August 17, 2020–Multinational companies that use complex global supply chains to produce their products might shift as much as a quarter of their production to new countries in the next five years, according to the McKinsey Global Institute.
It’s not the end of globalization, but “an opportunity to reinvent it,” the business think tank says.
Disruptions from Shocks
Shocks such as COVID-19, political instability, cyberattacks, financial crises, and extreme weather due to climate change are impacting trade flows and disrupting production facilities around the world.
According to a report released by McKinsey this month, shocks are rising and imposing greater risks to global companies. “Intricate production networks were designed for efficiency, cost, and proximity to markets but not necessarily for transparency or resilience. Now they are operating in a world where disruptions are regular occurrences,” the think tank said.
The risk of shock varies across industry, with labor-intensive industries such as apparel being more susceptible to pandemics. Meanwhile, highly digital businesses like those in aerospace and semiconductors are more vulnerable to cyberattacks.
Market Access May Matter More
Political pressures also pose a reason for businesses to shift manufacturing, particularly for U.S. firms as tensions between the United States and China rise.
However, even as businesses face these challenges, it is not likely industries will make a huge shift of production away from China, according to S&P Global, a consultant to institutional investors. The research firm says companies have multiple reasons for keeping manufacturing bases in China. These include:
- The high cost of moving operations,
- an efficient labor force,
- access to raw materials and resources,
- lower tariffs, and
- access to China’s large consumer base.
“All told, the likelihood that any public or political drive toward de-globalization will result in a material and rapid shift in the manufacturing process is low, in S&P Global Ratings’ view,” their report says.
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