Trade wars. Lockdowns. Production standstills. Cargo backups. Container shortages. Demand surges. Labor disputes. And Russian sanctions. If the last several years have taught companies nothing else, it's that strategic planning and risk management lie at the intersection of geopolitics and supply chain. As businesses brace for the long tail of disruption, this lesson will continue to assume importance.
Over the next 12-18 months, companies will be witnessing an avalanche in slow motion. Even as the pressure of cargo and vessel backflow begins to ease, there’s no turning it around. And, as it runs its course, it will continue to alter the geopolitical and market landscape in ways both predictable and unknown. While certain questions will only be answered in time, following are three imminent threats that many businesses aren’t paying enough attention to.
The ILWU and PMA contract renewal. The sun will set on the current labor agreement between the International Longshore and Warehouse Workers Union (ILWU) and Pacific Maritime Association (PMA) at midnight on June 30, 2022. An agreement acceptable to both sides is uncertain, since each is locked in a battle to avoid an existential threat.
On the part of laborers, the threat lies in the increasing use of port automation. For the PMA, it includes the prospect of a longshore strike that would paralyze U.S. and Canadian ports along the West Coast, and unleash yet another shock wave of disruption. Cargo would have to be diverted through the Indian Ocean into the Suez Canal, exiting the Mediterranean and entering the Atlantic, or passing through the Panama Canal.
This scenario is enormously problematic in its own right, but even if a strike is avoided, the canal's infrastructure puts it at grave risk of quickly creating a bottleneck of 80-90 vessels. (Which means skyrocketing costs for companies and U.S. consumers.)
Global schism and Cold War 2.0. The global system is undergoing a schism related to two centers of power, one hegemonic (the U.S.) and the other rising (China), along with the strategic alliances respective to each. With the modus vivendi of systemic coordination between Beijing and Moscow and the invasion of Ukraine, Russia appears to be positioning itself to play the long game. The implications of this are a second cold war between the hemispheric alliances that are solidifying between players such as Russia, China, and Iran, each making the others less vulnerable to U.S. and NATO sanctions.
We can expect further destabilization and a redrawing of alliances with China's efforts to reconfigure supply chains away from western or U.S.-controlled sea lanes. Given that around 80% of world trade is conducted via these routes, China's Belt and Road Initiative is steadily creating land-based connectivity across Asia and into Europe.
From a purely logistical perspective, Belt and Road has been a stunning achievement. China has been exceptionally shrewd about investing in relationships, partnerships, and infrastructure at major port cities along the Pacific and Indian oceans, various seas, the Mediterranean and even the Atlantic. What we’re witnessing is a series of ports owned and operated by Chinese state-owned enterprises or Chinese companies. The danger is that China increasingly has the naval and commercial power to conduct trade by hopscotching from port to port. In the case of a conflict, it could force countries into operationalizing these ports to function in ways contrary to U.S. interests, further compromising American hegemony and putting supply chains at greater and greater risk.
Complex reshoring challenges. Positive efforts by both political parties are being made to reshore critical supply chain infrastructure, with new fabrications and foundries under construction in Arizona and Ohio. These efforts are to be celebrated, but we’re not yet ready to tackle the broader challenge underlying the chip shortage.
Even with new fabs underway, our ability to access raw materials and resources is highly limited. Production of next-generation semiconductor components depends on access to a wide range of raw materials that are sourced from only a few places. (The alternative is to synthetically manufacture them via other materials and compounds — bauxite, aluminum, alumina, and their byproduct, gallium — that pose equal or greater procurement challenges.)
Much research indicates that gallium is the super-material of the future for advanced semiconductor manufacturing and applications for extreme temperature ranges or data-intensive physical hardware. And China holds majority control of the world's bauxite resources, and hegemonic power over gallium production.
But here's where it gets really interesting. Australia sits on a large bauxite reserve and is one of the world’s top bauxite manufacturing countries. Geographically, China is in Australia's backyard — far closer than the U.S., and too close for comfort. Given Australia's long membership in the western commonwealth, the U.S. must contend with the question of how to protect its interests. Reshoring is far more geopolitically complex and economically challenging than is often recognized.
As the avalanche of supply chain disruption continues to run its course, companies that lack the insight and agility to avoid the worst of it are those most likely to be buried. Proven partners with a diverse portfolio of supply chain options and decades of experience in helping customers weather complex risks are worth their weight in gold. While there's no stopping the avalanche, solutions often exist — if you know where to look for them. Whether they’re sought through domestic production, repurposing of parts and components, innovative engineering hacks or some other strategy, efforts undertaken at the intersection of geopolitics and supply chain are companies' best chance at success.
Mark Dohnalek is president and chief executive officer of Pivot International, a global manufacturing, product development, engineering and technology company.
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