Supply Chain Shift Will Require Industry Response

The global re/insurance industry is set for a $65 billion boost over the next five years as global supply chains undergo a seismic shift.

Swiss Re has issued a new Sigma report, “De-risking global supply chains: rebalancing to strengthen resilience “, which says the world is set to see a shift from globalisation and movement to parallel supply chains.

The COVID pandemic has exacerbated the rate of change but the move was already underway said Swiss Re Group Chief Economist Jerome Jean Haegeli (pic).

The reinsurer said the disruption to the flow of intermediate goods and services during the COVID-19 lockdowns has made governments and manufacturers ever more aware of the risks inherent in today’s increasingly complex, specialised and global production processes. Manufacturers, meanwhile, are speeding up their development of parallel supply chain operations in new host markets alongside existing production bases as a means to diversify and strengthen their operational resilience. Markets in Southeast Asia will be the preferred destinations as new host locations. There will also be some re-shoring of activities back to the US, the euro area and advanced markets in Asia.

“Global supply chain restructuring has become a key macroeconomic trend and the COVID-19 experience has accelerated changes,” added Mr Haegeli. “During the pandemic, lockdowns brought international exchange to a near halt, making businesses, and governments increasingly aware of the impacts that disruptions in today’s very complex and specialised global supply chains can have. “

He added that the peak of globalisation was “now in the rear-view mirror”, as supply chains were brought closer to the customer.

The creation of parallel supply chains would see economics in South East Asia, such as Vietnam, Cambodia, and Malaysia see manufacturing operations relocated to the countries from other areas, including China, as moves to reduce costs and an over-reliance on a single supply chain gathered pace.

These relocations and moves from established economies to restore greater manufacturing capacity back to domestic production would see a total, investment of $1 trillion dollars in new infrastructure and systems. As such it would also see an increased demand for insurance products estimated to be worth at least $65 billion in the next five years.

“The best example as to the view for the development of parallel supply chains is the human kidney,” explained Mr Haegeli. “There is no reason to have two, but you are really grateful you have a second if anything happens to the first.”

He added that the thinking behind the supply chain had also changed given the impact of COVID, disruption caused by natural catastrophe, and ongoing political risk issues such as the US-China trade war.

“There are big changes ahead. It is goodbye to the corporate vision of ‘just in time’ supply chains,” he explained. “It is set to move to ‘just in case’ production as companies take a more conservative approach.”

The report said there had been some tempering of globalisation fervour even before COVID-19 severely curtailed the movement of goods and people. A number of natural catastrophes over the last decade, such as the earthquake and tsunami in Japan in 2011, and widespread flooding in Thailand in the same year, inflicted costly supply chain interruptions across different industries. Rising political risks, such as new tariffs and a looming threat of global trade war, also prompted manufacturers to rethink their globalised production and sourcing strategies.

“Supply chain restructuring is also a question of national resilience,” it added. “For example, the COVID-19 crisis immediately exposed vulnerabilities in the medical manufacturing supply chain. Government responses to the pandemic globally show that in times of crisis, international cooperation can be interrupted as countries prioritise according to their domestic needs, in particular to ensure fail-safe access to vital supplies.

“From a business perspective, the driving force for accelerated restructuring of global supply chains is manufacturers seeking to de-risk their operations. In the 20 largest economies, 40–80% of exports are integrated into the global supply chain and, within this, China is the world’s largest production hub. Parallel supply chains will form as firms diversify their manufacturing presence across new locations alongside existing operations in China and elsewhere, in an effort to strengthen operational resilience.”

The sigma study estimates the changes to global supply chains will generate combined export and investment value of close to $1 trillion in the alternative production locations over the five-year transition period. Global growth will gain by an estimated aggregate 0.2% each year in that period. In China, the government will likely enact additional fiscal stimulus to boost demand at home to compensate for the loss of some production activities to alternative markets, and to further the desired transition from an export-oriented to a domestic demand-led growth strategy.

Swiss Re Institute forecasts that after a slump in the first quarter due to lockdown, GDP growth in China will recover strongly. Full-year real growth is forecast to remain in positive territory at 2.7% in 2020, and to rebound to 7% next year. In contrast, growth in the US and euro area is expected to remain in negative territory this year, given the later easing of lockdown measures in these markets. The post COVID-19 recovery is forecast to push growth back up to 4.2% in the US and to 4.8% in the euro area in 2021.

“For insurers seeking to cover business disruption exposures, the more transparency there is on supply chain flows, the more insurable the risk becomes,” said Gianfranco Lot, Head of Globals Reinsurance at Swiss Re. “To this end, the industry is extending its digital technology capabilities, to better process and understand all the structured and unstructured data out there. The idea behind the Swiss Re Digital Market Centre is to develop large-scale tools to predict and manage exposures, to facilitate the development of innovative risk protection solutions.”

“Global supply chain restructuring has become a key macroeconomic trend and the COVID-19 experience has accelerated changes.”

Jerome Jean Haegeli, Swiss Re