The conflict in Ukraine – and earlier events like Brexit - led prominent asset managers such as BlackRock to declare the “end of globalisation.” Where is globalisation headed?
This talk will take a supply chain perspective on globalisation: why we buy from or sell to far off places and build global supply chains to get the goods from raw material suppliers to manufacturers, and eventually to consumers. And it will look at why globalisation is under threat – besides geopolitics, the supply chain is complicated by factors including its carbon footprint and modern slavery. While it is hard to imagine the end of globalisation, what does the future hold?
A lecture by Professor ManMohan S. Sodhi
The transcript and downloadable versions of the lecture are available from the Gresham College website:
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- Globalization has been in the news quite a bit recently, so I thought I'd take my cut at where exactly it is heading, and the perspective, as advertised, is a supply chain one, and supply chain has also been sort of only bad news the past few years. So overall, I'll be talking about how globalization has benefits, but it also has risks, and certainly, it's very hard not to talk about the conflict in Ukraine, and for those of us from Britain, Brexit. Overall, I'll talk about why do supply chains occur in the first place, and that, of course, leads to globalization, why is globalization getting a bad name, and are we really talking about de-globalization. are we talking about de-risking globalization, and those two are different, and finally, what can we expect in the future. This is a quote from Larry Fink, he's the CEO for BlackRock, and BlackRock manages about $10 trillion worth of assets, that's trillions with a T, that's more money than academics make in a year. So anyway, he's important enough to be noticed by the business press, and it has been discussed quite a bit, as the quote's implying an end of globalization, so I thought I'd start from there. And he's saying that the invasion of Ukraine has put an end to globalization as we have experienced over the past three decades, so those three decades I'll focus on as the globalizing years when I look at some of the things, and he's saying that this is going to prompt companies to basically redo their supply chains. That means reevaluate their dependencies to other companies and countries, reanalyze where they're making things, where they're assembling things, where they're buying from, so essentially, redo their supply chains, and something that had already started with COVID. So de-globalization has been talked about a lot in investor calls, in whatever income statements companies have given, and you can see, this is the number of mentions of things like near-shoring, where companies want to bring their operations much closer to the home country, on-shoring, bring those operations into the country, and re-shoring, same thing, the things that were offshore earlier now to be made in-country, so there's been a lot of talk, and there was a lot of talk when it was COVID, and certainly, there's a lot of talk about Ukraine. The question, of course, is, is this only talk, because as economists say, talk is cheap. Did actually things happen? So it's worthwhile trying to understand, from a supply chain perspective, what is possible, or what is not possible. It's fine to talk about de-globalization, or the end of globalization, but what should we actually expect to happen? So in terms of terminology, globalization is a huge word. Any time you watch a Hollywood movie or a Chinese movie, you are talking about globalization in some extent, but in this lecture, we are only talking about globalization when it pertains to trade across countries. And typically, these are countries that are also far away, so for the UK, it could be China or Vietnam. And so globalization means increasing the trade between countries, or companies in different countries, de-globalization means reducing that trade, so in that sense, near-shoring, on-shoring, or re-shoring that we saw earlier are part of it. And finally, supply chains are how raw materials, components, finished goods get moved around from country to country, company to company throughout the world. So once again, the term globalization here is not cultural context, or whatever, it's strictly about supply chains, the movement of goods across countries, across borders throughout the world. Recently with globalization, we've seen a lot of challenges come up. Back in President Trump's time, it was officially declared that there was strategic rivalry between the US and China, and that has continued with the Biden administration, and it may even get hotter with discussion around Taiwan, and of course with COVID-19, I'm sure you have been to stores where you didn't find pasta, or you didn't find eggs, so that means supply chains were jammed up, and they're continuing to jam up even now. And it certainly goes without saying that the Russian invasion of Ukraine, and then the counter economic war, as Fink calls it, by the West on Russia, together, those two have also jammed up supply chains, and it's a question of, do we really need all this global sprawl of supply chains, why not just make it at home? Or make it, I think the Treasury secretary in the US says, friendly off-shoring, that means you buy only from friendly countries. Of course, who your friends are and who they are not keeps changing too. But this is only recent, even before that, there have been lots of challenges. I think somebody online had mentioned the Suez Canal incident, and you can keep coming up with various incidents, but the real problems are, as I see it, threefold. Globalization has tremendous benefits, but the benefits have gone to just two countries for the most part, so two countries have got more than half the benefits, China and the US, and some other countries, you can keep adding up