Bloomberg New Economy Conversations: Supply Chain Revolution

Andrew Browne: Is there a danger that in addressing medical supply chains, we could damage supply chains that have been so instrumental in lifting hundreds of millions of people out of poverty in the emerging world and building a middle class from China to Ethiopia?

Kevin Sneader: That is a very important dialogue and there is that risk because if the world was to retrench its supply chains, that will do some real damage to some parts of the world that have been able to lift people out of poverty on the fact that we now have got these distributed supply chains out there. At the same time, we have to recognize that one of the responses to this crisis has been that borders are back. Whether we like it or not, borders have been put back in place for good reasons around health. But once they’re there, how quickly will they come down?

Even if you can get into the argument that having supply chains distributed around the world is a way to diversify and reduce risk, nevertheless—if actions taken by governments on behalf of their citizens restrict the movement of goods—then it’s a theoretical argument, because in practice we’re going to have to change the way we do things. Therein lies the real debate.

There’s no question that we’re going to see a real move toward emphasizing resilience—at least the equal of efficiency—and that means we will probably shift from a just-in-time economy to a just-in-case economy, where we need to have robustness and resilience and be more confident about being able to retain a supply.

I don’t think that’s entirely related to vaccines, but overlaid on top of that is going to be this very real return of borders and with that a mindset that distance is back. For all that we’ve gone through in Europe from the 1990’s-on, where we predicted and lived through the death of distance because of technology, now, we’ve seen a return of distance— physical distance and how people feel about things that come from far away.

There are some real barriers that need to be overcome here. The consequences of the rhetoric around reshore/onshore need to be thought through in terms of inequality, what it does to the world, and how it actually plays across, because it would be a very different world than the one we were original foreseeing.

Andrew Browne: The relationship between the US and China seems to be going from bad to worse, we’ve already seen decoupling in certain areas: technology, manufacturing, investment, talent, and perhaps now even in the realm of finance. How far does this go? 

Kevin Sneader: It’s gone quite far in terms of rhetoric, but the substance hasn't yet caught up with it. The question is at what point will the reality of what’s happening really change, and there’s a couple of things worth keeping in mind. In 2008, when the global financial crisis happened, it was easy to blame the financial institutions, the banks in particular. As we wrestle with coronavirus, people are going to look for things to blame and were’ seeing that already.

As that happens, the question is what actions follow, and at this point in time there are a few realities that we have to keep in mind. One is that China is less dependent on the world than the world is on China, because China has a massive domestic economy. It does export, but it actually exports a relatively modest part of its production. If you compare that with Germany, which is an export economy, it very much depends on being able to send its and other industrial products around the world. Germany is actually the one that stands to lose most if barriers go up.

This issue of the US-China relationship clearly is of massive importance, it’s geopolitics writ large because I do think we ultimately wrestling with two powers, each of which has a vital role to play in the global economy. When both are firing on all cylinders, the whole global economy does better but now we’re entering a period where clearly the lack of stability of that relationship is having very real consequences.

You can see it in the way in which goods are flowing and the impact on commodity prices, so I think it’s a political question you’re asking me and I’m not a politician, but I can tell you that on the ground we’re watching very carefully.

Kevin Sneader: If I had to have a phrase that’s been stuck in my head—and I wrote an article about this recently—which was by the great American philosopher Yogi Berra, who plays a terrible game called baseball, when he said, “The future ain’t what it used to be.” I think that applies to globalization; globalization ain’t what it used to be.

Yes, we’re going to see data and related flows, but let’s also remember that the physical movement of goods has been in decline for many years. And it suffered a major decline when we saw the 2008/2009 financial crisis hit the world, after which physical goods declined significantly. I saw an IMF forecast an 11 percent decline in global trade, so it’s hard to square that with the notion that globalization as we know it is going to return or continue. I think we’re seeing a very fundamental change and we need to get used to it.

Andrew Browne: Tradeshift has 1.5 million companies buying and selling on its digital platform. As CEO, you have visibility into all of this activity, give us a snapshot. What is the data telling you about the state of the global economy and supply chains right now?

Christian Lanng: Fiscal goods has been trending downwards for a long period of time. Just in March, we had a 63 percent drop in cross-border trade on the platform pretty much overnight. We had huge spikes in pharma in February, and curiously in the US in March and April. You could also pretty much see when every country was reacting to the current situation.

