The devastating impact of the coronavirus (COVID-19) on global value chains (GVCs) is unprecedented, but disruptions from crises are not new. The 2008 Global Financial Crisis, the 2011 Japanese earthquake, and the 2011 Thailand Chao Phraya river floods each shaped the evolution of GVCs, in many ways making them more resilient. Agile adjustment is a main characteristic of lead firms within GVCs, and reshoring is not the only strategy for building more resilience.
As the architects of GVCs, multinational corporations constantly adapt to risks and opportunities by reconfiguring production networks and optimizing supply chain complexity. They strategize to improve not only efficiency, but also resilience. Their strategies take into account technological advancements, shifting consumer preferences and government policies. For example, asset-light models of investment and automation-driven reshoring had been underway long before the crisis.
No consensus has emerged on how GVCs will look after COVID-19 subsides. Some economists hold the view that there will be little significant change and that adjustments will concentrate in health-related industries, as the economic rationale for most GVCs continues to hold. Others believe that COVID-19 has become a wake-up call for a new balance between risk and reward for GVCs, as pandemics, climate change, natural disasters and manmade crises may expose the world to more frequent crises. Further, the pandemic has exacerbated protectionist sentiments, calling for shortening of supply chains and greater self-sufficiency.
Diversification of suppliers has been a key strategy of multinationals to mitigate risks. Given the changed risk appetite as a result of the pandemic, some will be willing to lose some efficiency gains to diversify suppliers, including from certain countries. Some companies may choose to reshore their production, diversify their operational locations, or hold more inventories. Indian automotive manufacturing companies such as Tata Motors and Maruti, for example, are increasing local sourcing to reduce their dependence on China. Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract integrated circuit manufacturer, announced it will invest $12 billion to build an advanced semiconductor fabrication plant in Arizona.
Just how massive will localization or relocation of production be?
Consider two facts. First, the relationship between production length and GVC resilience is more complicated than it looks. There is no correlation between supply chain complexity and the severity of the economic impact of COVID-19(figure 1). Production localization, or shorter supply chains, would not necessarily be less vulnerable. On the contrary, some previous crises and disasters we mentioned earlier led to more offshoring to diversify suppliers and a production network across different countries. Even during COVID-19, countries have still relied on the global production network to meet sharp rising domestic demand of essential medical goods. For example, before the crisis, China produced around 20 million face masks per day, roughly half of global production. By early March 2020, this had been ramped up more than six-fold, to 120 million per day, mostly for export.
Figure 1. No clear relationship between GVC complexity and severity of COVID-19 impact
