Col SM Kumar
Co-Founder & MD MitKat Advisory 

The unprecedented gains made over the last three decades where the globalization of supply chains, the rise of China as the major manufacturing hub, outsourcing, offshoring, lean manufacturing, and just-in-time were the dominant trends, are now facing severe headwinds of geo-political tensions and trade wars, the conflict in Ukraine, Covid-related shutdowns, economic sanctions, and renewed urgency to tackle climate-related risks. 

Geo-political tensions, particularly the US-China trade wars unleashed by President Trump ignited the debate on resiliency of supply chains. The pandemic exposed the many shortcomings of globalized and over-extended supply chains. Apart from lockdowns and travel restrictions, the pandemic also impacted the health of many suppliers and industries. Taiwan droughts and global shortage of chips impacted hi-tech and strategic industries across the globe – it led to legislations and actions in the USA, the EU and Japan and India to spur indigenous production of semi-conductor chips. 

Over the last few weeks, the Ukrainian crisis, crippling sanctions on Russia and China’s zero-Covid strategy and pandemic related shutdowns of cities and ports have created new challenges for global economies and supply chains. Oil is on the boil. Container shortages are worsening; Black Sea ports are unavailable. Closure of airspaces is forcing airlines to take longer routes adding to the fuel costs. Freights are rising; so are costs, prices, and inflation.

Crippling western sanctions on Russia are beginning to bite. A Russian default could spread the contagion to other markets. In dealing with its friend Russia, China is likely to be guided by its own interests. Chinese trade with Russia is a fraction of that with the West; Chinese banks and companies would not want to risk secondary sanctions. 

Rising energy prices will hit oil-guzzling large economies of Asia – China, Japan, and India. Europe will see a lower economic growth, higher energy prices, larger defence spending, investment in green and alternate energy infrastructure, and the socio-economic burden of millions of refugees. 

Russia and Ukraine are big exporter of grains - wheat, corn and barley and fertilizers. Rising energy and food prices will fuel inflation.  Russia and Ukraine provide key metals like Uranium, Nickel, Lithium used in batteries and electric vehicles, neon gas used in semi-conductors –  these supply chains are under strain. 

The debate between resiliency and efficiency is not new. The pendulum is firmly on the side of efficiency when times are good but shifts towards resiliency when chips are down. Building resilience involves costs and takes time to produce results. 

The spate of never-ending crises with global implications are strengthening the voices of those in favour of resiliency. While global supply chains are not going away completely any time soon, increased resilience, regionalization and localization of supply chains, onshoring and near-shoring may gain momentum. 

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(This "CFO Talks" Published in April 2022 Edition)