Now, you’re seeing spikes in food. Food supply chains are definitely ramping up fast as people are trying to secure a supply. But I think the cross-border trade drop was the largest we’ve ever seen and the fastest we’ve ever seen. It’s come back a little bit as capacity came on again in China, but it’s also very real that there’s not a lot of places for that capacity to go yet—expect if it’s PPE or pharma.

Andrew Browne: When you double down or triple down on your supply chains, aren’t you also adding to your risk of goods crossing more borders? Doesn’t that add in some way to your insecurity?

Christian Lanng: Fundamentally we have two issues with modern supply chains. One is that they might be digital on top, but fiscal and paper on the bottom. Even before we talk about goods, imagine every single time you have a supply chain transaction it actually generates a physical piece of paper that’s moved somewhere. That stopped in February, we had customers that had 3 million transactions sitting in mailrooms that they couldn’t actually process. We have a tendency in 2020 to think that our supply chains are digital; they are not, and that’s going to be a huge challenge.

The second piece is that we have to throw out the playbook on how we design supply chains. Modern supply chain design is invented by MBAs; it’s great for driving down costs. It’s essentially an imitation of the two principles: lean just-in-time and no inventory. If I designed a cloud computing platform in such a way that, if one server fell over, we had global unavailability, I would be fired as a cloud computing provider.

I think we need to stop thinking about those principles,  and we need to start thinking about resiliency that we actually have learned to build in a lot of systems and apply it in the right areas. In computing, we talk about micro-services, flexibility, redundancy, and multi-sourcing, and I think all of the technology to do that is there; it’s not that we can’t have much more distributed manufacturing.

The last bit on borders: Crossing borders—even today—is actually very complex, but people don’t see it because we are integrated into customs systems. There are fast lanes for all of this stuff. I am more concerned about people than I am about goods because there is already infrastructure around goods crossing borders. Yes, it’s going down, but it’s not going to disappear, and that’s one area that makes me optimistic. The tools, processes, and shippers are very advanced, but for people it’s going to be more complicated.

Andrew Browne: Without reinventing or further complicating supply chains, isn’t there a simpler answer? Stockpiling, particularly when it comes to medical equipment, which is really the heart of the problem right now.

Christian Lanng: If you look at the UK—before this crisis—the cost of buying enough PPE to support the UK until the end of 2022 would’ve been around $5 billion. For the US, to have enough ventilators to support the largest imaginable spike would’ve been around $12 billion before the crisis. The incremental cost of having capacity in the healthcare system to handle these things is actually extremely small.

I think, especially in healthcare, just-in-time supply is a crime. When we’re dealing with health and people’s lives, I think that’s something where government needs to step in and mandate resiliency.

Andrew Browne: How can companies afford to spend the massive amount of money that it will require to reshore production? Particularly if reshoring production will involve investment in automotive technologies? Where’s the money going to come from, and where is the incentive for businesses to do this? 

Christian Lanng: I think reshoring is the wrong word that describes the wrong movement; I think it’s multishoring. Just to be clear, during the trade forum, many manufacturers actually moved out of China. There’s a lot of Western companies that don’t understand that they need to have manufacturing in China if they want to sell to China’s consumers. What you are going to see is multishoring, meaning you’re also going to have manufacturing capacity in the West, for which it’s been a long time for a lot of these Western companies.

If you’re looking at technology like Apple and others, they have enough cash in their balance sheets. For auto it’s going to be a lot more difficult; I think they’re going to lean on Mexico, Latin America, and some of the other manufacturing hubs. The other trend we’re going to see—it’s a little longer, about 5 to 10 years—is more close-to-dock factories where a lot of the workforce might not even be in the country. You might have robots that are completely autonomous or robots that are human-operated, but those operators might very well be in India or China.

We can have production capacity in the US or in the West that’s managed and operated elsewhere. I think you need to have a big imagination of what reshoring means, because if you just think reshoring you think about taking what you have today and putting it [somewhere else], and I don't think that’s what’s going to happen. I think we’ll have diversification of services, production capacity, and it’s all going to be very technology-driven much more than we see today. 

Andrew Browne: Is this a question of reconfiguration or politicization of supply chains? Reconfiguration without a rethink about the character of supply chains will not guarantee resilience, alternative suppliers, adequate financing, and engaging the long-tail key.

