The Continuing Impact of COVID-19 on the Global Supply Chain

Over the past two years, just about anything that could go wrong with global supply chains has done just that. The COVID-19 pandemic has led to volatile swings in demand, widespread factory shutdowns, and every type of supply chain disruption in between. But which industries were most affected by these stresses to their supply chains? How were companies able to adapt their supply chain management?  And what are countries doing to make sure that future shutdowns don't affect their supply chains so drastically?   [caption id="attachment_7875" align="aligncenter" width="621"] Click the image to access the report![/caption]   Which industries experienced significant stress on their supply chains? The COVID-19 pandemic brought to light long-standing vulnerabilities in global supply chains. Lockdowns slowed or stopped the flow of raw materials and disrupted manufacturing in several industries, putting supply chains under significant stress. Factory shutdowns caused a shortage of semiconductors, already in short supply amid sustained demand from a growing EV market, and the increased demand for electronic goods from consumers confined to homes by lockdowns.  Major automakers bore the brunt of this shortage, made worse by the concentration of the world’s semiconductors manufacturing among just a handful of producers—Taiwan’s Semiconductor Manufacturing Co.(TSMC), for instance, along with South Korea’s Samsung, manufacture a combined 70% of the world’s semiconductor supply. The automotive industry was also hit hard by the supply chain issues affecting both battery manufacturers, and the mining industry that extracts the rare-earth elements needed for those batteries. Automakers’ over-reliance on the Asia-Pacific region for these critical components was made clear when major battery manufacturers such as BYD and CATL announced extended production delays, forcing automakers to slash production.  The textile and fashion industries are two more to have been extremely hard hit by the global supply chain crisis. With China being a critical global supplier of textile inputs, pandemic-related production disruptions there reverberated throughout the rest of the textile and fashion industries. These industries were further affected when the global transportation system came to a halt, preventing or delaying the transport of components to manufacturers, and finished products to consumers.     How were companies able to adapt their supply chain management?  With COVID-19 related shortages exposing vulnerabilities in the global supply chain, companies across different industries have taken action to determine how best to deal with the disruption and mitigate the effects of future supply chain shocks.   China plus one strategy One way to address the risks associated with over-reliance on a single supply source, is to use sources in locations not vulnerable to the same risks. This is the core idea behind the ‘China plus one’ strategy currently in use by several major companies. It emphasizes diversification by establishing a factory in one other developing Southeast Asian country – such as Thailand or Vietnam – in addition to existing facilities in China, to minimize the risks of geographic concentration.   Strengthening local supply networks Some companies are strengthening their supply networks by investing in local suppliers. Samsung, for instance, has invested a combined $238 million in nine midsize companies since the summer of 2020, to develop a network of chip equipment and materials suppliers inside South Korea and reduce its reliance on overseas suppliers. Similarly, Tesla is creating a domestic US lithium supply chain by sourcing the lithium ore necessary for lithium-battery fabrication within the US, thereby reducing its reliance on traditional lithium-producing countries.   Innovative workarounds Major companies have been forced to find innovative solutions to their supply chain problems. Tesla, for instance, has dealt with the chip shortage by rewriting vehicles’ software to support alternative chips.  Cardinal Health, a leading US healthcare services company, has turned to the use of tracking software to track shipments of their products between manufacturing plants and Cardinal's distribution centers. This allows for the making of predictive decisions to adjust supply plans and production schedules.   How are countries making sure that future shutdowns don't affect their supply chain? Global supply chain problems have made clear to governments the need to take action to strengthen and support their domestic supply chains, and many have taken important first steps towards doing just that, in preparation for future crises.   USA President Biden signed an executive order in February 2021, for a comprehensive review of critical US supply chains, with the associated White House report being released in June. Among other recommendations, the review determined that a solid supply chain must include a small and medium-sized business manufacturing base and highlighted the US’s need to diversify its international suppliers to reduce the risks associated with geographic concentration.    Japan The Japanese government has focused its efforts on subsidizing local businesses to strengthen domestic supply chains. It has distributed 146 subsidies totaling 247.8 billion yen ($2.4 billion) with the goal of encouraging an increase in domestic manufacturing, to reduce the country’s dependence on Chinese supply. Japan is also investing in overseas rare earth minerals projects, particularly in Australia and India to reduce its reliance on China’s supply from 58% registered in 2019, down to 50% by 2025.    Outlook: The Global Supply Chain Looking Forward As lockdowns have lifted and a global economic recovery has gathered pace, consumer demand has increased sharply. Supply chains that were disrupted during the crisis continue to face significant challenges and are struggling to bounce back, much less meet increased demand. While companies and governments alike have taken substantial action in response to the supply chain crises, these will not be sufficient to solve supply chain woes in the near term. Months of shipping backlogs and continuing labor shortages have caused bottlenecks that are proving difficult to resolve, and most analysts agree that supply chain problems will only get worse before they get better, with some estimates warning that the crisis could last another two years.   Author: Mohamed SAIDI Sources

