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The Emerging Supply Chain Wars

In the new book “Connectography: Mapping the Future of Global Civilization, author Parag Khanna discusses the concept of the “new supply chain wars”. In this book the author discusses how multinationals have become deeply connected and exposed to the emerging markets that have become their main competitors.   But as countries like China become wealthier and export more of their low cost jobs, it too will favor openness over protectionism and a level commercial playing field.

Central to his argument is the notion that global supply chains have become more complex, but have also merged into a comprehensive whole. For example, America’s import content of exports is relatively low (15%) but increases to actually 40% if one takes a full-cycle view of downstream distribution and sales as being included in the end to end supply chain view. Even the World Trade Organization chief economist Patrick Low describes these “hybrid value chains” as different: “The physical and the digital, the manufacturing and the services, and the value-added from intangible factors such as competence and reputation are simply not captured by today’s statistical methods”.[1] Products should carry the label of “Made Everywhere”.

One of the best examples of this is Apple, which is often criticized as producing too many of its products in China at FoxConn. The CEO, Tim Cook, recently said that “I don’t think we have a responsibility to create a certain kind of job. But I think we do have a responsibility to create jobs.”[2]   In fact, Apple is now going to produce one of its iMac lines in Texas, but most of the parts for these products will be imported from all over the world. Even China imports 34% of its electronic components in producing its information technologies. The point is that import and export is a key part of this global trade – but this is being threatened.

One of the biggest threats to current patterns of global trade suggested by Khanna is the combination of 3D printing and sharing economies in which goods will be consumed as services. Moreover, he predicts that local prototyping and mass production could bring about a severe long-term contraction in global shipping, inventories, and warehouses. Replacement parts for airlines, equipment, appliances, etc. could be produced proximately on demand. If this is the case, then technology wont eliminate supply chains, but will “morph” them, as raw materials such as organic matter or plastics will need to “feed” 3D printing. In addition, the people who design the software and the printers will be the ones that lead the market.

One of the most compelling insights of this future view of supply chain wars is the formulation HORIZONTAL + VERTICAL = DIAGONAL. “Competitors want to be horizontal nodes of production and distribution and vertical hubs of value creation – together propelling themselves diagonally up the ladder of economic complexity” (p. 158). In this formula, countries with no resources can become transshipment points that smooth out supply chains, such as Singapore which has no raw materials but generates massive profits from its transshipment port. When countries impose sanctions, higher royalties, port access restrictions, anti-corruption witchhunts, and other “tug of war” tit for tat measures, the global economy will be impacted by this “horizontal resource mercantilism”. In the same manner, “vertical tug of war” occurs when countries grab the most technologically sophisticated and financially profitable segments of strategic industries. And eventually countries who are lower on the food chain will expand and ascend up the value chain to take over those industries now populated by Western countries. And in places like India, companies think of “copywrite” as “right to copy”! And keeping the “R” of “R&D” out of countries like China is not a formula that Western companies have been able to work out yet.

Companies will need to pay more attention to the global dynamics that are emerging around these supply chain wars.

[1] Interview with Parag Khanna, July 18, 2015.

[2] Josh Tyrangiel, “Tim Cook’s Freshman Year: The Apple CEO Speaks,” Bloomberg Businessweek, December 6, 2012.