Christian Lanng: This is something we talk about with a lot of our customers and CEOs every day. The modern supply chain model was invented after the Second World War, and it basically builds off the idea that we have a centralized hub that coordinated everything. We’ve only been able to measure two factors—costs and what you get in return—but you know very little about the impact or footprint of your supply chain in many different ways.

Before all of this, at Davos earlier this year, everybody was agreeing that the private sector needed to look at a lot more impacts. The other thing about these hugely centralized supply chains, they’re also centralizing jobs and creating very skewed political effects inside countries. We saw the hollowing-out of the UK and middle America from a manufacturing perspective, and I think that’s actually what destabilized their political base.

Pandemics don’t care about populism; that’s a good thing. But I do think we need to think about what the socioeconomic impacts are of how we structure supply chains, not from do-good perspective, but certainly from an economic impact perspective.  There’s a big moment right where we can rethink a lot of those things.  As I said before, COVID-19 is the great revealer.

We have all the technology. All of the companies that are running fake digitization have a massive problem, and the ones who’ve done it right are in a good spot. It’s the same with production. All the companies that are thinking about what this means for production of the future will be in a very good position for where we’re going, but I guarantee it won’t look like what we have today. 

Andrew Browne: Before COVID, many were calling for supply chains to be more transparent and accountable to stakeholders (e.g. Scope 3, greenhouse gas emissions, modern slavery reporting, using blockchain to track the sustainability of products). What happens to those developments post-COVID?

Christian Lanng: We’re seeing it live right now with some of the largest producers of things using palm oil: you’ve got to be economically driven. We've had transparency initiatives in a silo and the economy in a silo, and what we’re seeing now is a super interesting combination. For instance, we're seeing supply chain liquidities that are linked to transparency and origin. You can actually get supply chain financing roughly one-third cheaper from green funds if you can link it to the transparency of a lot of production methods.

If you keep saying 'transparency' to suppliers, it won’t change anything, but if you’re telling suppliers you can get capital faster at a lower cost if you’re being transparent, it’ll change a lot of things. That’s an interesting trend that started before and I haven’t seen it slow down.

Sara Menker: I’ll also add the fact that—as somebody who’s been running a company focused on global food systems and agricultural systems—it was almost viewed that there’s a set group of people that think about this issue, and most consumers never really thought about where their food came from.

I’ve never seen so many reporters reporting about food, where our food comes from, and people asking these questions. All of us are starting to have a much deeper personal connection to asking why things are more expensive, where they come from, why things aren’t on the shelf all of a sudden. That mindset by the consumer will also continue to keep the pressure on companies to increase transparency, and they’ll have to think of transparency in ways that transfers down to the consumer level that maybe hasn't happened before.

Andrew Browne: How should the private sector respond to government export bans, particularly of critical needs during a time when demand outweighs supply?

Victor Fung: Obviously, the first thing we do is obey all the government regulations, there’s no other and, ifs, or buts. But if we’re trying to ultimately achieve a certain product, there are many ways to achieve that goal while respecting government regulations. This goes back to the idea of diversification, assembling goods from many locations, and putting it all together in the appropriate package with total transparency.

Transparency and total traceability of the supply chain are here to stay. There are ways to respect totally the government regulations, and yet achieve the objective of getting the right product to the consumer at the right time.

Andrew Browne: What risks does climate change present to the stability of global supply chains in the future?

Sara Menker: It's a very big question that doesn’t have a simple answer. When we talk about climate change, we often times use blanket statements as if it’s going to be good or bad for all, and the reality is that’s it’s a very complicated set of outcomes. When you look at the climate scenarios that are out there and start to do long-term projections of what yields will be in the production of food in different parts of the world, you see different impacts. For example, if you use one of the baseline scenarios (B-1 ‘mid-level’ scenario), you will see yields of soybeans in Brazil declining over time, but yields in Russia increasing over time. So, there’s different outcomes based on different scenarios and different outcomes for different countries. We’re only now starting to leverage all that we know about the research done in climate change and apply it to predictive models that let us forecast the physical outcome tied to a very specific industry. The reality is that diversification of supply chains just because of climate change itself will also be a real thing, because the producers now aren’t necessarily going to be the biggest producers 30 years from now.