. The post-pandemic reconfiguration of value chains may simply be taking longer than some experts expected.
Humanitarian and Health Supply Chains
A combination of climate change, conflict, and the coronavirus has sharply increased demand for humanitarian relief. The pandemic has exposed the vulnerability of medical supply chains in developing countries. And nearly three-quarters of the spending on this relief is supply chain-related.
The World Food Programme reports that there were 45 million people in 43 countries at the “emergency phase” of food insecurity in 2021; the WFP’s operations involve the daily use of 5,600 trucks, 30 ships, and 100 planes. Such logistics assets must be available both for immediate deployment in an emergency, and for supporting longer-term economic and social development in highly-vulnerable communities.
The UN Refugee Agency estimates that in 2019, weather-related hazards displaced 24.9 million people in 140 countries - and it forecasts that “climate-related disasters could double the number of people requiring humanitarian assistance to over 200 million each year by 2050.” The annual cost of this assistance could reach $20 billion by 2030.
Supply-chain disruptions and travel restrictions have hit humanitarian operations harder than businesses, due to the vulnerability and volatility of the environments where they operate. Lengthening lead times, inflated costs, and a widening funding gap mean relief agencies are struggling to meet rising demand.
These agencies are under constant pressure to use their assets and resources as efficiently as possible, to maximize benefit from the donations that fund much of the sector. They are also now expected to maintain relatively high environmental standards for the ways they source, store, and deliver supplies. Purchasing more goods and services locally can help agencies achieve their goals, while also supporting local businesses in stricken regions.
Since 2005, a WEF-initiated, public-private collaboration between relief agencies and four major logistics providers has been pooling resources and transferring logistics expertise. Accelerating digitalization can improve humanitarian response times and efficiency, while increasing agility and resilience. In terms of the humanitarian effort to distribute COVID-19 vaccines, there are formidable challenges for developing countries - particularly when it comes to vaccines that require stringent temperature controls.
The vulnerability of medical supply chains in these countries has been critically exposed in this regard; however, the upgrading of logistics systems and cold chain infrastructure to support vaccination programs may bring lasting benefits to many communities, and set a good example for future supply-chain investment in the humanitarian sector.
Digital and Hardware Innovation
Freight transport is on the eve of a technological revolution that will spur greater use of renewable energy. The digital transformation of logistics, already well underway, was accelerated by the pandemic. Service providers and freight forwarders with relatively strong digital capability could compete more effectively as remote working grew more prevalent, and better cope with COVID-19-related supply chain disruptions.
The portion of logistics business that is transacted through online platforms continues to rise, while big data, artificial intelligence and machine learning are being increasingly deployed to improve trading outcomes, maximize the utilization of logistics capacity, and mitigate risk.
Shared intelligence is increasingly viewed as an enabler of resilience and trusted trade. The proliferation of sensors and tracking devices is rapidly expanding the availability of real-time data on logistics operations - giving companies the visibility they need to manage assets, inventory, and product flows more effectively. Breaking down many of the information silos that exist across supply chains will also require a change in corporate culture, however.
Supply chain applications for blockchain, the Internet of Things, and digital twinning are still at a relatively early stage and projected to increase significantly. Meanwhile the digitization of physical products in the news, entertainment, and education sectors is steadily replacing freight consignments with data transfers.
3D printing is having a tangible impact on supply chains, after being used more broadly during the pandemic. Logistics hardware is also undergoing major change; within distribution centres, materials-handling operations are increasingly mechanized and automated. The growth of online retailing is expanding the use of robots in item-level picking, while wider uptake of augmented-reality devices is improving the productivity and accuracy of manual picking operations.
The speed and efficiency of container handling in ports, which has been impaired by staff shortages during the pandemic, is being further automated and digitalized. The truck driver shortage has meanwhile stimulated greater interest in the automation of road-freight vehicles. The battery electrification of vans is progressing rapidly, and the first battery-powered, heavy-duty trucks are hitting the market (mass production and adoption of battery- and hydrogen-fuel-cell-trucks is expected by the late 2020s).