benefit, India, Korea, Germany, even UK, we've benefited here, but these countries together are 80% of all the benefits of globalization. And you can imagine, in a world with about 200 countries, almost all of the benefits have gone to about 35 countries, 100% of the benefits, so the benefits of globalization are not uniformly distributed. And by the way, these are GDP in constant dollars so that these percentages are fairly accurate. So that's one, the second is, with all this, if you see, emissions globally have gone up. You can see here China and the US have basically swapped their emissions when it comes to percentage emissions throughout the world, these are US emissions as a percentage of global emissions, these are Chinese emissions as a percentage of global emissions, and they basically swapped, and again, they benefited from globalization, and they basically swapped their percentage emissions. But overall, the total emissions have grown, not just for China and the US put together, but for the world as a whole. These are absolute numbers, and they've been increasing every year. And this is, again, the period we are talking about is 1990 to 2020, those three decades that Fink was talking about. So emissions have grown, and one of the reasons emissions have grown is, as trade grew, so this is just data from shipping before 1990, the shipping CO2 emissions are fairly flat, but after that, they've been increasing, more than doubled since 1990, in 30 years, more than double the emissions from just shipping. And out of those, nearly 60% are from bulk shipping, shipping commodities. And then, the benefits may have been concentrated, but the costs, especially costs related to climate change, if you believe in climate change, at least climate-related disasters, we can all agree there have been climate-related disasters, I'm not counting Suez Canal incident in that, that wasn't climate related, you can see the number of people every year, hundreds of millions of people, hundreds of millions are affected by some climate-related disaster somewhere or other. These lines are by continent, you won't be able to see, this is Asia, which is the so-called manufacturing base for most of the world, and then there's Europe, Americas, and so on, but if we added all those up, that's still hundreds of millions of people affected every other year or so because of some climate disaster somewhere or other. And of course, it shows up in terms of damage of property as well, and that is, again, in the billions, or trillions, that's, again, huge amounts of money throughout the world by continent, and again, Asia is here, so around $50 billion of damage a year, these are the Americas, so the US also bears a brunt of these climate-related disasters. And thirdly, we're more aware of social issues coming as a result of globalization, and that's been the globalization of misery. One such misery is modern slavery. We now actually have a word for it, modern slavery, we may not have had much language before, and we're talking about 40.3 million people in 2016 alone, and that's an estimate. How good that estimate is, we don't even know that, because a lot of this modern slavery is hidden. This can be discovered easily in countries like the UK, with a proper legal system, but in countries where you don't have a legal system, then you do have this problem, out of which 25 million are in forced labor, and 16 million people working in supply chains somewhere in the world. This is the organized sector, this is not, you have a small farm and you force some neighbor's kid to work there, this is in supply chains, including those supply chains, eventually, are supply chains of Western companies, and 71% are female, so the costs, even, by gender are not proportional for modern slavery. And despite all these challenges, we know these, and it's not that we discovered only in 2022 that there are challenges for globalization, we keep rediscovering that, those are longterm trends, as you saw with the data on environment, on the data on social sustainability, so why has globalization continued? That's a very simple argument. Every company, let's say it's this company, this company has to, any time it makes or buys something, it has to decide, should I make it myself or should I buy it. Well if you buy it, you need to find a supplier, if you make it, you have to decide, do I make it at home or do I make it in some other low-cost country. And over time, as you saw, the benefits of globalization have not been equal, so the ratio between what the costs are in a rich country versus in a poor country are only increasing, so it becomes more attractive to go to a low-cost country to find a supplier, and those low-cost countries will be far away. So each time you make these make-buy decisions, the supplier also does the make-buy decision, and then their supplier does the make-buy decision. Many of the goods you buy from Chinese companies are actually made in Vietnam because the costs in Vietnam will be lower than that in China now, and then eventually, somebody in Vietnam will export again to somebody in some other country, so supply chains get longer. Same thing on the demand side, you wish to expand sales, and then do you expand sales, maybe it's a distributor who in turn expands sales to some other country, so the supply chain gets longer and longer both on the demand side and on the supply side. So supply chains have got longer, and it's a chain, right, the magic word here is chain, chain is the chain of activities in the supply chain, the longer the chain, the more links that can break, so that means the threat of disruption grows, and that means there is more fragility. The other thing with the longer supply chain is what system dynamics expert Forrester talked about, was the bullwhip effect, also called the Forrester effect, which means there is instability in the supply chain, the further you go away from the consumer, the more the variability in the supply chain. So the consumer means, let's say you buy certain goods from your grocery store at a certain level, it could be something as commonly used as, say, nappies, or soap, or detergent, but those small fluctuations mean, at the plant level, the order fluctuations that Tesco sees, their wholesaler sees, the manufacturer, like PNG, sees, and their supplier sees, it keeps growing. That's one aspect of the Forrester effect, or the bullwhip effect, the other aspect of that is the instability continues. It's like a system that's been shaken up, once it's shaken up, it stays shaken up and doesn't stop, even though there is enough capacity, the demand has stabilized.And you can see that with COVID today:
