Global shocks strengthen case for supply chain diversification

French risk managers were urged to diversify their supply chains as the US becomes more protectionist and Western economies continue to decouple from China.

The warning was made during the Rencontres de l’AMRAE, France’s risk management association’s annual conference. Experts stressed that processes like the energy transition, desirable as it is, will have significant negative social effects, at least in the short run.

Participants on a couple of panel debates during the first day of the annual event in Deauville were reminded of the many parallel processes that are driving the current fluid business environment, which was hardly imaginable a mere five years ago.

The most dramatic drivers are the return of inflation and the growing animosity between the US and China. This is forcing companies to rethink supply chains that had become highly reliant on China in recent decades.

Karine Berger, the secretary general of Insee, France’s official statistics office, said that the two developments are related. As companies strive to find alternatives to Chinese suppliers, supply chain costs have shot up, and increases have more often than not transferred to higher prices.

“In the past two years, production costs have increased by more than 18% in France,” said Berger. “And it all started at the moment when the United States decided that the relationship with China, which had gone on for 15 years, was no longer working.”

Recent measures taken by the US government, such as the Inflation Act of 2022, have reflected this new posture by implementing policies that are clearly protectionist, Berger continued.

As a result, Western companies came to realise the extent to which they were reliant on Chinese suppliers and customers, and the risks that such dependence entails, continued Berger.

In her view, this all shows that supply chain diversification is key. “The Inflation Act is all about supply chains. Risk managers know that a company cannot rely too much on a single customer or supplier,” she said.

Berger added that it is clear the US has changed its approach to trade and globalisation. The big question is whether other economies should follow the same trail.

Pascal Lamy, former head of the World Trade Organization, noted that many countries may well feel they need to embrace protectionism in a tit-for-tat reaction to US policies. However, that is hardly a realistic option for Europe, he suggested.

“European economies have less domestic growth potential. To maintain the welfare state, which is much more comprehensive than in the US, they need to export. They cannot play the full protectionist hand,” said Lamy.

He also highlighted the impact of Russia’s invasion of Ukraine as a disruptive event that is adding to the challenges faced by French companies.

“Just like the fall of the Berlin Wall in 1989 and the 9/11 attacks in 2001, February 2022 will be remembered as a turning point in history,” he said.

For his part, investor Georges Ugeux, the chairman and CEO at Galileo Global Investors, warned that the full extent of global debt will hit the economy in 2023, throwing a darker perspective on the sunnier forecasts expressed in January during the World Economic Forum in Davos.

In addition to the challenges above, French companies face the task of transitioning to a greener, more responsible way of doing business.

Claire Martin, vice-president of sustainability at the Renault Group, reminded the audience in Deauville that the transition will take longer than many people wish and will have social costs.

She quoted predictions that 60,000 jobs will be cut by France’s automotive industry as it decommissions fossil fuel plants to produce less labour-intensive electric vehicles.

But companies may have little choice as public opinion raises pressure on them to make the green transition.

Environmentalist Camille Etienne said the concerted pressure that is being applied to Lloyd’s to cease providing coverage for the construction of the EACOP pipeline in Uganda is one example of ESG-focused actions that will become ever more common in the years to come.