Take a look at what is happening in global supply chains: Taiwan has received NT$1.13 trillion (US$39.08 billion) of investment pledges from companies to move parts of their production lines back home; India is emerging as the world’s second-largest smartphone manufacturer, as large companies such as Apple Inc move their operations there; and Japan plans to significantly ramp up a program encouraging businesses to build production sites in Southeast Asia to diversify supply chains out of China.
If there were any doubt about the effects of the US-China trade dispute and the COVID-19 pandemic on the landscape of global supply chains, the news that continues to come through should make it crystal clear: There is an increasing need to make supply chains more flexible and resilient in the post-COVID-19 world.
That is because there is growing awareness that supply chains have become weak and vulnerable to events beyond the control of those who manage or rely on them.
A report issued in August by global consultancy McKinsey & Co — Risk, resilience, and rebalancing in global value chains — indicated that under the threats of trade disputes, cyberattacks, pandemics and a number of climate-related events, companies in the next three to five years might move production of a quarter of global goods to new countries.
Based on McKinsey’s estimate of how much global trade could relocate, 16 to 26 percent of global exports, including pharmaceuticals, apparel, communication equipment and petroleum products — worth US$2.9 trillion to US$4.6 trillion in 2018 — could be in play.
The aforementioned risks often have severe repercussions on how businesses operate. For instance, McKinsey said that companies would need to strike a balance between their “just-in-time” lean production systems and a new “just-in-case” mindset of having sufficient backup inventory of key raw materials and safety stock of finished goods.
This could minimize the financial impact of disrupted supplies, as well as position companies to meet sudden spikes in demand, according to the report, which also suggested that companies deploy digital systems, analytics and cash management tools that could keep production going in the wake of any shocks.
For Taiwanese companies, suppliers in China have long been their major partners, but it appears that those in the home market are their most reliable partners for sourcing products. However, what happens when a shock strikes and they need to reroute production elsewhere?
Facing this uncertainty, Taiwanese companies should give more than a second glance at emerging markets, even though some of these nations have already been targeted by the New Southbound Policy launched by President Tsai Ing-wen (蔡英文) four years ago.
There are clear signs that India, Vietnam and several other Southeast Asian economies are eager to become part of global supply chains — and have invested more in infrastructure and education in the past few years.
In the past two decades, global multinationals have benefited from China’s cheap production costs, but the COVID-19 pandemic has exposed the shortcomings of their over-reliance on Chinese supply chains.
Most businesses are rethinking the importance of diversifying to a broader portfolio of suppliers, hoping that in a disaster, alternate sources can be secured quickly and cost-effectively.
For policymakers, reshaping Taiwan’s supply chain strategies must make flexibility and resilience the focal point, and they should strive to balance risk diversification and production efficiency.
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