Dubai: Companies rushing to move manufacturing closer to home is resulting in major shifts in globalisation, new research reveals.
The latest Trade in Transition study, commissioned by DP World and led by Economist Impact, captured various standpoints of company leaders as they navigate the latest disruptions to global trade.
Its key finding is that 96 per cent of companies confirmed they are making changes to their supply chains due to geopolitical events. The change has been swift. In the space of just a year, the number of companies shifting their manufacturing and suppliers – either to their home markets or nearby – has doubled compared to 2021. This is mainly driven by efforts to reduce costs and the risk of disruption.
The study said UAE companies were looking to diversify their supplier base and adopt technologies to increase resilience amid growing geopolitical tensions and economic uncertainty.
While 27 per cent of companies said they were decreasing the length of their supply chains due to geopolitical events, another 33 per cent plan to expand into more stable and transparent markets.
“By bringing production closer to the final customer, firms can reduce the number of touch points involved in the supply chain and build greater resilience into the flow of cargo around the world,” said DP World Group Chairman and CEO Sultan Ahmed Bin Sulayem. “But the trade environment is always changing.”
“The next challenge that will alter these trends is an economic slowdown looming over regional markets,” he said. “Agility, real-time visibility and end-to-end supply chain capabilities will be critical to ensuring companies can continue to find new efficiencies in an increasingly challenging environment.”
The persistent threat of inflation was cited by 30 per cent of the executives as having the most significant negative impact on trade over the next two years. Inflationary pressures are seen in input costs – from supply shortages – and transport, through high-energy costs and shipping capacity constraints.
In a scenario of monetary tightening, companies across Europe, North America and Asia-Pacific anticipate exports to be 1 per cent lower than under a business-as-usual situation due to decreasing production and demand.
“If inflationary pressures continue, exports in the Middle East and South America are expected to be hardest hit, declining by 3.52 per cent and 2.74 per cent respectively,” the report highlighted. “Only Africa is expected to see its exports rise by 0.26 per cent.”
Limiting growth of international trade
Apart from the war in Ukraine, US-China tensions and cyber warfare are preventing the efficient functioning of economies worldwide. The fragmentation of the world into trade blocs was also cited by 10 per cent of respondents as limiting the growth of international trade. “This is leading to increasingly protectionist policies such as the US Infrastructure Bill and the CHIPS and Science Act, which aim to incentivise and prioritise US and North American manufacturing,” the report cited. “Similar protectionist policies are popping up all over the world, leading to further fragmentation of the global trade system.”
“Businesses in previous decades have only had to focus on the economic aspects of trade, being price, quality and delivery,” said John Ferguson, Practice Lead for New Globalisation at Economist Impact. “Now they have to account for other non-economic factors such as resilience and sustainability.”
“All of which is having a drastic shift in supply chains, which we are witnessing both in the survey results and global trade patterns shifts,” he added
The global survey of 3,000 company executives found that companies in North America and Europe are most likely to outsource more than half of their services within their region. This is followed by 40 per cent of companies in South America, 36 per cent in the Middle East, 32 per cent in Asia-Pacific and 18 per cent in Africa, outsourcing within their regions.
The widespread and increasing adoption of technology is another way to build resilience into the supply chain. Some 35 per cent of respondents said they were currently implementing Internet of Things (IoT) solutions to facilitate the tracking and monitoring of cargo, while another 32 per cent of companies are adopting digital platforms to enable direct business with customers or suppliers.