The world has entered a phase of geopolitical instability marked by the proliferation of regional conflicts (Ukraine, Red Sea, South China Sea). To secure their supplies in such an uncertain context, international companies are shifting from a globalized supply chain to an increasingly regionalized model. There is growing talk of “glocal” supply chains, a contraction of global and local. Market research firm KYU asked 1000 managers (100 answered) in the fields of supply chain and risk management in various industries (aerospace, automotive, luxury industry) about where they stand in the face of these new challenges. The conclusions were announced yesterday during a press conference we attended. Here is what we learned.
A World of Uncertainty
“The world has entered a zone of uncertainty,”
This is how Thibaud Molin, a partner at the KYU consulting firm, started yesterday, during a press conference. “Geopolitical crises are unfolding, with a physical manifestation of tensions in the Red Sea”. This refers to the attack on commercial ships by Yemen’s Houthi rebels, following the resumption of the Israeli-Palestinian conflict last October.
The slowdown in China’s economic growth fuels concerns about an acceleration in its ambitions concerning Taiwan to divert public attention from poor economic results.
In addition, there are increasingly numerous constraints on free trade, including tariff increases and embargoes. According to the authors of the 2024 supply chain risks barometer, this growing instability is already impacting international trade. There was a significant decrease (-4%) in transactions between geopolitical blocs from the first quarter of 2022 to the third quarter of 2023. This trend could persist and even intensify this year, warn the authors.
For them, 2024 is likely to be a pivotal year geopolitically. But let’s go back to 2023 to better envision the future.
2023 Crises: Analysis by Industrial Sector
2023 has not been the year of economic recovery. On the contrary, all industrial sectors experienced crises at various levels of their supply chain.
Despite the global automotive market’s significant growth in 2023 (up 9% to 86 million units sold), it remains below the 2019 level (90 million units) due to economic challenges and labor shortages. The semiconductor shortage in the automotive industry has eased, but inflation and a competitive pricing war in the electric vehicle market, particularly with Chinese manufacturers, are influencing the sector.
The year 2023 is marked by record order books for Airbus (2094 net orders and 735 planes delivered), Dassault, and Safran. But the challenge lies in the supply chain’s ability to meet these accelerated needs. This is particularly evident in the demand for qualified workforce. The high demand poses risks to delivery timelines and quality, as seen in the recent Boeing 737 Max crisis.
In the European chemical sector, despite the expected growth following the decrease in energy and raw material prices in 2023, demand continued to decline, and stock levels reached their highest at the end of the year. The deterioration of European chemical competitiveness is particularly pronounced in Germany, where the dual effect of decreased demand and dependence on fossil fuels led to massive cost reduction plans among major industry players.
In contrast, the Chinese chemical industry is experiencing significant growth and has become the EU’s primary trading partner, contrary to the goal of independence on strategically important products used by various industries.
The agri-food industry, highly sensitive to climatic conditions, experienced a year of relative easing of commodity price pressures. According to the FAO index, global prices for basic agricultural products (cereal, vegetable oil) at the end of 2023 were nearly 25% lower than their 2022 record levels. This decline was attributed to good harvests in major producing countries, reduced shipping costs, and a decrease in energy and fertilizer prices.
Exceptions include a double-digit increase in sugar and rice prices in recent months due to the effects of El Niño on production, trade restrictions, and stockpiling in producer countries to address potential shortages.
In the road transport sector, the situation remains problematic as it continues to grapple with a severe labor shortage. Accounting for approximately 75% of European freight, road transport is at the heart of the supply chains for all sectors, and the structural capacity deficit poses a major risk to growth. According to the International Road Transport Union (IRU), there is an estimated shortage of about 3 million drivers in the 36 countries covered by its annual study, including 2.2 million in China.
The rapid transition to renewable energies is increasing the demand for a qualified workforce. The revival of nuclear energy and the necessary maintenance and extension of the existing infrastructure are straining the entire industry, starting with EDF subcontractors. Between underinvestment over the past decade and retirements, the shortage of capacity and skills poses the main risk to meeting order backlogs.
What Are the Top 10 Supply Chain Risks for 2024?
