Opportunities for India as supply chains restructure

The pandemic exacerbated and exposed the vulnerabilities that had taken shape in earlier years. The growth rate of the global trade in goods began to slow since 2008, up from an annualized level of 4% to 3% in the decade that followed. A US-China trade war and the rise of economic nationalism around the world caused global trade in goods to plateau in 2018. As global production recovers sharply in 2021 and 2022, so will trade, but it will likely be several quarters before it catches up. along its previous trajectory. After recovering from a sharp decline, world trade trade is expected to grow 10.8 per cent in 2021, putting further pressure on containers, ports and supply chains.

As demand improved around the world this year, supply and logistics chains collapsed, adding to many important factors such as semiconductors, rare earths for industrial magnets, active pharmaceutical materials (APIs) for pharmaceutical manufacturing, high-density interconnect circuit boards and precision castings. revealed a lack of components. The pandemic caused a reduction in the number of shipping vessels, which in turn left containers stuck in inland depots and stuck at ports. This has led to an increase in freight prices, with some routes registering an increase of 500%. Inland trucking freight prices in the US increased 36% year-over-year to keep pace with the closed ports in Los Angeles and Long Beach. In turn, pressure on logistics chains has increased the working capital requirements and costs of small and medium enterprises, with payment cycles extending to several weeks.

Global manufacturing companies are scrambling to adapt to current supply chain issues, but are also shifting their ‘lean manufacturing’ to ‘risk-adjusted agile’ supply chains. The first step in this process is a non-trivial requirement to deeply map supply chains with a critical assessment of vulnerabilities to a single geography, sole supplier, etc. The newly developed agile supply chain should not only be able to address the associated vulnerabilities. For the global trading system, but also for extreme weather events that are becoming increasingly common as a result of climate change. Just last week, a deadly storm cut off road access to the Port of Vancouver, which was already battling an impasse in container traffic.

Toyota, a global leader in supply-chain management practices, had already revised the ‘just-in-time’ approach, pioneered in the 1930s, to instead stockpiling four months of inventory (30,000–) for critical parts. approximately 1,400 of the odd parts). who gets into a car). While Toyota weathered the early quarters of the pandemic very well, supply chain issues have begun to slow down its production. Other firms, such as Black & Decker, have moved manufacturing closer to customers. Firms are seeking greater visibility and credibility in their supply chains and optimizing through stock-keeping-unit rationalization, promoting digital and autonomous suppliers, and transforming their hitherto linear supply chains into agile networks. are converting. Some companies have begun to hold intermediate inventory as safety stock. State-of-the-art technologies include the use of 3D printing to reduce the time taken to create molds and complex metal shapes, and real-time tracking with Internet-of-Things tools feeding artificial intelligence systems for supply-network management Is.

This presents a huge opportunity and challenge for India. Well designed and implemented schemes like Production Linked Incentive (PLI) scheme have attracted investments and firms in India. However, its continued success will depend on dramatic improvements in India’s logistics capacity and capability, consistency in regulation and tax policy, and government non-interference in the conduct of business.

Nhava Sheva Port, India’s largest, ranks 35th on the global port capacity list and has just one tenth of the capacity of Shanghai Port and an eighth of Singapore. Other enablers such as reliable and consistent power, inter-modal freight transfer and inland waterways have a long way to cross. Indian technology entrepreneurs can make a significant contribution by building SaaS platforms to handle the evolving and complex global supply chain networks.

China will continue to be a key pillar in the new interconnected supply chain world as efficiency and capital economy will still be desirable for global manufacturing firms. As China turns its focus inward through its ‘dual circulation’ strategy and firms seek to improve visibility and mitigate vulnerabilities, we will see a material change on margins. Countries that organize themselves to take advantage of this will benefit, but it will require rigorous planning, implementation and consistency. Direct manufacturing employment may be only modest in the new era of digital and autonomous production (an estimated 700 workers produce 100,000 Apple iPhones), but the services that surround these units should be meaningful generators of employment. Contradictory policy objectives, such as openness to self-reliance and a retrospective condemnation of globalized firms, would prove to be self-defeating.

PS: “If you don’t change direction, you can get where you’re headed,” Lao Tzu said.

Narayana Ramachandran is the chairman of Include Labs. Read Narayan’s mint column at www.livemint.com/avisiblehand