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Recalibrating the supply chain compass

Insights by Clare Francis, Regional Head, CCIB Client Coverage, Standard Chartered

The global trade landscape has seen a significant shift over the past few decades. Automation and digital trade have gained pace, facilitated by improvements in technology and the emergence of new digital products.  Global supply chains have become more specialised and interwoven, with goods often having to pass through multiple stages before finally reaching the end consumer.  Emerging market economies have steadily come to account for a greater proportion of global GDP, with China rising as an economic superpower, thanks to its infrastructure, logistics networks and supply of educated workers.  It has also become the predominant driver of earnings growth for many companies across industries and geography.   

Covid-19 has delivered a sudden bolt into this complex network and upended trade channels in a period of just 12 months.  The supply-demand imbalance, leading to a shortage of everything from household necessities to critical goods such as pharmaceuticals, medical supplies and personal protective equipment, has revealed single-point dependencies and exposed vulnerabilities in the production strategies and supply chains of firms.  And while shocks may result in short-term changes to supply chains, there is some evidence pointing to the likelihood that the current pandemic may lead to more long-lasting structural shifts. 

  • Standard Chartered conducted its annual survey of manufacturers operating in China’s Greater Bay Area (GBA) Respondents expect contractions across sales, orders, hiring and investment in 2020.  Every year, the Bank asks respondents whether relocating production is an attractive proposition to counter rising wage costs. This year, respondents see other, more compelling reasons to move capacity overseas, with 43% saying they would more actively consider relocating due to persistent US-China trade tensions and/or COVID-19.
  • A UBS Evidence Lab Survey of 450 senior executives of Korean, Taiwanese and Japanese export-related businesses found that 85% of corporates still intend to move some capacity out of China, and that they intend to do so imminently.
  • In a Standard Chartered survey conducted with of 300 CFOs, Financial Directors and Treasurers of corporates with revenues in excess of USD 500m turnover revealed that almost one-third (32%) of respondents considered their number one supply chain priority, as they pursue international opportunities over the next 6-12 months, will be to diversify their supplier base beyond their home market.

Over the last six months, we’ve seen a sweeping adoption and rapid acceleration of digital tools, furthering the degree to which technology is permeating how societies live and interact.  Digital platforms are mushrooming.  New consumer habits are being formed.  The future of work is being redefined. And none of these changes are likely to reverse. 

Resilience through diversification

As the world looks to move on from the pandemic into recovery, companies will need to focus on making their supply chains more resilient whilst enhancing their competitiveness – by no means an easy task.  It will necessitate a diversification and regionalisation of their manufacturing and supply networks, factoring-in a production and distribution buffer and re-optimising their inventory. This new focus on resilience has changed decades-old accepted wisdom about globalised supply chains, which were designed to deliver process effectiveness, cost efficiency and proximity to markets, but not risk exposure or sudden shocks.

At the core of this change is the need for strategic leadership and ownership.  Historically, discussions about trade would have been had with the treasury functions of multinational organisations and institutions.  However,  with the growing complexity of trade, this dialogue is now happening inside Boardrooms and shaping strategic priorities.  Indeed, Caroline Stockmann, CEO of the Association of Corporate Treasurers told us that while treasurers’ core foci remain on capital management, liquidity and financial risk, “the pandemic has seen an increased focus from the rest of the organisation on treasury matters, with cash flow forecasting increasing in frequency as have conversations with CFOs, CEOs and the Board.”  Leaders need to examine their supply chains to deliver performance, remain resilient to the changing business environment, and contribute to competitive advantage. As trade becomes more important strategically, rather than being transactional, companies drawing on trade advice from partners well-versed in dealing with different local markets across a wide network stand to succeed and prosper. 

Prosperity and growth need to be sustainable of course, not just commercial, but ethical.  And profit and purpose are not mutually exclusive. We see trade financing moving forward as a key pillar for sustainable investing, where investors are able to fund supply chains  Companies either concerned with responsible sourcing or applying an environmental, social and governance (ESG) risk filters into their supply chain decisions stand to perform best in the long-term.  As Carole Crozat, Head of Thematic Research at BlackRock Sustainable Investing, in a recent panel discussion noted: “ESG is not distracting from returns but helps build better resilience against market volatility.” BlackRock’s Global Client Sustainable Investing Survey revealed that global investors, representing US$25 trillion in assets under management, consider sustainability to be fundamental in their investment processes with plans to double ESG assets by 2025. 

