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Nearshoring and safeshoring: transforming global supply chains – A column by Ingo Plöger

Ingo Plöger  |  President of CEAL | Brazilian Chapter

Nearshoring, as an adjective for the new orientation of the location of strategic positions, seeks to reduce the risk of global shortages, bringing the strategic industries of the Global Supply Chain (GSC) “closer” 1).

The pandemic has shifted the center of gravity of GSCs from the consumer to the supplier. If the consumer’s purchasing power and its variations in preferences were the full focus of attention before, the pandemic due to its mismatch, by exponentially increasing the demand for electronics and reducing the offer for mobility, has placed shortage in the supply area. The supply of electronics, especially that of semiconductors, made the industry recognize the scarcity and extreme vulnerability for the few suppliers. The location of this industry is mostly in Asia. Adding to this drama, incidents in these industries stopped production for a few weeks and months, increasing the risk for global supply. The pandemic lasted longer than we imagined, and in the last mile logistics, consumers experienced the demand for digital and realized that it worked well, and they made it their preference.  GSC responded at the speed of demand and, in addition to semiconductors, another shortage came about, namely, logistics through containers, of the packaging by the repackaging, and raw materials that required a processing industry with operators in person. Globalization went through its stress test in these two years, where it perceived the vulnerability of GSC, by overconcentrating some productions in giga-productions and doing so in competitive places, but concentrated in few countries or regions.

While the consumer was looking for options in the price and quality duality, supply made this GSC stream grow in this direction. No one thought that a pandemic of the global scale dimensions could occur. Transportation collapsed, the demand for products such as automobiles could not be met, as happened for other products that incorporated semiconductors.  In the post-pandemic recovery, services picked up again and previously smaller-scale consumer products began to reposition themselves. The shortage of other raw materials, as well as their transformation, became noticeable. In the meantime, with the enormous absence of international solidarity due to the lack of vaccines for the least privileged countries and the increase in food prices, the UN was mobilized to seek food security and health policies. 2) Months later, Glasgow was debating the new global GSC decarbonization goals and the 2030 and 2050 GHG mitigation targets. The stress on GSC was reaching its peak, and as if the pandemic was not enough, the three other vectors – growing poverty, global health and decarbonization – added new parameters to the process.

Nearshoring seemed to be one of the solutions to meet this challenge.

If we were to place supply closer to demand, we would be increasing supply security and shortening GSC pathways. Countries and regions (like the EU) launched policies of repatriating strategic investments to their localities. Thus, the USA, Germany and other invested in new semiconductor factories, more protectionist policies in the food chain were enacted (EU) to deal with the systemic shortages that had taken hold, to fight supply inflation.

However, the war in Ukraine redesigned the supply shortage strategy through another vector that had not been considered until then. The European Union, given its energy dependence on Russia, and China being its largest customer and supplier, finds itself in a very difficult situation to equate its matrix of risks and opportunities, with the two players directly and indirectly linked to the dispute. As if this were not enough, the OPEC, insensitive and opportunistic, is allowing the price of a barrel of oil to rise well above US$100/barrel, which accelerates supply inflation even further. Even though the US released its strategic oil reserves, they were not enough to lower energy prices significantly. The war conflict and its consequences will not be resolved in the short term.  The EU’s ambiguity towards Russia and China’s dubious position towards the conflict leave developed countries in a search for new medium and long-term strategies.

Nearshoring no longer suffices to ensure predictability in GSC. Some of the alternatives presented are no longer sufficiently secure. Other objectives agreed upon in Glasgow or at the UN, no longer appear to be urgent or a priority.

Nearshoring is starting to be replaced by safeshoring; that is, near is not necessarily safer. Many nationalist trends of “home-made” being better than the imported, have led to protectionist policies on previously unimaginable scales. Thus, the European Union, which was leading the world in its sustainable agriculture policy, in a few weeks authorized farming in areas earmarked for natural vegetative recovery for soy among other. The extended use of coal-fired or nuclear power plants overnight was reinstated.  Already in GSC safeshoring alternative strategies, safe-life and safe-fail routes are starting to be built. Safe-live in health, safety and food and safe-fail in energy, processes and logistics.

But safeshoring is also getting new attention. Continents that used to be predominantly democratic, open societies with free press and rule of law, are getting double the attention. In the period of a few weeks, stock exchanges in Latin America did not an outflow of foreign exchange, as in previous crises, but rather unexpected investment flows. This is in part because of high interest rates to fight inflation, partly because their assets are still cheap, and partly because they are in “safe havens.”  Especially the US, but also European countries are repositioning Latin America in their near & safeshoring 3) strategies. Latin America itself, in its major political and structural divergences, perceives itself as more united by opportunity and purpose. Although no one should seek advantage in the misfortune of others, we cannot ignore that decades of peace and democracy have a value in themselves, only perceived in times of war and scarcity.

 

 

Ingo Plöger is a Brazilian Entrepreneur, President of CEAL Brazilian Chapter

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