The first fleet of zero-carbon, deep-sea container vessels is under construction, and at the local level cargo cycles, both manually- and electric-powered, are handling much short-distance, small-order distribution. Freight transport is on the eve of a technological revolution, as a new generation of trucks, locomotives, and ships is being designed to run on renewable, low-carbon energy.
E-commerce and Logistics
Decarbonizing Supply Chains
Cities have become fertile terrain for innovation, much of it to increase the speed and convenience of last-mile delivery. The pandemic has hastened a retail revolution that was already well underway around the world, shifting sales from physical shops to online channels.
According to eMarketer estimates, during 2020 the share of global retail sales attributable to e-commerce rose from 13.8% to 17.8%, and it is expected to grow to 24.5% by 2025. Retail supply chains are being transformed not only to cope with the growth in internet sales but also to meet online customers’ changing delivery expectations. These expectations have been partly conditioned by e-tailers competing on the basis of speed of delivery, product range, and ability to offer many delivery and collection options.
Home delivery has increasingly been supplemented by the distribution of online orders via locker banks, petrol stations, transport terminals, and even conventional retail outlets - many of which now offer a “click and collect” service. Servicing such a diverse range of delivery points within tight deadlines has required the development of “omni-channel” distribution systems. For traditional retailers developing an online capability, this has involved adapting their legacy logistics infrastructure.
The Internet of Things, in the form of internet-enabled refrigerators and cupboards, offers the potential for automated replenishment of grocery items. Meanwhile, within the gig economy, online “crowd-shipping” platforms are engaging ordinary people in the delivery of parcels, sometimes in the course of their everyday travel.
A relatively recent addition to the online food delivery market has been the ultra-fast food delivery service, designed to distribute small orders often within minutes. City logistics has become fertile terrain for technological and service innovation to increase delivery speed and convenience. Small delivery robots (or droids) play niche roles in some cities, though distribution of online orders by drone has yet to develop at scale.
The growth of e-commerce is having extensive global supply chain impacts - a survey of over 2,000 online shoppers in the US, the UK, Germany, and Australia by Logistyx Technologies found that 57% had made a cross-border purchase over the previous year. Manufacturers and small traders are increasingly using both the web platforms and logistical systems of large online retailers, such as Amazon and Alibaba, to extend their own geographical reach.
Businesses have come under mounting pressure from governments, shareholders, and consumers to reduce the environmental impact of their logistics and supply chains. More decisive policies and fuller exploitation of technology are required for necessary emissions reductions.
Upwards of 80% of many companies’ greenhouse gas emissions originate in their upstream supply chain. International Transport Forum data indicate that freight transport accounts for 10% of all energy-related CO2 emissions, and will be particularly difficult to decarbonize because of a heavy dependence on fossil fuels.
According to the ITF, full implementation of current policies would actually result in freight-related emissions rising by 22% by 2050, while more decisive policy initiatives and fuller exploitation of technology could mean a 72% reduction. The movement of goods by road accounts for two-thirds of freight CO2 emissions globally (the subject of the World Economic Forum’s Road Freight Zero initiative) and will be decarbonized primarily through repowering with low-carbon electricity. The International Maritime Organisation says it wants greenhouse gas emissions from shipping to drop by 50% between 2008 and 2050. It expects two-thirds of this reduction to come from a switch to low-carbon fuels like e-methanol, green ammonia, and bio-LNG; the use of bio- and e-fuels will also be the main means of decarbonizing air cargo operations.
However, the long asset life of ships, aircraft, trucks, and locomotives, and the need to transform freight energy supply systems, will slow this decarbonization process. It will be faster for warehousing, port, and terminal operations, as the carbon intensity of grid electricity declines and on-site micro-generation of zero-carbon electricity expands. While they await the mass deployment of new technology and cleaner, low-carbon energy to help hit “net zero” targets, businesses can focus sustainability efforts on managerial and operational changes - which can yield substantial emissions reductions often with relatively low, or even negative, carbon-mitigation costs. Such changes include freight modal shift, improved vehicle loading and energy efficiency, and the application of circular-economy principles to minimize waste and maximize recycling across the supply chain.
