Even before the ongoing pandemic, companies worldwide were re-thinking their supply chains – external shocks, rising protectionism, changing labor costs, and automation advances collectively elevating the need for new approaches.
Yet the outbreak also exposed substantial structural flaws, prompting organisations to further reassess their manufacturing and sourcing operations, and exacerbated other discrepancies. In addition to factory lockdowns, transportation disruptions, essential supplies shortages, and trade restrictions, geopolitical tensions that existed before the crisis also increased and national policies that promote domestic industry are now likely to continue reshaping the business landscape at the global level.
Although resilience was traditionally considered a low priority versus cost efficiency, production, and quality, it is now an overarching necessity, and recent events have presented a window for firms to gain a competitive advantage.
Christian Oussi, principal, Boston Consulting Group.
As such, many are now exploring options for diversifying and regionalising their manufacturing and supply networks, reoptimising inventory, and adding back-up production and distribution capacity. They are prioritising enhanced organisational improvements, with greater supply chain flexibility, risk-monitoring capabilities, and capacity to respond to new shocks all pressing imperatives.
From the outset, though, it is important to appreciate that two factors will largely influence decisions in this direction. The first is an impetus to change, which entails import dependency and economic and political pressures. The second is the ease of adjustment, which involves the capital costs associated with moving to new locations and overcoming difficulties when replacing certain suppliers.
Companies operating in sectors with a strong impetus to change that make the right adjustments will stand to benefit the most moving forward, creating supply chains that, in turn, position them as they turn their attentions from navigating the turbulent business climate to winning in the post-pandemic future.
Rami Rafih, managing director and partner, Boston Consulting Group.
Crucially, both these factors relate to US companies in terms of chemicals and mechanical machinery. In today’s climate, some sectors are more prone to supply chain shifts than others with geopolitics and economic nationalism on the rise, particularly in the US and China.
While verticals such as aerospace, automotive vehicles, agribusiness, metals, and electrical machinery require further improvements with regards to the aforementioned factors, chemicals and mechanical machinery rank highest in terms of sectors most prone to change from a US standpoint.
Given the recent change in impetus and ease of adjustment corridor expanding, GCC firms can benefit from their US counterparts’ improved flexibility to substitute and diversify their suppliers, ultimately capitalising on greater business opportunities. After all, US companies are redefining resilience in their supply chains, and the GCC can benefit from US companies differentiating their supplier ecosystem and building their manufacturing network.
A prominent example relates to chemicals. As the US imports from China, US rubber, plastics products, and specialty chemicals exports continue to witness substantial growth while China’s exports and total imports’ market share continue to decline.
Aside from their strong structural advantage in the chemicals space, GCC countries are also leaders in exports of rubber, plastics and other petrochemical derivatives, positioning the region to make the most of these trade frictions and China’s subsiding market value in this segment.
In mechanical machinery, a similar trend is also apparent in industrial machinery and parts due to China’s US imports market share gradually decreasing. In line with these changing trade dynamics, the GCC can capitalise on its strong re-export hub role and expand manufacturing capabilities to capture anticipated trade mix opportunities in US import markets.
This has been substantiated by BCG analysis, which suggests a $3.7 billion per year mix-shift export opportunity in sub-segments where US total imports have been growing and China’s receding as companies strive to build supply chain resilience, namely rubber, plastics, and industrial machinery and parts.
The changing trade dynamics in these two sectors have left a gap in the market and mix-shift opportunity for the GCC. Given growth projections and the Chinese market share decline, a trade shift of three percent is likely in due course. Should this trajectory in terms of China’s market share from US imports over the past three years continue, it will reduce from 30 percent to 27 percent, presenting a $3.7bn market share opportunity for GCC players.
As such, GCC governments and rubber, plastic, specialty chemicals, and industrial machinery firms should act now so they take full advantage of the opportunities ahead.
Over the coming period, they can develop their logistics and manufacturing industries further, building sustainable competitive advantages and opportunities for suppliers.
As a result of US companies’ effort to build resilience, the GCC will be even better positioned to capitalise on a fair share of opportunities if actions in this direction are pursued.
By Rami Rafih, managing director and partner, Boston Consulting Group and Christian Oussi, principal, Boston Consulting Group
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