In their 2024 barometer, KYU identified the 10 major supply chain risks to follow in 2024, in order of importance. If most of the risks anticipated for 2024 had already been identified last year in their latest barometer, the pandemic risk, on the other hand, has disappeared from the ranking. This is evidence that companies are no longer concerned about a new global pandemic like that of COVID-19 and its potential consequences such as lockdowns and border closures.
1/ An Increasingly Unpredictable Demand
The ripple effects of the strong post-Covid recovery and numerous shortages have led to significant overstocks in late 2022 and early 2023. Companies had to clear these inventories in the context of sharply declining demand linked to inflation in many countries.
- In the electronics and telecom sectors, there was a significant drop, with iPhone sales down by 10% (and 13 to 15% for its competitors), a decrease of over 20% in exports of integrated circuits from China, Japan, Korea, and Taiwan, and over 30% on chips and memories from Korea.
- In the United States, finished manufactured goods stocks decreased for eight of the first nine months of 2023. Destocking was particularly notable in computing. By the end of 2023, two-thirds of US retailers indicated having significant overstock.
A recent study with clothing procurement directors revealed that 73% of US retailers identified demand volatility as having the strongest impact on their supplier relationships.
2/ Shortages Are Still There
Shortages of certain products and materials persist. Various factors contribute to this, including climate events affecting crops, geopolitical crises restricting trade, and some sectors struggling to manage an increasingly volatile demand.
- In the aerospace industry, the resurgence of airline orders and increased military budgets, coupled with restrictions on Russian steel, create significant supply chain tensions.
- In the agri-food sector, shortages are driven by Black Sea tensions (cereals and oilseeds from Ukraine and Russia) and the consequences of extreme drought episodes affecting agricultural yields (rice, corn, soybeans, sugar, olive oil, etc.).
- In India, for example, weakened monsoons led to restrictions on rice exports, impacting global trade.
- In the semiconductor realm, shortages appear to be easing as demand adapts and capacities expand, but they remain a threat in the automotive sector, with many anticipating the continued impact of the dreaded “bullwhip effect.” Some automakers are securing their supplies by directly purchasing semiconductors from manufacturers; Volkswagen, for instance, has initiated co-development with STMicroelectronics.
- In the EV sector, concerns about future raw material needs for batteries persist. Although lithium resources seem sufficient, rare metals are not limitless and mostly come from China, which already dominates resources.
3/ Multiple Geopolitical Crises
The ongoing Russo-Ukrainian conflict continues to threaten global balance, although its direct impacts on trade appear to be diminishing.
The attack by Hamas on October 7 reignited tensions in the Middle East, with significant consequences for global maritime traffic due to Houthi attacks in the Red Sea and disruptions in the tech sector, where Israel is considered a second Silicon Valley.
Tensions between China and Taiwan persist, jeopardizing the supply of electronic components, as the island contributes to over 60% of global production.
In Asia, tensions escalate with China’s hegemonic ambitions, leading to territorial conflicts with Vietnam, the Philippines, Japan, and India.
North Korea becomes increasingly threatening, and economic rivalry with India intensifies as companies seek to reduce dependence on China.
4/ Inflation and a Sluggish Global Growth
Fueled by post-COVID supply chain challenges and exacerbated by the energy surge triggered by the war in Ukraine, global inflation soared to 9% in 2022. It decreased to 5.9% in 2023. Projections from the IMF suggest it will further decline to 4.8% in 2024.
- In Europe, inflation continued to weigh on household consumption and manufacturing activity, reflected in a PMI index well below 50.
- China reported only 5.2% annual growth, its lowest since 1990, excluding the COVID period. It is expected to further decelerate to around 4.5% in 2024, according to the World Bank.
- The World Bank forecasts a third consecutive year of deceleration at 2.4%.
5/ Cyberattacks On the Rise
The cyber threat remains one of the primary risks for the supply chain. This is due to the increasing interconnection of all stakeholders. Suppliers, carriers, and customers manage flows. There is a growing dependence on information systems to conduct operations (sensors and other IoT devices throughout the chain).
- Ransomware attacks, for example, increased by 50% in the first half of 2023 according to Allianz.