COVID meant longer shipment times, obviously less production, more demand, so there was unmet demand, but then now there is oversupply, and in fact, that oversupply has suddenly meant that companies that did extremely well during the COVID times, Walmart and Target in the US, now their stock price is badly hit because they've got oversupply, and they've had to mark down their stocks. And now, again, we are seeing some shortages, so that cycle of too little inventory and too much inventory hasn't quite died down even though, well COVID also hasn't completely died down yet, but things are better than they were before, but this instability we can see continuing, and one reason is simply that the supply chain is very long, something or other always goes out of sync when there are so many links to manage. So overall, from 1990 to 2019 alone, the amount of trade grew about 13 times, slightly more than 13 times, from 1.4 trillion to 18.3 trillion, but these are the consequences. Is this a good thing? Yes, more trade means more goods, on an average, people are better off, but remember, on an average means, it's like putting somebody's head in the fridge and their toes on the stove, on an average, this person is very comfortable, but of course the poor head and the poor toes are suffering, and so the benefits have not been the same even though globalization has benefit in terms of increasing trade, increasing number of goods, and certainly cheaper goods, more affordable. All those things have come, but the benefits are not uniformly distributed, and the cost is being borne by many other people, so there is growing inequality between countries, which of course means supply chains get longer, because now you have another low-cost country you can buy goods from. And then there is some research which shows that, from the low-cost countries supply chains buy from, there becomes growing in inequality in those countries, and countries get poorer over time. As you saw, the benefits of globalization for at least 150 countries are zero or negative over these three decades, and that's because countries export low-value-added goods, they export minerals, they export agricultural goods, that means just digging stuff up and sending it out, very low value add, and in turn, they buy weapons, or electronics, high-value-added goods, so they only get poorer over time. We've seen the damage and threat to the environment, and there is obviously, depending on how you stand on the issue, people believe that that's causing climate change, which means more fluctuations of the weather in the coming years, climate weirding, I believe, is the term. And then social sustainability, modern slavery is just the tip of the iceberg, there are so many other problems, and it doesn't matter, rich country or poor country, society is also shaken up. And then of course there is migration. We talk about globalization not just of goods, but globalization of people, a lot of migration is economic, it doesn't matter how you want to look at it, and then we in turn can outsource that to Rwanda, or wherever, that just makes that supply chain a bit longer. So globalization has benefits, globalization has costs, those who benefit from it are not necessarily those who pay the cost, and the question is, in this environment, where is globalization headed, which is the question I started from. Okay, here's a quiz for you,let's see if you pass this quiz or not:
should a company look for new markets? A difficult question. What if these new markets present some risk? Should we not look for new markets, and just stay home, or should we diversify risk by looking for even more new markets so that our risk is somewhat diversified? And then should a company look for cheaper sources for raw materials or components? Very difficult to say, yes, no, don't buy cheap. And then what if these cheaper sources present more risk, or they're less dependable, should you not buy from them at all, or should you diversify, buy from many such sources, hoping, when this guy is unreliable, maybe that person is reliable, and you get the goods? So now you've solved the whole problem and we can end the lecture right here. So there are benefits, costs, and risks tied to globalization. Those who benefit, they don't have an incentive to change, they'll only benefit more, and we'll come back to Larry Fink's letter. It has costs, those who pay those costs don't have much of a say in globalization, they're at the receiving end. And then globalization has risk, which affects all kinds of people, those who benefit and those, so maybe that's what needs to be worked upon. So it's the risk side, so hence we can talk about de-risking globalization, as opposed to de-globalization. De-globalization would mean reduced trade, and trade only within the country, or with nearby, or as the US Treasury secretary says, friendly countries, and de-risking globalization means reducing dependency on any one country, maybe any one currency, as the Russians are finding out. So to de-risk global supply chains, there are many strategies, but these are common ones. First of all, like what Diageo has done, Diageo makes alcoholic beverages, as some of you might have heard or experienced personally, they buy raw