Many externalities, like air and water pollution, traffic accidents, noise irritation, and a loss of biodiversity can be targeted through corporate ESG (environmental, social and governance) policies and government legislation. Fortunately, some initiatives can alleviate several of these environmental problems and at the same time yield economic and social benefits. The resulting emissions reductions can be significantly enhanced when companies collaborate.
Infrastructure and Real Estate
Human Resource Issues
As economies have sought to recover from the pandemic, infrastructure bottlenecks have caused serious supply chain disruptions. In many places space used for offices or parking is being repurposed for last-mile delivery.For example, a lack of capacity at major hub ports has contributed to a doubling of average container transit times, and some countries have experienced acute shortages of warehouse space.
The health crisis has highlighted the need for greater investment both in transport networks, and logistics real estate. Public funds have been committed in the US, Europe, and in many developing countries for substantial investments in road, rail, and port infrastructure. This should help relieve congestion, improve the speed and reliability of freight services, and generally better facilitate trade. In some countries, environmental policies are prioritizing investment in facilities that promote a modal shift to rail and waterborne services.
The spatial structure of logistical systems and supply chains will adjust to changes in the patterns of accessibility across road, rail, and waterway networks. This is likely to induce further clustering of logistics property in the vicinity of major terminals and highway intersections.
CBRE has estimated that every additional $1 billion in online spending requires a further 116,000 square metres of warehouse space; it has also anticipated “further demand coming from the reconfiguration and expansion of supply chains, in order to better prepare them for future disruptions and consumer demand shocks.” Within some urban areas, space used for retail, offices, and parking is beginning to be converted to micro-hubs for the last-mile delivery of online orders.
In many countries, logistics real estate markets have been booming, driven mainly by the need for new fulfilment centers to support the accelerating switch from bricks-and-mortar to online retailing. This re-purposing of urban real estate for logistics uses has been further accelerated by the pandemic-induced increases in online retailing and working from home.
Meanwhile the decarbonization of supply chains requires a transformation of energy supply infrastructure, a proliferation of recharging and refueling points for renewable energy and the electrification of rail (and possibly highway) networks. Adaptation to global warming will require the climate-proofing of transport and logistics infrastructure against extreme weather and sea-level rise.
The pandemic has accentuated deep-rooted problems in terms of recruitment and retention of logistics labor and management. Despite extensive mechanization and automation, logistics very much remains a labor-intensive activity. It depends heavily on a healthy flow of workers at different occupational and skill levels, but in many countries this flow has been failing to meet demand for many years.
The pandemic has exacerbated logistics worker and skills shortages, particularly in countries such as the US and the UK, where they have been responsible for much of the supply chain disruption. A Business Continuity Institute survey indicated that in 2020, 46% of supply chain disruptions were due to “a loss of talent/skills.”
Following a global review of the truck driver shortage, the International Road Transport Union concluded that the “driver shortage threatens the functioning of road transport, supply chains, trade, the economy, and ultimately employment.” The vulnerability of the logistics workforce to the coronavirus has accentuated deep-rooted problems in terms of recruitment and retention, especially of truck drivers. And the human-resource crisis in logistics extends well beyond truck drivers.
Logistics service providers also report difficulty in maintaining staffing levels in their warehouses. Shortages can be particularly acute in the fulfillment centers for online retailing, where item-level order-picking is inherently labor-intensive.
For several years, companies have been reporting a shortage of qualified managers for supply chain roles in both developed countries and emerging markets. These shortages have been attributed to several factors. For workers, they include uncompetitive pay, poor working conditions, an aging workforce, an image problem for the sector, and a lack of training and career progression. Meanwhile, the growth in demand for logistics services has been unrelenting.
