Month: January 2023

By Geraint John

These are uncomfortable times for the global elite – which include the politicians, multinational company bosses, and policy wonks who rubbed shoulders at the World Economic Forum’s annual meeting in Davos two weeks ago. A decades-long era of unbridled free trade and globalization – not just core WEF principles, but assumptions on the nature of global economics – has gone into reverse and nations are grappling with rampant inflation, a cost-of-living crisis, and the imminent threat of recession.

No wonder G7 country leaders who would normally have been happy to swap their domestic travails for the fresh air of the Swiss Alps for a few days (Joe Biden, Emmanuel Macron, Rishi Sunak…) opted to stay away this year. As one newspaper commentator put it: “The idea that Davos is faintly toxic has gained ground.”

Nevertheless, plenty of power brokers did attend this first event back in familiar ski-resort surroundings since the pandemic. And in line with the theme of “Cooperation in a Fragmented World”, geopolitical considerations were uppermost in many minds.

“The number one topic here is geopolitics – it’s not the economy,” noted Julie Sweet, CEO of Accenture.

Economic Consequences of Geopolitical Supply Chain Risk

Major sources of concern included growing US technology export controls on and decoupling from China, and tensions between the US, Europe, Japan, and South Korea over aggressive industrial policy that is handing huge subsidies to manufacturers of semiconductors, electric vehicles, lithium-ion batteries and clean-energy solutions on American soil.

It was once again left to China to champion the virtues of globalization (or “re-globalization”) at Davos. “We oppose unilateralism and protectionism, and look forward to strengthening international cooperation,” Vice Premier Liu He told attendees.

This year’s WEF Global Risks Report, published just before the event, confirms that these tensions are perceived as highly significant for the world economy in the short to medium term, at least. “Geoeconomic confrontation” – which includes sanctions, trade wars and investment restrictions – was ranked third out of more than 30 different types of risk for the next two years by the 1,200 survey participants (see chart).

Fostering greater self-sufficiency in supply chains through state aid and onshoring, and seeking to bolster national security via so-called “friend-shoring” hold dangers for the future, the report warns.

“As geopolitics trumps economics, a longer-term rise in inefficient production and rising prices becomes more likely,” it argues.

Investment in Supply Chain Resilience Remains High Priority at Davos 2023

Resilience in various guises, but particularly operational and supply chain, was also high on the Davos agenda.

Pat Gelsinger, CEO of Intel – which is set to be a major beneficiary of the US government’s subsidies – talked about this in relation to chip shortages. “We needed a global crisis to realize we had allowed ourselves to become dependent on single points of failure in the supply chain,” he told his audience.

“We need resilient supply chains for the future.”

For consultants at McKinsey, this was one of five key takeaways from Davos 2023. “Global disruption isn’t slowing down,” they suggested. “Companies must prioritize building resilience muscles today to prepare for tomorrow.”

That said, business leaders also made it clear they are focused on efficiency, cost discipline and profitability this year. Uber’s CEO, Dara Khosrowshahi, spoke for many when he said: “We have to be much tougher on costs and achieve the same growth plans with a lot less investment.”

This means that investments in supply chain resilience – and in technologies to enable it – need to be carefully weighed and precisely targeted.

Such sentiments are backed by empirical evidence from a global survey released by Capgemini to coincide with the WEF meeting. Its research among 2,000 executives in a wide variety of roles, geographies and industry sectors found that:

• 89% see supply chain disruptions as the main short-term risk for their organizations – by far the biggest source of risk (see chart).
• 92% of organizations say changes in global supply chains will impact them, but only 15% think they are well equipped to manage this.
• 43% plan to increase their investments in diversifying and digitizing supply chains, on average by more than 10%.

Technologies that aid cost reduction and faster decision making; provide visibility and transparency of supply chains; support supplier and production diversification initiatives; and help to manage trade-offs between cost and service are particularly in demand, according to Capgemini.

In a tough economic climate, investing proactively in operational and supply chain resilience won’t come easy to many companies. But, as WEF President Børge Brende noted in his closing remarks to the Davos meeting: “The cost of inaction when it comes to resilience far exceeds the cost of action.”

By Nicolas de Zamaróczy

Thousands of U.S. and European companies are facing supply chain disruptions as a result of the ongoing political violence engulfing Peru.

The six-week-long unrest has seen at least 50 people killed and 700 wounded, while exposing the country’s deep societal cleavages.

Supporters of ousted President Pedro Castillo are demonstrating to secure his return to office, facing off against members of the Peruvian police and military who have routinely employed heavy-handed tactics.