materials, say, in Southern Africa, and then make alcohol and sell in Southern Africa, so it's a regional supply chain, and the same thing with Asian countries, same thing in the UK. So in a way, you're still global, your footprint is global, but each of the supply chains is local to within part of a continent. Or Barilla used to buy durum wheat from Texas and Arizona, and then ship it all the way to Italy and make pasta for the Italian market, and the company itself is in Italy, but a few years ago, they decided to encourage the Italian farmers to grow durum wheat so they could buy it from Italy, make the pasta in Italy, and sell in the Italian market. So that's called regionalizing your supply chains, which means, in case something goes wrong somewhere in the world, it affects only locally, it doesn't create havoc in the rest of the world. You can also diversify your sources, instead of buying from one, you buy from many sources so your risk is diversified, if something goes wrong here, you are still getting some resources from somewhere else. You can also segment your supply chains, that means, for different products that you make or sell, you have separate supply chains, completely separate, so again, if something goes wrong in one supply chain, your other supply chains are still working. So Zara, for example, which is the apparel company, for certain goods like socks, or T-shirts, plain, non-fashion goods, they buy those from, say, India or Bangladesh, but for the fashion goods, they'll make it in Spain for the UK market, so close by, so completely different supply chains, and that's called segmenting your supply chain. But the thing is, with all these efforts, you are actually leading to more globalization. That means, now, you're buying from even more countries than you were buying before, so de-risking the globalization means you're actually becoming more global.So this is the paradox:
the end of globalization means even more globalization, so what does end mean here? So that is really the question. And this I've already said, those who benefit disproportionately, they'll want more globalization, those who pay the price don't have a say, those who want to deal with the risk of globalization can only de-risk by making the supply chains even more global. So any efforts to de-globalize is actually leading to more globalization. So now let's look back at what Larry Fink actually said about the end of globalization, as it has been reported in the press quite a bit, he actually said, "The end of the globalization we have experienced." So it's not just any good, old globalization, it's the globalization that we experienced. That means there will be a new globalization, and that globalization will have to be much more extensive in order to deal with risk, so this new globalization will also be more efficient, with increased attention to de-risking. The biggest problem in today's supply chains is the flow of money, and you can see that, in what Larry Fink calls the economic war against Russia, it's the flow of money that has been disrupted. And we experienced that here back in 2008-2009 when we had the financial crisis, it was the flow of money that disrupted the supply chains. So it wasn't that we didn't have capacity to make goods, we just weren't able to pay people properly, or the banks weren't giving enough liquidity. So improving the flow of money is the last area of efficiency that is needed in supply chains. And actually, if you continue reading Larry Fink's letter, and see where BlackRock is putting their effort, it is on this, on the flow of money. That means BlackRock is also thinking it's not the end of globalization, but it's a world where there will be more globalization, and in that world, flow of money will become much more important, so BlackRock, it's putting its money on digital currencies on enhancing the settlement of international transactions. They wouldn't do that if they thought, if there is no global trade, you don't need to worry about international settlement, but this is what is happening. So once again, de-globalization eventually means more globalization, and making it more efficient to make it bigger and better, with effort being put on digital currencies, and so on.So follow the money:
if they have $10 trillion of assets, their strategy is to invest in more globalization, and not the end of globalization, and they want to do that by investing in, like I said, the last area of inefficiency in the supply chain. So businesses will figure this out, whether BlackRock has already figured it out, and other businesses will figure out, they need to manage their risk, they need to make their supply chains bigger and more efficient, they need to make sure international settlements of cross-border payments are done better. The question is, what should governments do? And governments and businesses are not the same. Sometimes, yeah, I remember this as a kid, what is good for GM is good for the US, that used to be the same, but governments and businesses are different, and governments need to tackle with those ills that I mentioned before that have come about as a result of globalization, about the growing inequality within the country, countries not adding much value, and therefore not benefiting from globalization, the threat to the environment, social unsustainability, migration across borders, and so, so governments need to do something about that because globalization can only increase. So what can governments do?Four things:
