Supply chain de-risking to boost southeast Asian economies

Southeast Asian economies such as Vietnam will gain from the expected de-risking of the global supply chain and creation of parallel chains as multinationals seek to reduce their dependence upon China, according to the latest Sigma report from Swiss Re. The Swiss reinsurer says the development of parallel supply chains to de-risk the global flow of intermediate goods and services is a key macroeconomic trend, and Covid-19 has clearly accelerated the trend. It says the healthcare, technology, consumer staples, textiles and electronic sectors will lead the charge. Swiss Re says the changes will include alternative host markets, mainly in southeast Asia, and re-shoring of production processes, mainly in the US, euro area and advanced Asia markets. Interestingly, Swiss Re believes that during a five-year transition period, the changes will be “net positive” for the global economy and are anticipated to generate about $63bn in additional global insurance premiums. The Sigma report – De-Risking Global Supply Chains: Rebalancing To Strengthen Resilience – says the disruption to the flow of intermediate goods and services during 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. The reinsurer notes that manufacturers, meanwhile, are speeding up their development of parallel supply chain operations in new host markets alongside existing production bases, so that they can 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,” predicts Swiss Re. “Global supply chain restructuring has become a key macroeconomic trend and the Covid-19 experience has accelerated changes,” comments Jerome Jean Haegeli, Swiss Re Group chief economist. “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 adds. Swiss Re notes that there had been some “tempering” of “globalisation fervour” even before Covid-19 severely curtailed the movement of goods and people. This was caused by the impact on supply chains of natural catastrophes during the past decade, such as the earthquake and tsunami in Japan in 2011 and widespread flooding in Thailand in the same year, as well as rising political risks, such as new tariffs and a looming threat of global trade war. This prompted manufacturers to rethink their globalised production and sourcing strategies, argues Swiss Re. Governments are also driving this process. “Supply chain restructuring is also a question of national resilience. 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,” points out the reinsurer. Markets in southeast Asia will likely be the preferred destination as new host locations because of their strong growth potential and competitive labour costs. Swiss Re reckons that Vietnam tops the list as an alternative manufacturing location. The Sigma study estimates the changes to global supply chains will generate combined export and investment value of close to $1trn in the alternative production locations during 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,” it states. Insurers and reinsurers have been criticised by risk managers during Commercial Risk Europe’s annual supply chain risk conferences for failing to react to demand for cover to help them cope with the complex exposures related to supply chain. Swiss Re sees a big opportunity here for the market, based on better data capture and analysis. “Supply chain restructuring will have important implications for insurers, by generating new demand for risk protection covers and providing new opportunities for the industry to underpin global economic resilience. Insurance plays a key role in supply chain risk management. Supply chain, contingent business interruption and non-physical damage covers can compensate for losses resulting from incidents at suppliers,” states the Sigma report. “For insurers seeking to cover business disruption exposures, the more transparency there is on supply chain flows, the more insurable the risk becomes,” notes Gianfranco Lot, head of global 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 Center is to develop large-scale tools to predict and manage exposures, to facilitate the development of innovative risk protection solutions,” he adds. The Sigma report estimates that the overall income effect from the higher growth created by supply chain restructuring will generate additional global premium volumes of about $63bn cumulatively during the five-year transition period. This includes a one-time boost of $1.2bn from new demand for engineering covers during the construction phase of manufacturing facilities and infrastructure. It also includes $9bn for commercial insurance in the operational phase of the new facilities.

Supply chain de-risking to boost southeast Asian economies

Want to read this article?

Read Next

Marsh tracks slowdown in global Q1 rate hikes

Markel names head of terrorism in London

Insurers defend Nord Stream’s €400m lawsuit as act of war

Allstate posts nat cat loss of $343m for March

UAE flash flood losses manageable as insurers adapt to changing weather

Marsh tracks slowdown in global Q1 rate hikes

Markel names head of terrorism in London

Insurers defend Nord Stream’s €400m lawsuit as act of war

Allstate posts nat cat loss of $343m for March

UAE flash flood losses manageable as insurers adapt to changing weather

Want to read this article?

Read Next

Marsh tracks slowdown in global Q1 rate hikes

Markel names head of terrorism in London

Insurers defend Nord Stream’s €400m lawsuit as act of war

Allstate posts nat cat loss of $343m for March

UAE flash flood losses manageable as insurers adapt to changing weather

Related Articles