The pandemic has permanently changed the global economy

Op-ed by Katja Gentinetta, published at NZZ magazin

Does it take government action to develop corporate resilience to bottlenecks in global supply chains? Global or at least regional cooperation could help. But too much incentive is likely to be inefficient. Right from the beginning of the pandemic, there were calls for more resilience from the business community. At the time, I wondered whether companies really needed to develop resilience – or whether agility was the right concept to enable them to react quickly to new situations and adapt to change. But now that Covid is almost two years old, it is becoming clear what resilience might mean – and how much it could change the face of the global economy. Global supply chains, once the backbone of globalization, have emerged in recent months as its most vulnerable element. Prices of container shipments between continents have risen eightfold. And even financial buffers can only go so far when there is no possibility to deliver. For instance, German car factories such as Opel have been suspending production until the end of the year and applying for short-term work, showcasing the extent of the current challenge.

More Robust supply chains needed

In view of the foreseeable increase in risks – whether from more pandemics, earthquakes, floods and storms, from terror, armed conflicts and wars, or even technical accidents – companies and states must fundamentally ask themselves where and how they should invest in more robust supply chains. Economist Daron Acemoglu of the Massachusetts Institute of Technology (MIT) predicted back in 2012 that problems in global supply chains would have far-reaching consequences. Today, however, the question is a very practical one: what to do when supplies are not delivered? In principle, there are three options: a broadening of supply chains, warehousing or in-house production. Trying to rely on multiple suppliers is easier said than done. Companies often rely on highly specialized sub-products that they develop in close cooperation with suppliers. Such investments cannot easily be duplicated. Moreover, in the course of specialisation, clusters of suppliers have formed in the same region. Hence, the risk of failures of such clusters would remain. At first glance, warehousing appears to be the simplest, albeit not cheap, solution. However, it is difficult to estimate what quantities of which goods have to be stored. After all, one pandemic is not necessarily followed by another; the supply gaps could appear somewhere else entirely. In addition, many goods – even medical masks, as we learned – have an expiration date. This leaves in-house production as the third option. The return of industrial production is possible primarily through the use of robotics and is already underway under the title of Industry 4.0. The costs are enormous, but at least they pay off: production becomes more efficient, and domestic, highly qualified jobs are created. One or two countries are therefore already asking themselves whether this „re-shoring“ should be supported by the state. Bosch, for example, recently opened a state-of-the-art semiconductor factory in Dresden – co-financed by the EU.

Identifying risks in good time

U.S. President Biden has appointed a task force to address supply chain problems in the United States. However, the Obama administration had already adopted a strategy to better safeguard against related problems. The measures included integrating all efforts within the administration- from data collection and analysis to diplomatic and international economic policy efforts – in order to better understand the system and identify risks in a timely manner.
So does it take government action to develop business resilience to bottlenecks in global supply chains? A deeper knowledge of the interrelationships is certainly valuable, and so is global or at least regional cooperation. But too much incentive is likely to be inefficient. After all, this would recompense the very costs that companies have been saving up on that t have made the global supply chain system so efficient. In addition, global trade is likely to suffer, which will slow down global growth – and with it the process of equalizing living standards, which is crucial for developing and emerging countries in particular – and in turn will negatively impact everyone. What is clear, however, is that Covid will have a lasting impact on the global economy, and that both companies and countries will have to adapt to it.