one is, certainly if globalization is happening anyway, you might as well join that club and make globalization more efficient, and that way, the governments can work with business, so free trade agreements is one. Digital solutions for international trade, and you can see them in things like movement of containers, and so on, finding digital solutions. Although it's funny, I remember back in the late '90s, I was working as a consultant in e-commerce, e-commerce was very new then, the same kind of things were talked about back then, so somehow we need to up our game a bit. Now, of course, there's blockchain, and other kinds of things. Second, making cross-border payments more efficient, the governments have to play a role rather than leave it to industry to come out with Bitcoin, or this or that, government will have to step in. And reducing geopolitical tensions. Back here in the UK, certainly, one of the Tory MPs has talked about reversing Brexit, earning him a lot of abuse,but that is a question:
if the benefits are not there, and globalization is happening anyway, is this something we should talk about? And the EU is insistent that the EU is really about the movement of people, but really, it's the movement of goods that should take precedence if globalization is occurring. And goodness knows there are other tensions globally, which we need not get into, which the tempers can be reduced a little bit. Second, I think all governments need to develop an industrial policy for development and robustness. I remember, I was asked to comment on Prime Minister Gordon Brown's efforts on making a manufacturing policy for the US, this was many years ago, this was around 2007, and I remember, I said, what about the role of the City? You can't have manufacturing and supply chains unless money flows well, and the City will play a key role, and I wish I had done something, bought stocks, or something, because 2008, the crash came, and it was exactly because the money stopped flowing that caused the disruption. This industrial policy really means exporting value-added items, but also importing less value-added items. These are obvious, any country should try to do that, but also reducing dependence on one currency, and currently, the dollar has become a weapon, and that means many countries, even friendly countries to the US, will have to think about, if you want to trade with another country, does it have to be through the one currency, or can you do it some other way with digital currencies or not. I think this is going to be true for the UK, even though we are at good terms with the US. Third thing governments need to do is require companies to report more. Yes, we can always groan, oh no, yet another report, and more money for the audit companies who'll help write the reports, but there have been efforts, Sarbanes-Oxley in the US, for example, reporting on, what's the level of risk, and what are the efforts the company is making on de-risking their supply chains. I think, every few years, there'll be a survey, and say, many CEO surveys, and many CEOs will say supply chain risk is their biggest worry, and then of course, some incident happens, say the Suez Canal, and then we are back to, oh my God, we need to think about supply chain risk. And you saw that graph earlier, where the peak of near-shoring, and all that, that talk goes up each time there's an incident, and that talk dies down and life goes on without de-risking. But for large companies, corporations, government should require them to report on risk because the cost of failure of a large company is paid disproportionately by the society, and not by the company's shareholders, so this is required. And then transparency of supply chains in terms of their impact on the environment, you saw how the US and China just swapped their CO2 footprint, or greenhouse gas emissions, so you can just outsource to someone, and say, look, I'm okay, but it's part of the same supply chain, so the supply chain needs to be more transparent, and supporting NGOs can help with that. And finally, back in 2015, after many years, all countries around the world agreed on these UN Sustainability Goals. We seem to have sort of forgotten them, where they were, they were actually quite well thought through and quite detailed in terms of what could be done, and I think companies, especially large companies, have an important role to play, and therefore the government should require companies to report on what they're doing for these 17 sustainability goals. And these goals are very prescriptive, so it's not difficult to create these reports if you're actually doing something, quite prescriptive. And finally, this is a pet peeve of mine in terms of governments always saying, oh, we love small business, and small businesses are the biggest employers together in any country, well why can't we do anything for small companies?The benefit is twofold:
of course, small companies are doing well, the country is doing well, it doesn't matter which country we talk about, and also, the country as a whole, or the economy as a whole can be much more robust to shocks if the small companies are doing well, because small companies tend to have small supply chains, they buy locally, they sell locally, and therefore they can be quite self-sufficient. And for things like food or medical goods, I mean it's astonishing how much the UK imports by way of food, so if supply chains are cut off, what are you going to eat? And medical goods, masks, trivial things which can be made. So there will have to be sectors which will need to be supported, that means maybe more expensive goods, but as long as these sectors can meet the demand for a few months, then the economy as a whole is de-risked. So this is not for reasons of charity that we support small and medium companies, it's to make the economy more robust and achieve self-sufficiency. So one idea, and this is actually becoming tangible now, is this old idea of commons in an English village. In the commons, you can take your sheep, or cows, or whatever, I actually saw cows close to Richmond Park, there is a commons, and you can take your cows, and graze them, and the idea of commons can be brought forward for the economy as a whole. One example that's just started coming up is this open-network digital commerce. You know how, if you are a small shopkeeper on Oxford Street, you're not going