Brexit and Global Trade Uncertainty Drive Network Changes

By December 2, 2019Power of the Profession
191126 November Cover

Is the Brexit impasse about to be broken? Businesses across the United Kingdom, continental Europe and further afield are hoping the answer is “yes.” But it will depend, to a large extent, on how millions of Britons vote in the country’s general election next week.

If Boris Johnson’s Conservatives win a majority of seats in Parliament, then his recently renegotiated Brexit deal will be pushed through and Britain will leave the European Union by the end of January. Any other result is likely to see the uncertainty continue well into 2020, as politicians argue about the details of the agreement and whether to put it back to the people in a second referendum.

Regardless of the outcome, however, Britain’s withdrawal from the EU single market and customs union means that new tariffs will be levied and new trade deals will need to be negotiated with EU partners, the United States and other countries. So leaving is the beginning of what is set to be a long and unpredictable journey, not the end.

According to analysis by the International Monetary Fund, the global trading environment is the most uncertain on record. The World Trade Organization, meanwhile, expects growth in the flow of goods across international borders in 2019 to be the weakest in a decade.

Supply Chains Take Stock

Our 2019 Future of Supply Chain study, published last week, shows that the majority of supply chain executives are concerned about the impact that Brexit, the U.S.-China trade war and other international disputes are having on their businesses. A quarter expect this impact to be “significant” over the coming months. And 60% expect the trade war to rumble on for at least the next one to three years.

Research among these almost 1,400 practitioners, spread across the globe and in a wide range of industry sectors, reveals that nearly all have taken some kind of mitigating actions in their supply chains. Broadly speaking, these fall into three categories:

  • Absorb costs and/or raise prices. Working with supply chain partners to absorb the additional costs incurred as a result of import duties and countermeasures is the most popular response (see chart below). And more than one-third of executives say they have raised prices to customers, with firms in the consumer packaged goods, food and beverage, and chemicals sectors particularly active here.
  • Implement workarounds. Switching orders to suppliers in alternative locations to minimize import duties is a strategy used by almost half of our sample. Almost as many have asked government agencies to exclude their companies from duties on specific imported components, materials and other goods, or to refund monies already paid. (The U.S. Treasury’s tariffs revenue is up more than 50% year on year.) Changing shipment routes, postponing final assembly and reengineering product origins are other commonly used tactics.
  • Make physical network changes. A slim majority of firms have already opted to move some manufacturing operations to different countries. And 34% say they have reshored or nearshored production and/or sourcing activities — away from, say, China to other parts of Asia or to popular destinations such as Mexico. Many more plan to take such steps in the next two years, according to our findings.

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Permanent Network Changes

Rebalancing a company’s operational footprint takes time and may require substantial capital investment in new factories, distribution centers and other facilities. So these aren’t decisions that are taken either lightly or quickly. What’s particularly revealing about our survey data is that 52% of supply chain professionals report that the changes they are making in response to the trading environment are long term and permanent, versus 31% who say they are short term and temporary.

China appears to be the main casualty. Apparel and high-tech manufacturers head the list of those scaling back their operations in the country or leaving altogether. Sony and Fitbit are among those that have either recently stopped, or will soon stop, making smartphones and wearable devices in China, shifting production to countries such as Vietnam, Thailand and India.

This diversification is reflected in the choice of countries that supply chain organizations plan to add or reduce jobs in over the next three years. Since we first asked this question in 2015, China has been by far the biggest net winner. But in 2019, its advantage has narrowed sharply.

On balance, more firms still expect to expand their supply chain workforces in China than contract them. But the gap between the two positions has shrunk by 19 percentage points year on year. In contrast, our sample expects to accelerate job creation in India, Mexico, Vietnam and several other countries through 2022 (see chart below).

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Rising wages in China are, of course, a major reason why companies seeking to maintain a low-cost manufacturing and sourcing base are switching to other countries. But the volatile trade situation — alongside changing customer needs and the impact of digitalization — is clearly prompting many to reassess their network strategies and seek to build in a greater degree of resilience and flexibility going forward.

As far as the U.K. is concerned, the chart suggests that in the medium term it can expect to pay a Brexit penalty in the form of fewer jobs as some British-based plants are closed and manufacturers relocate their operations elsewhere.

Geraint John,
VP Analyst,
Gartner Supply Chain
[email protected]

 

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