E-commerce has also created a huge demand for last-mile delivery drivers that, in many places, has proved hard to satisfy. Increases in the technological sophistication of logistics operations and the complexity of supply chains call for new and varied skills at operational and managerial levels. Yet training existing employees and recruiting fresh talent can be difficult during times of tough competition in labor markets.
Efforts to professionalize employment have been undermined by the growth of the gig economy, which has fostered a pool of casual, part-time logistics workers. As one McKinsey report noted, wage inflation in the logistics sector will not correct the problem. Instead, a redefinition of the “employee value proposition” will be required to entice more skilled workers into logistics and supply-chain management roles.
Prioritizing Resilience
The pandemic has thoroughly stress-tested the resilience of supply chains. The pandemic has exacerbated pre-existing deficiencies in infrastructure and labor practices. It has vividly demonstrated how vulnerable globalized, low-inventory supply chains have become to such a high-impact, low-probability event - particularly when its adverse effects are prolonged and geographically extensive.
The crisis has exacerbated pre-existing problems such as deficiencies in infrastructure capacity, worker shortages, and poor labor practices. Purchasing managers in Europe and North America reported that average delivery times more than doubled as the health crisis worsened, while the World Bank’s indicator of global supply chain stress rose seven-fold between the end of 2019 and mid-2021.
It also caused businesses to reassess some of the fundamentals of supply chain management. Only 14% of 1,000 managers surveyed by the Capgemini Research Institute in 2020 expected their supply chains to return to a “pre-COVID normality,” 62% saw resilience becoming a key supply chain priority after the pandemic, and 57% were planning investment to enhance it. Implementation of these survey responses would increase protection against a range of threats, including climate change, cyberattacks, geopolitical tension, and financial crises - in addition to future medical emergencies.
Companies can reduce the exposure of their supply chains to these risks in several ways. One much-debated option is to shorten supply chains by re-shoring production, and sourcing from less-distant locations. Some companies are regionalizing and diversifying their supply base to spread risk, though so far there has been little evidence of a pronounced reversal of globalization.
Surveys suggest that as the pandemic has progressed, a general commitment to prioritize resilience has remained strong - though managerial thinking on how exactly to achieve this has partly shifted from re-shoring to inventory-based risk management responses. The Business Continuity Institute estimates that about 40% of COVID-related supply-chain disruptions occurred at or above the second tier of suppliers, and according to McKinsey, only 2% of businesses have actual knowledge about operations above this second tier.
Geographically re-sourcing supplies can be a slow process. Some relaxation of the just-in-time principle is now underway - with many companies increasing their inventory levels, and lengthening order-cycle times. The pandemic has also demonstrated the need for greater end-to-end supply chain visibility.
SUPPLY CHAINS
Supply chains are the circulatory system of the global economy, providing access to the things we need to support commerce and sustain life. Despite their vital importance, most people have traditionally had little appreciation of the complexity of supply chains, and only noticed them when they were disrupted during the pandemic.
Even prior to COVID-19, their vulnerability and environmental impact had become major sources of concern. The responsibility for much of the physical movement, handling, and storage of products has been outsourced to specialized logistics service providers, whose operations are growing ever more complex.
It feels that the pandemic has made changes to just about everything in daily life. Not only have our routines changed, but we have also been put on a steep learning curve of new concepts. Citi’s Global Supply Chains identifies six macroeconomic factors that have come into play and disrupted global supply chains: (1) supply-chain management practices, (2) a shift in consumption toward goods, (3) massive monetary and fiscal stimulus by the public sector spurring aggregate demand, (4) the emergence of the Delta variant, (5) a shortage of available workers, and (6) commodity shocks that amplified other supply-side pressures.
Because more than one cause or event got us to our current situation, one single solution will not relieve the stress. Ultimately, the overall solution to resolving supply chain disruptions is tied to improvement in the pandemic. Addressing the other
macroeconomic issues will take time, but we are already seeing key indicators improve — e.g., congestion issues at U.S. ports, and prices in energy markets and commodities. Without any other major setbacks, we believe supply chain issues should feel better.