Even before the pandemic, commercial and technological developments have required organisations to adopt to the increasing pace of change as well as the rate of change.  Covid has not only intensified these pressures, but also challenged business models in new ways that will require them to further accelerate towards digitisation, globalisation, automation and analytics.  To build resilience and survive in this more volatile, unpredictable, and complex environment, companies must learn to be more nimble and agile at scale, capable of adopting to constant change.  When Metso Outotec, a global frontrunner in sustainable minerals processing technologies, end-to-end solutions and services, was faced with the temporary shutdown of its operations in China in early 2020 and restrictions on shipment from harbour closures due to Covid, the company quickly shifted capacity to its plant in India to ensure supply continuity. Commenting on her key takeaways from this crisis, Group Treasurer Minna Helppi noted: “It’s important to not be dependent on a single supplier, but instead leverage your global network in order to provide maximum flexibility and ensure continuation of your own and your customers’ operations.  We have learned to anticipate and adapt to short-term challenges in various locations and focus on cost control and cash flow.” 

Caroline Stockmann believes that “a culture of a business must be one of agility and resilience”.  While the focus on financial performance remains, and treasurers are well-versed on the challenges of business continuity, most organisations recognise that they form part of a co-dependent ecosystem.  As the UK stands to leave the European Union, the survival particularly of small and mid-sized companies will hinge on the support from both the public and private sectors in ensuring funding schemes are channelled into areas needed the most.  Supply chains today are only as good as the weakest link within the chain. Strong trading partnerships provide strong foundations for ongoing business success.  This has never been more evident than it is now.

Building on collaboration and partnership

Global trade is expected to rebound sharply in 2021, according to Standard Chartered Bank Research forecasts, which should imbue a sense of optimism.  Factors to support growth include an improvement in export volumes as economies reopen and activity resumes, the mass rollout of the Covid vaccine, likely in H2-2021, delivering a return to relative normalcy, as well as an enhanced global trade environment led by a new US administration under Joe Biden.  New trade deals – such as the recently signed Regional Comprehensive Economic Partnership (RCEP), covering 2.2 billion people and 30% of the world’s economic output – or the review of existing ones like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) which the US is widely expected to re-join, will further support in accelerating growth.  Likewise,  there is plenty of hope being placed in the Africa Continental Free Trade Agreement (AfCFTA) as an opportunity to create larger markets and make regional manufacturing economically more feasible.  The rollout of AfCFTA will help drive trade across Africa, and between Africa and the rest of the world, creating a single market of 1.1bn people – most of whom are young – with a GDP of USD 1.75bn.

We continue to engage with our clients in our collective response to current challenges and opportunities, whereby we bring our experience of Asia, Africa and Middle East, and knowledge of trade supply chains, to aid success and prosperity.  Due to the impact of Covid, we saw many corporates from industries with strong sourcing activities in Asia who worked quickly to increase their supply chain facilities or implement additional new programs on short notice.  These measures were put into place to protect their supply chains and support key suppliers whose need for working capital financing increased dramatically. Most did not stop their orders, but extended payment terms for a couple of months, beyond the agreed timeline to secure their liquidity. Later in the year these payment terms were then reduced below agreed levels to compensate suppliers for the earlier stretched terms.

The Retail sector is a good example where grocers have seen a significant and continued need to support their suppliers, whereas fashion retailers have observed the ups and downs correlating with various lockdowns in local markets.  These industries are heavily dependent on procurement from Asian markets, which is one reason they looked to SCB as being strongly positioned to support their needs. 

We have helped clients across the UK and Europe to unlock liquidity throughout their supply chain and to minimise disruption in their businesses.  Working with our clients across industries to support their suppliers, we have provided innovative solutions to include new supply chain finance programs, pre-shipment finance solutions, bilateral loans extensions to suppliers as well as considering sustainability criteria in these programs.

At Standard Chartered we want to open the boundaries we face and find the means to facilitate success for our clients.  I hope that we will be able to come together this year and look back on how 2020 both has shaped the way we do business for the better and the advancements of digitisation helped us all prosper.