The government recently extended a 30-day state of emergency in the capital Lima, as well as the regions of Cusco, Puno and Callao, which will further disrupt business.

Peru: a Key Commodity Exporter, Gridlocked and Causing Supply Chain Management Challenges

Peruvian companies, which are experiencing disruptions owing to the protests and associated road blockades, supply thousands of international businesses.

From a geographical analysis of the affected regions of Peru, Interos identified 2.95 million Peruvian entities whose business operations are likely disrupted.

Global relationship data in the Interos platform indicates that:

• More than 7,500 North American companies have at least one Tier-1 (T1) supplier among the affected Peruvian companies.
• More than 1,600 European Union and British companies have at least one T1 supplier among the affected Peruvian companies.
• More than 116,000 North American companies have an affected Peruvian company indirectly in their supply chains at Tier 2 (T2), with almost 355,000 at Tier 3 (T3).
• More than 144,000 E.U. and British companies have an affected Peruvian supplier at T2, with over 483,000 at T3.

Peru’s main exports are agricultural products and minerals, and supply chains reliant on these could be hit hard. The Peruvian agricultural producers’ association, for example, estimated in mid-December that its members had already lost $150m in potential exports due to the political crisis, and those numbers will have grown since then.

From an industrial perspective, Peru is the world’s second-largest producer of copper and zinc, and also a major player in silver and gold production.

On 12 January, a major Swiss-owned copper mine near Cusco was attacked by protestors, while a tin mine announced it was suspending operations for the time being.

While most of Peru’s minerals are exported to China and other Asian economies, disruptions could affect commodity prices and inputs availability worldwide. This would be a blow for downstream industries as well as direct purchasers—copper and silver are both widely used in renewable energy and vehicle manufacturing, while zinc is critical to the production of galvanized steel and iron.

Metals and Minerals Are at Risk

Source: Interos analysis of various industry reports

Transportation Infrastructure is a Main Target for Peru Protests

Despite being primarily located in the country’s more indigenous and poorer southern regions, President Castillo’s supporters have nevertheless achieved a nation-wide impact though the deliberate targeting of critical transportation networks.

One of the protesters’ main tactics has been blockading the highways on which national and international trucking depend. As of 17 January, the Peruvian Ombudsman’s Office reported 96 roadblocks, across 14% of country’s provinces, primarily in the country’s lightly populated but mineral-rich south.

Since the start of the crisis, all of Peru’s airports have experienced temporary closures, rail service in the country’s south has been suspended (including at tourist destination Machu Picchu), and commercial truckers continue to struggle to enter or exit the key southern port of Matarani.

Cross-border commerce with neighboring Bolivia is at a standstill, leaving companies in eastern Bolivia scrambling to find alternate export routes through Chile.

Growing Polarization within South American Countries Complicates Friendshoring

Peru’s ongoing troubles are part of a broader pattern of political upheaval within South American countries. In 2022, large-scale protests occurred in Brazil, Argentina, Bolivia, and even normally peaceful Chile, worrying NGOs that track political violence in the region.

While historically geopolitical tensions in the region were driven by differences between left- and right-leaning countries, increasingly the turmoil is emerging within societies themselves.

Political scientists use the concept of “group grievances” to understand how schisms between different groups in society — particularly divisions based on social, ethnic, or political characteristics — play a role in governance. Group grievances in Peru are currently the highest among all major South American countries (see chart).

Note: Group grievances scores range from 0-10, where 0 = best
Source: Interos analysis of Fragile States Index data from the Fund for Peace

This increasing inability of many South American governments to maintain domestic order complicates hopes that the region could become a hub for “friend-shoring”, the trend whereby Western companies are seeking to move production out of inhospitable locations to more stable and less geopolitically charged destinations.

Ultimately, any attempt at relocating production or sourcing sites must assess their long-term potential for political instability.

How to Mitigate Supply Chain Disruptions

Expect roadblocks to hit your supply chains in 2023. Chief Procurement Officers can mitigate impacts from the Peru protests by:

• Better understanding their extended supply chain dependencies on Peru and identifying those at highest risk of being disrupted.
• Discussing the impact of the protests with T1 suppliers, with an eye towards developing business continuity plans and workarounds where possible/needed.
• Cultivating alternative sources for the products affected in other countries, and potentially looking to see if the orders/volumes in existing contracts need to be adjusted.
• Invest in tools that can integrate geopolitical risk into their supply chain risk management process.