Wednesday, October 07, 2020

Is the government into rethinking of global supply chain and state of the economy?


In the office today re-reading yesterday's The Star column by Anthony Dass entitled A need to rethink global supply chains, it reminded of a Chairman message for a PLC meant for their 2020 Annual Report.   

The Chairman wrote that the world is undergoing a transformtion of epic proportion due to the Corona Covid 19 pandemic. 

Contrary to the victorious chest thumping by politicians, civil servants, and public at large several months ago, he felt the world is not yet out of the woods. People are wary of other people around them and what used to work does not work the same way anymore.

Upon analysing the current social trend, he predicted trend towards remote mode of working, accelerated use of technology, roll back in globalisation, and need for self reliant and self sufficiency for goods and services. The world will be re-prioritising its needs.    

That is where he meets the view of Anthony Dass, who viewed the pandemic reversed globalisation and stiffled global investment and trade. FDI for 2020 to 2010 is expected to drop by 40%. Cross border M&A will continue to decline. 

In the past, nation's concern is to keep foreign companies from dominating the provision of good and services. The new challenge now is to keep critical goods and services available within the country. 

Businesses are changing and adapting to the new business ecosystem. Countries are increasingly looking inward. He concluded with government should draw up policies and strategies to strengthen economic and business cooperation with partner countries in an “innovative” way.

Dass's article reproduced at end of posting.

This should set all of us to ponder as to what are we in Malaysia are doing other than the current national leadership endlessly gloating their only success to address health emergency beyond gigantic proportion. 

Then there is the public wanting to get spooked by new surges of positive infection, endless blame against each others, and non-stop politics to satisfy the insatiable appetite for power by the small since GE14 in May 2018. 

Googling to search for Dass's online version of the article, it generated long list of discussions on the subject of global rethinking of supply chain. It is a major concern of businesses and academics globally. Suppyminded.com provides an excellent overview here

MIT's Sloan School is talking about rethinking global supply chain from the perspective of improving resilience for future shocks. University of Brmingham's Birmingham Business School blog enlisted four generic strategies to improve global supply chain including the resilence and flexibility stressed by Sloane School.   

Talking of dependence on a single source, Ajot.com raised the issue of single source risk of being heavily  dependent on China across the industry vertical and relooking cost to service trade-off.  Outsourcing does not solve the problems in its entirety.  

Despite views such as in businessfacilities.com cautioning the impracticality against flipping the switch to shut off supply source from China, the US-China trade war is making companies rethinking of their reliance on low cost China to migrate to other countries. 

According to supplychainbrian.com, the pandemic made them re-examine that standard supply chain strategic option to question on the aspect of reliability.

Taking the definition from cips.com, global supply chains are networks that can span across multiple continents and countries for the purpose of sourcing and supplying goods and services. Global supply chains involve the flow of information, processes and resources across the globe.

As the 16th trading nation and surviving for more than 500 years on that model, Malaysia is part and parcel of of the global supply chain, be it as a manufacturing base, Straits of Malacca sea-lane, ports, sourcing of raw materials, and consumer of intermediate, or semi-finished or furnished goods.  

The Malaysian economy depended on trade and will continue to depend on it. It means being a part of the global supply chain. 

With FDI on the plummet, barriers being put up, economic war between US and China lurking, border intrusions that put our sovereignty at risk, and insufficient resources relevant for today's economy, one wonders whether the government is concern and thinking hard enough of these serious challenges. 

The national leadership should be providing that guiding light for the nation. The least they should do is to be concern on where to get our food and how to pay for it.

If the country could survive for 14 days with PM, 7 Ministers and 6 Deputy Ministers under quarantine, maybe there is no need for political leadership. 

They could not even ponder what is needed by the country.     

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Insight - A need to rethink global supply chains

ECONOMY

Tuesday, 06 Oct 2020

AmBank's Anthony Dass: Firms and governments need to rethink to ensure resilience in global supply chains following the impact of Covid-19.

THE unprecedented Covid-19 pandemic may have shattered the fantasy of those who championed globalisation and promised a world of winners, a more inter-connected society and international cooperation.

The pandemic has shown how the global community is heavily interconnected and vulnerable with a change in the behaviour.

Not a single country, no matter how powerful or prosperous, can overcome this cross-border pandemic alone.

