Industrial firms require long and complex supply chains to ensure delivery of their products to their customers at the right time and place. The intricacies – and dependencies – of these supply chains are being scrutinised in this new industrial era, with concerning implications for Western businesses.
China’s role as the “global factory” has granted it leverage across a broad scope of vital sectors. China has not only established dominance at an industry level (e.g. controlling at least 75% of solar PV manufacturing capacity), but also at the micro level. Three Chinese companies have over 50% of the international market for cellular Internet of Things (IoT) modules. These omnipresent micro devices collect, send and act on data that they acquire from their environments. Beijing’s domination of the global IoT market gives it access to vast amounts of data and creates a national security risk for Western governments and businesses. As recently as January 2023, the British Government discovered and dismantled Chinese cellular modules found in government cars.
It is unlikely that Western governments will continue to tolerate this level of reliance and exposure at both a macro and micro level. Governments have learnt from the experience of scrambling for Personal Protective Equipment during the pandemic, while the conflict in Ukraine underscores the risks of relying on autocratic regimes for vital resources.
The response from businesses to date has been to increasingly localise supply chains. But many challenges remain unsolved. The implication for global carbon footprints, commercial competitiveness and the scope to consistently manufacture a product across multiple markets: all are critical questions. Diminishing scale in supply chains has implications for the effectiveness of R&D spend, given the potential loss of an “international sandbox” in which innovations can be rapidly shared across and between markets.
There will be no simple solution. Recreating industrial firms’ existing, hyper-efficient large-scale manufacturing at a smaller scale will have cost implications. Implicit trade-offs between efficiency and resilience will need to be made explicit. This is where the right leadership will be key to delivering success. The ability to make decisions on what you “need to know” will be critical; it could be the difference between being competitive or not.
Industrial firms understand that the global system of the last 25 years – one in which it was possible to operate a single international supply chain to manufacture products for a global audience and market – is no longer viable. But a new system will take time to emerge. Western businesses, under intense pressure from national governments, will struggle to replicate the cost efficiencies of international scale and to challenge China’s prominence in critical sectors.
Uncertainty and increased complexity are inevitable. But the best led firms will pre-empt, prepare and pivot where necessary. Informed and proactive leadership will be critical.
Miramar has been pleased to partner with Gatehouse Advisory Partners, a boutique geostrategic advisory firm in London, to enhance its clients’ awareness and understanding of the most business-critical geopolitical trends.