to have an e-commerce company of your own. You can go to Amazon and sell off Amazon, but then you pay a 30% commission on your revenues to Amazon, so that means your profit margin is going to be either negative or minuscule. But if that platform could be provided by the country, and this is what India is trying to do with this ONDC, it's not a platform, it's a meta-platform, the idea is, if this connectivity is already there, just like electricity, electricity exists, you can do things with electricity, so imagine if there is a network, an internet-based network with everybody connected, then people can create apps, or you could create a small e-commerce platform just for the local area where people can order from their local shops just locally, or it could be nationally, but everybody would have the same access to the entire country. India is a huge market, but that means logistics providers can go in there, small companies can go in there, so the advantage that Amazon has, or Walmart has in India, that would be reduced, because profit margins for a small shopkeeper in India are not going to be more than 30%, so paying 30% to Amazon would not make any sense at all. So this way, you have a level field for anybody, that means you have access to the internet, you can buy goods, you can get a logistics provider to ship your goods, all off the internet. And I think the same idea, I've been talking about something similar here, even for Oxford Street, where small businesses could do something like this, but this is quite practical, and I hope other countries will pick that up. And this is another question, these tech companies, now they've started extracting much more profit now they're established, so the question is, are they utility companies? Should we expect, just like electricity companies or water companies, we expect them to make a little bit of profit, but not go all out, so same thing, should we start treating utility companies, whether it's Meta or Google, and not allow them to make these profit margins that allow trillion and multi-trillion dollar valuations?So let me summarize now:
the topic of course is where is globalization headed, and I've talked about, globalization has benefits, globalization has costs, and in the press, there's been a lot of talk about the end of globalization, and I've talked about where that came from, and I've talked about why globalization is under threat, and the need to separate de-risking globalization from de-globalization, and I said de-globalization actually means the world will become more globalized, so there'll be more globalization, not less, and there are other reasons. In this world, a government will have to, this world, meaning this world where you have more efficient supply chains, and much more sprawled out across the world, in this world, governments will need to do more to protect the people who are paying the cost, but not getting the benefits of globalization. Certainly, lower barriers to trade means lower costs overall, which is a good thing, and hopefully, businesses will join, but developing an industrial policy, especially things like the ONDC, where everybody has access to the same internet-based systems for commerce, requiring more reporting, especially on the UN STG goals, and finally, supporting small companies, so developing industrial policy for robustness, and then small companies, especially in critical sectors. (audience applauds) - Professor Sodhi, thank you very much. We have a lot of online questions, and I will try to get to most of them but there will be some I'm just not able to get to in the time allowed. I'll ask a few from the online audience, and then I'll open up to the in-person, and we'll probably come back to the online audience. Talking about governments, and there's a question here, "How can governments "seek to address the ills of globalization "when administrations are so heavily influenced, "reliant upon, and lobbied by industry?" - That is a huge problem in democracies, and ironically enough, it takes somebody like President Xi of China, in a non-democratic society, to say that society cannot be owned by a few large companies. I remember even President Putin writing many years ago about how liberal democracy is failing, and this is one of the reasons of that failure. I know he's not popular, we shouldn't be quoting him, but still, that is something that voters will have to consider going forward, and that this globalization hasn't benefited them as much. You can see that in these populism movements in so many countries, not just in the US, but even here, Brexit was a sort of populist movement, and that is happening. It would be good is governments recognized that the reason for populism is that people understand that the government is not working for them, and sooner or later, people will either change their government and find somebody who will work for them. - Thank you. There's a question here about quality of products, "How much does the quality of products "affect the growth of these damaging supply chains? "For instance, products wear out, they fail, "software becomes obsolete pretty quickly now, "is this by design?" - A lot of quality of goods being poor is by design, and it's the design actually imposed by Western companies. I visited China many years ago, they make separate kinds of microwaves, there was one company, and one factory, which makes 90% of the world's microwaves, 90%, just put it in different boxes, but they have different microwaves for the Chinese market, so the ones for the Western market are poor quality by design because the Western companies will pay very little money, and then sell them for a high price, and so the profit margin. So you can go to the store and say, my microwave doesn't work, and they'll replace it quickly, because you are the quality control, you took it home, you tried it out at your risk, does it work or not, but in the factory, there was no quality