This pandemic has resulted in political, economic, social and cultural shifts that changed the global landscape.

This is certainly worrying.

And it appears to be accelerating the deglobalisation process and already hurting global investment and trade.

Expectations are that global foreign direct investment (FDI) flows may fall by 40% in 2020-21.

Cross-border mergers and acquisitions will continue to decline.

How severe the impact on global investment and trade flow depends on the degree to which restrictive measures become binding and supply chains being relocated to home markets.

The placing of restrictions and screening on investment and trade are not new but the scope of their expansion is.

Prior to the pandemic, screening was justified on the fear of becoming dependent on a foreign company for the delivery of critical goods and services, a desire to ensure that domestic technology and expertise remain within national borders and the prevention of surveillance or sabotage of essential services.

Today, the pandemic has added a new dimension to these insecurities that will have global ramifications on investment and trade flows.

Change and adapt

As a result of the pandemic virus, there is a need to change and adapt to the new business ecosystem.

The goalposts have definitely moved.

Fundamentals in global supply value chains have changed in reaction to global supply disruptions.

Industries are reorienting and diversifying their lines of production, expanding the scope of their cooperation across borders to better adapt to the changing global supply and demand shock.

They are remodelling as they start reviewing business strategies, operation, communication and financial considerations with the aim of building and strengthening resilience amid a changing business ecosystem.

The reviews are undertaken as part of the change management process to implement structural changes to improve and facilitate cash flow and install innovative and state-of-the-art technologies.

As industries are reorienting and diversifying, they are also expanding the scope of their cooperation across borders to better adapt to the changing global supply and demand shock.

Due to Covid-19, the situation is becoming more challenging as more countries are now looking inward. Understandably, it is to sustain the growth of their own export market.

Supporting local businesses

Given these impending issues, government policy needs to focus on supporting local businesses to enable them to restrategise, revamp and remodel based on the global shift in consumer markets, investment and trade.

It is important to identify new global markets.

There is a need to start working on investments and trade in new areas of future growth while strengthening their market presence to stay relevant.

After decades of focusing on the electrical and electronics (E&E) sector, emphasis should be on growing new areas like health, medical device manufacturing, digital technology and halal food industries.

The energy sector has proven its resilience and adaptability in dealing with the unprecedented challenges of the past few months.

Covid-19 has been an enabler to innovation in the energy sector.

Innovation in the energy sector is not limited to developments in technology, but also encompasses innovation in contracts, business models, decision making and the diversification of portfolios.

Firms and governments need to rethink to ensure resilience in global supply chains following the impact of Covid-19.

For some, they argue for supply chains to be re-nationalised, or at least shortened, to reduce risks from global exposure. Firms may also need to rethink sourcing decisions, resulting in re-ordering of global production, with potentially far-reaching implications, especially for developing countries.

The government will need to reconsider the list of strategic goods for which there is a requirement for domestic production, or impose new sourcing constraints on businesses.

It must also revisit the procurement practices, consider the trade and investment policy environment that can best support resilience like digital infrastructure to improve productivity or improvements to trade facilitation practices to minimise scope for disruptions related to face-to-face processes.

The government may need to consider special arrangements for specific supply chains for strategic goods. However, this should not necessarily be equated with a reshoring of production.

Creating successful environment, social and governance (ESG) policies and strategies are essential. ESG investing will be big in the post-Covid-19 era. It is a wake-up call for all businesses as it has been revealed that global markets and supply chains are fragile and easily disrupted. This will result in an increased focus on sustainability. ESG integration helps to reduce risks as well as capture business opportunities linked to the transition to a more sustainable economy.

There is also a need to emphasise on market presence and reputation. Goods and services offered by companies need to stand out. Having a strong market reputation would help businesses gain the edge over the competition and ensure growth as well as sustainability.

Policies need to be designed to help businesses develop market presence and reputation to help determine their growth and secure a niche space in the market. It is important to take note that businesses in future will not be what they used to be.

In short, there is a need to change and adapt to the new business ecosystem, as especially with the disruption of global supply value chains. Policies and strategies should be drawn to strengthen economic and business cooperation with partner countries in an “innovative” way.

Anthony Dass is group chief economist/head, AmBank Research; adjunct professor, UNE, Australia; and a member of the Economic Action Council. The views expressed here are the writer’s own.

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