The war in Ukraine has already upended countless lives. Now, it’s upending business models as well. With the exodus of western multinationals from Russia and Ukrainian supply chain disruptions coupled with Covid-related disruptions in China, companies are having to rethink everything.
The challenges range from how they pay local Ukrainian staff (in some cases with cash delivered to Poland) to how to get hold of parts they sourced from the region before the war (the answer so far: slowly and spottily). Among those hard hit have been German carmakers that depend on components from Ukraine. Their plants are idle as they struggle to figure out a new system.
But even companies that do not have suppliers or operations in the thick of the conflict recognize they need to move from assumptions of unfettered globalization to more regional – or even local – hubs of production and consumption. They also see the benefits of more decentralization and system redundancy (namely having extra resources to provide back-up support) to avoid future shocks. “The ongoing supply chain disruptions have now lasted longer than the 1973-4 and 1979 oil embargoes – combined!” says Richard Bernstein, CEO of RBA, the investment firm. This is not a blip, but rather the new normal.
Large companies that can afford to own more of their entire supply chain have been moving towards vertical integration as a way to smooth disruptions and the inflationary pressures that result. Companies of all sizes are looking for ways to localize more production wherever their consumers are, no matter which country or region they are in. Many smaller “maker” firms in New York have benefited during the pandemic since they source locally, but the technique is also being picked up by big name brands that simply want more buffers against shocks of any kind – be they geopolitical or climate-related.
“Supply chains are under pressure and have been for some time,” says Arama Kukutai, chief executive of a vertical farming start-up called Plenty, which is working with Walmart to grow vertically-stacked fresh produce on location in California, and also with companies such as Driscoll, the world’s largest berry producer. The two have launched a new vertical strawberry farm on the east coast, with an eye to avoiding transport costs and delays. “Companies like this want to lessen their reliance on long, complex supply chains and imports,” Kukutai adds. “Basically, you want to build where customers are.”
This has been a trend in manufacturing for some time – particularly for private companies that are more often family-owned, more rooted in local communities and have less pressure on quarterly results.
One of those is New Balance, a footwear company that last week announced a factory in Massachusetts to service growing demand for “made in America” products, with more local suppliers to bypass shocks where possible. “Being private makes it easier to do more locally,” says CEO Joe Preston, “but I think coming ESG requirements are going to push more companies in this direction, because labor issues are a big part of that.”
Certainly, it is becoming clear that the world is not resetting to globalization as it did in the 1990s. Some industries, such as technology, will feel the pressure to change existing business models more than others. Witness Intel creating a major new chip foundry in Ohio as part of America’s larger tech decoupling from China, and now Russia, via chip export sanctions. The company is also investing in European regional foundry capacity.
I would not be surprised if the war in Ukraine quickens restrictions on “dual-use” technologies that can be deployed for either commercial or military purposes. A recent report by TS Lombard cited industries ranging from chips, telecommunications and IT equipment, to aerospace, avionics, computers, electronics, sensors, lasers and their components, that may need to shift their supply chains and customer base to account for decoupling.
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“Think of cloud-connected smart vehicles uploading real-time data to satellites (eg Tesla / SpaceX) as surveillance devices that can be repurposed for warfare,” notes the report.
This shift could certainly have a big financial market impact, since much of the growth of the largest tech firms has been predicated on their ability to cross borders seamlessly. But that impact will not go just one way. Witness the rise of 3D-printing stocks, for example, which have soared amid the pandemic. The industry was able to plug the gap in supply chains by locally manufacturing everything from PPE to medical and testing devices, to personal accessories, visualization aids and even emergency dwellings.
The entire 3D-printing market grew 21 per cent from 2019 to 2020, and is predicted to double by 2026. There are now a number of companies, such as Austin-based Icon, that are moving from printing disaster shelters to luxury homes. Given the complexity and carbon intensity of home building, with its multiple supply chains, it’s a shift that could help curb inflation. As a 2020 article in Nature put it, “3D printing of buildings requires shorter building times and lower labor costs, and can use more environmentally friendly raw materials.” The resulting homes can be “easily transported and deployed to areas where they are most needed”.
Even in times of war, decoupling and geopolitical fear, it’s worth remembering that there is opportunity in crisis.