control, or anything, it was just things being assembled, thrown up, put into boxes, a GE box, or a Whirlpool box, and at a furious pace, there's no time for quality controls. This is called planned obsolescence, many of these goods are planned to fail, so that's not quality because of not having the capability, that's poor quality by design, and that poor quality is designed by the buyer, which means the Western companies. - And then that increases the supply chain- - Yeah, because you're buying more goods than you need, and that obviously is a supply chain problem. - [Questioner] Hi, I like your point of view about SMEs. Because globalization is being monopolized and dominated by big corporations such as, take chips as an example, the Taiwanese, what's his name? TSMC, they supply a lot of chips. So how can SMEs and family businesses who are the antithesis of big corporations in this global supply chain challenge these big corporations? Like a family-run food farm, I can imagine supply local produce, but when it comes to at least high tech, complex industry, not supported by the government, how can they rival this established global company that is part of this very complex global supply chain? So what can government do to promote and foster the local SMEs who create local jobs, et cetera? So SME versus global, big corporations. - Let's take the example of TSMC, this is the company that makes chips for most of the world, and these chips have been in short supply, as we experienced in the auto industry, so certainly, what the US has done, what President Biden did, asked them to install capacity in the US, which they have done, and Samsung has done, and Intel has done, but the government is paying them the money to come and set up the plant, and that was $50 billion paid to these three companies to set up a plant, so that way, it's within the country, and there is some control. The second is bigger, obviously not every country is going to pay TSMC, or Intel, or Samsung $50 billion to come and set up a plant there. There's been talk here in the UK too, by the way. The opposite of that is innovation to come up with other products, or other things that you can make at home. There's also the question of, a lot of these electronic goods are actually just throwaway goods, it's not whether we actually need them or not, so there is a question of, are these being pushed on us or do we really need them. But I think even small countries, like Finland, or whatever, have done a tremendous amount of innovation on the e-commerce side. We think of mobile phones, they all came from Finland, so countries have to innovate. You can innovate out of the box or you carry a big stick like the US and then require companies to set up their supply chains in house, but those are the kinds of things that have to be done. - [Questioner] I've seen that we've had extra warehouses in the UK, an extra 1/5 in the last three years, do you think we're going to swing to shorter supply chains, more protection for another five years, until we get past these present shocks, and if there's no more shocks, then just, human nature, loosen up again and go back to the natural globalization? - I think five years is a long time. I gave you the example in the US of Target and Walmart, where they've gone from having too little inventory to too much inventory within a matter of months, and stock prices have gone from very high to very low also very quickly, so I think the same thing will happen here. We may have extra warehouses for keeping extra goods, but then, because of that Forrester effect, and the continuous imbalance, within five years, there'll be many cycles of too much inventory and too little inventory, so my guess is it won't be five years before that happens. - [Questioner] If you compare the economies of large countries like China and India, they did research on this, and they found that, in China, they like to get all the designs from abroad, and they act accordingly, and India, when they did the research, they got the impression that, no, they don't want to follow other people's designs, they want to do their own design, first of all for the internal market, and then they want the rest of the world to get interested in the thing. This paradigm is a problem. The other thing, I was rather concerned about people who fall back, who are falling behind because of globalization, and what governments can do, is it entirely due to corruption, or is it some other reason? - Two questions, first of all, I had looked at Chinese companies over the '90s, and during those '90s, initially, from taking designs from abroad, just making goods cheaply, they went further up in the supply chain to make their own designs, and now they will offer Western companies their own design and their own product. And some companies, they've even gone forward where they even offer customer service on behalf of the Western companies, so getting closer and closer to the customer, getting upstream in terms of design and R&D, because every company eventually says buy or make, so the same thing you can say about research, so Chinese companies have also expanded their remit into design as well. Comparing that with India,it's always been slightly confused:
on one hand, the current government says make in India, make it locally, everything done here, but then they import these really expensive weapon systems and then they export rice, which is already subsidized, so it's a money-losing business, so this industrial policy, bar manufacturing, hasn't really been thought through very well. And like I said, there is research which ties that to globalization, so globalization has created not only, widened the difference between rich countries and poor countries, but also has widened the gap between the rich and the poor in those poor countries. - [Questioner] But how can one prevent that? - That's why I'm hoping that governments can do these kinds of things, what we saw here, which will target, how do you protect the weaker part of society, and weaker countries. - [Questioner] I was really curious about that question, because is globalization the cause of this increased gap, or was it going to happen away if we didn't have globalization? I thought those countries, the countries that have fallen behind- - Yeah, there is enough research to show that it's the cause and not a correlation. - Can I bring you to a practical question here that someone has asked online? He's saying, "Practically, what should procurement "and supply chain functions in companies "be doing now to improve their systems thinking capability?" So it's about scenario planning and systems thinking, what should companies be doing now to improve their systems thinking capability? - There were two aspects when I said making supply chains efficient, de-risking the supply chain, and also this continued imbalance that I referred to as the Forrester effect, and all that. For both, obviously I don't understand the full intent of the question, whether that means more modeling for systems dynamics to understand these continued shortage and excess inventory cycles, certainly, there are modeling solutions, but effectively, it's, the longer the supply chain, that'll happen. But in terms of how to de-risk their supply chains and prevent shocks from happening in the first place, and if shocks don't happen, then the system will not become unstable, I would say right now, immediately, the companies have to think about how they can de-risk their supply chains, although the effort, again, can result in more risk rather than less risk. - And one more, which I think is a bit more practical,this is about port congestions:
"How can these be avoided in a planned way, "especially in a post-distress period, "for example post COVID?" - I think after the fact, many people will say, oh we should have done that, we should have done that. The point is, in a world which is highly unstable, something or the other will always be going wrong, so either you plan for your supply chain assuming something, somewhere will go wrong, as long as most of the supply chain is working, that is a good thing, but you cannot predict, or take precautions such as, oh, the Suez Canal happened. I mean, who would have guessed that this ship would have turned in such a way and then blocked? These things will happen, somewhere they will happen, in a very long supply chain with many links, some link or the other will break down. - [Questioner] I was just curious to ask whether you think, in some regards, there's also an inequality in the complexity of supply chains? So like you said about countries that essentially just dig a mineral or an agricultural produce out of the ground, and then it enters a more complex supply chain as it's sent abroad as an export, in that sense, for that country, it's really just a one-way street, and then it enters a more complex supply chain as it enters more advanced economies, or economies with more infrastructure to move it in different ways. So in that sense, do you think globalization somewhat relies on that inequality of supply chains, where, for the export-focused country, it's really just a one-way street? - Yeah, that is very true, that's why globalization causes inequality, because if one country says, oh, we are not going to export bauxite, we want to refine it a little bit before we export it, then you say, oh, I'll just buy it from the neighboring country. - [Questioner] I come from Australia, which is often accused itself by others of selling the farm, iron ore, wheat. But during the Second World War, the problems of isolation became evident, and they started to industrialize, so we were quite industrialized for some time. The result was that there was protection on the industries. They made nice motor cars, but they didn't always work very well, until they took the protection off, then the motor cars worked better, then they took more protection off, and now they don't make any at all. But I was surprised just recently that I heard that the previous prime minister was at a factory that was making things for making phones work, I lose the words from time to time, and there was another factory making solar panels, and they're fairly new industries, they're coming in. Let's hope they don't protect them overmuch, but just enough to keep them going, somewhere in the middle, it's got to be. - One is, if we stay true to capitalism and make sure there is enough competition. Once you take away the competition then there is not much incentive to improve quality. And part of that increasing the competition is to level the playing field for small companies too, because then the threat is always, those small companies can, tomorrow, become large, and then compete with the current large companies. The whole effort of any large company is to wipe out the competition so that they can have monopoly profits, and the government, if it's a truly capitalist government, should make sure there is enough competition that bad players do not exist. The other part of the question is, should we protect some industries which are critical in the long-run, and you could argue steel, or healthcare goods, even though they are more expensive than, say, importing from China, we need to have something always there so that supply chains in the country can run even if everything was cut off, and food in the UK is something we'll have to be looking at very carefully, because there is just not enough supply chains, and we can keep importing, but at some point, if you say, what if we cannot import anything for six months, what are we going to live on? So there has to be some protection for some industries. - Well Professor Sodhi, I'm afraid that's all we have time for, thank you very much for your lecture, and thank you to our audience for attending, both those in the room and online. Please join me in thanking the professor. (audience applauds)