- By 2025, Gartner predicts that 45% of global organizations will fall victim to cyberattacks targeting their supply chains.
- In Taiwan, for example, the number of daily cyberattacks has increased by 80% year-over-year. Semiconductor manufacturers are particularly targeted due to their strategic importance.
6/ Skilled Labor Shortage
A prolonged labor shortage is affecting developed countries. Businesses lack a qualified workforce, especially technicians and engineers. Emerging economies are also affected, where new entrants attract workers.
- Europe faces a structural shortage of qualified labor in aerospace and defense.
- In the US, the “great resignation” post-Covid has transformed into a “great reshuffle.” The manufacturing industry continues to struggle, with over 600,000 positions unfilled.
- In China, shortages emerge, especially in the EV sector, where over 1.5 million employees are distributed among manufacturers and suppliers.
7/ Quality Problems
The post-Covid recovery has driven a rapid resurgence of activity in various sectors. However, this rush to capacity has resulted in a rise in quality incidents, impacting mature industries like aerospace and automotive.
- 2023 has been the worst in terms of problems encountered by new cars in the USA. This has led to increased recalls, with Tesla’s recall on safety failures in its autopilot system.
- Boeing also recently experienced a bitter incident when a “bottle cap” was torn off a 737 Max mid-flight due to a lack of quality control in the activities of one of its subcontractors.
Such quality issues are partly explained by innovation and the inherent difficulty in identifying all failure modes throughout a product’s lifecycle. Companies are compelled to reconsider their “make or buy” decisions and evaluate the depth of controls they implement in their value chain.
8/ Climate Crisis
If 2022 was the year of extreme climate events, 2023 is the year of the highest global temperatures ever recorded, according to the European Copernicus program. This slowed down the production and delivery of goods and services.
- In Vietnam, electrical infrastructure succumbed to high temperatures. Companies like Foxconn (an Apple subcontractor) and Samsung had to reduce their consumption during peak hours.
- In the summer of 2023, the Panama Canal, which handles 6% of global maritime trade and operates with fresh water unlike the Suez Canal, faced an unprecedented drought. This led to traffic restrictions for several weeks and disrupted the supply chain by extending delays and increasing costs.
For maritime freight 2023 started as a return to price and delivery levels close to those in 2019. The cost of transporting a 40-foot container from China to Europe or the U.S. West Coast has dropped to around $1,000, a decrease of over 25% compared to 2022. However, this turnaround was short-lived. Several major shipping routes were affected by geopolitical, social, and climatic crises throughout the year:
- In April, a missile fired by North Korea temporarily disrupted maritime traffic in the Sea of Japan.
- In July, the Russian threat to Ukrainian ports in the Black Sea extended to all commercial ships in the area.
- Several strikes paralyzed Canadian and American ports.
- In the fall, the Panama Canal had to reduce its traffic due to a historic drought in the region.
- Since November, Houthi rebels have launched attacks on commercial ships transiting the Bab el-Mandeb Strait. This has led to increased insurance for cargoes passing through the Suez Canal. Some are diverting part of the freight to the Cape of Good Hope. The extended delays put pressure on transport capacities and increased freight costs.
In road transport, as seen before, the situation remains problematic as the sector continues to grapple with a severe shortage of labor.
10/ CSR Regulations
The proliferation of regulatory projects in 2022 prompted companies to reconsider their procurement strategies for sustainable and responsible supply chains. Regulations adopted (Due Diligence on the Origin of Minerals in Switzerland, Due Diligence Law in Germany) or in the process of being adopted (European CSDDD) accelerated the compliance timeline for companies.
Examining the upstream value chains and product life cycles, with growing concerns such as PFAS and human rights, underscores the crucial importance of traceability. The entry into force of the Corporate Sustainability Reporting Directive (CSRD) on January 1, 2024, compels companies to assess their impacts on the planet and society through a double-materiality analysis.
The challenge for companies is not only to trace their supply chains correctly. It is also to document their activities and those of their subcontractors in great detail, avoiding a macroscopic view. In case of non-compliance, potential sanctions range from significant fines to exclusion from regional markets.