While global trade has risen dramatically since the 1990s and has continued to improve the lives of millions of people, geopolitical concerns have lately been rising too. Terms such as “reshoring” and “friendshoring” have seen increased use in corporate presentations by more than 20-fold in the past few years.
For example, in recent years China’s share of US imported manufactured goods fell from 24 to 15 percent. The latest value-added data extends only through 2020, since it takes time for official sources to conduct and finalize their analyses. For now, the trajectory of the most recent years, as well as the future of value-added versus gross exports, remains unknown. Yet it’s clear that a company does not ensure that it has a geographically diverse supply chain if it merely shifts from suppliers that assemble and ship from one country to suppliers that assemble and ship from another country. In fact, even as the share of US imports of manufactured goods from China declined, the share of value added in final consumption remained steady (exhibit). Goods that had been supplied directly from China are still being largely produced in China, but they are also being rerouted through other countries that add incrementally to the final value. The result can be that a supply chain is not significantly more geopolitically diversified—and is now also longer and potentially more opaque.
For CFOs—who in many organizations function as the de facto chief risk officer on the top team and, in every case, should be asking and encouraging hard questions—it’s essential to dig deeper: How well do we understand our own supply chain? What is our company’s exposure if different geopolitical scenarios play out? In one recent survey of senior global supply chain executives, only about half reported that they understood the location and essential risks of their tier-one suppliers—and only 2 percent had visibility beyond the second tier. Yet our research finds, too, that in times of uncertainty, the best leaders hone three types of competitive edge: insights, commitment, and execution. As uncertainty ramps up, CFOs will need much clearer insights across borders.
For more about the reconfiguration of global trade patterns and the potential trade-offs ahead, see Geopolitics and the geometry of global trade, McKinsey Global Institute, January 17, 2024.
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