Consumer trends and the demand for sustainable products

  Sustainability Concerns Continue to Rise Issues of sustainable production and consumption have, over the last ten years, become increasingly important in the eyes of consumers around the world. Companies have had to make changes to meet these new expectations and can expect to do more of the same, in the future, in line with the continuation of this trend.  According to a 2015 study by NielsenIQ, 66% of global consumers surveyed responded they would be willing to pay more for sustainable brands, up from the 50% who said they would do so in 2013. Almost half responded they would pay more to environmentally friendly companies and those demonstrating a strong commitment to social values. In recent years, pressure on companies to pay attention to issues of sustainability has only continued to mount.  In a 2018 survey conducted across 5,000 consumers in Europe, for instance, nearly 40% of respondents said their top priority was that food and drink be produced in a way that doesn’t harm the environment, while almost a third prioritized paying workers a fair wage and ensuring that animals were not harmed during production. Almost three-quarters of all respondents wanted to know how their food is produced and a similar number wanted food companies to say where the ingredients in their products come from. Further, 61% reported looking for information about how food companies protect workers’ human rights.  Respondents placed even greater emphasis on the need for companies to act on global challenges. Protection of the environment was cited as important by 88 % of those surveyed, with 85% and 84%, respectively, responding similarly with regards to tackling climate change and global poverty.   Sustainability: The Global Nature of the Change in Consumer Preference  The European findings are echoed in a 2018 Accenture study of 35,000 people in 35 countries, which revealed that two-thirds of consumers make decisions about what to buy based on a company’s transparency, while 62% wanted companies to have ethical values and demonstrate authenticity.  A BCG survey conducted in July 2020 found that in the six-member states of the Gulf Cooperation Council, more than 80% of consumers said they were willing to live more sustainability. Moreover, 56% of respondents said they felt strongly about the need to adopt a sustainable lifestyle The 2021 Voice of the Consumer: Lifestyles Survey, published by Euromonitor International, further demonstrates the extent to which changing consumer preferences are global, and not restricted to Western or developed markets. It found, for instance, that almost 35% of those polled in emerging or developing markets reported that they buy sustainably produced goods. (Figure 1.) [caption id="attachment_7865" align="aligncenter" width="450"] Figure 1. Euromonitor International, 20-Aug-21, Ethical Claim Potential Index Identifies Top Market. Source: Voice of the Consumer: Lifestyles Survey, 2020 n=26,321; 2021 n=26,222[/caption] The Sustainable Market Share Index report, published by the NYU Stern School of Business in 2021, showed that the same shift in consumer preferences could also be seen among US consumers. The annual share of sustainability-marketed products there, for example, grew from 13.7% in 2015, to 16.8% in 2020. (Figure 2.) [caption id="attachment_7862" align="aligncenter" width="450"] Figure 2. NYU Stern, 1-Mar-21, Sustainable Market Share Index 2021[/caption]   Covid-19’s Impact on the Shift Towards Sustainability Several surveys conducted in the wake of the pandemic have found that people are more concerned about environmental challenges because of the pandemic and are more committed to changing their own behavior to contribute to sustainability. Consumers are, as a result, reducing their household energy consumption, increasing recycling and composting, and buying more local goods. In a recent BCG survey, 90% of consumers said they were equally or more concerned about environmental issues after the COVID-19 outbreak, while 87% of respondents felt companies should better integrate environmental concerns into their products, services, and operations. In May 2020, research firm Kantar found that COVID-19 had led to a global surge in localism, with 65% of consumers responding that they preferred to buy goods locally (local products do not have to be shipped over long distances and therefore require fewer resources to bring to market, producing fewer carbon emissions in the process). November 2020 Data collected by data analytics firm GlobalData shows similarly that consumer perceptions have changed during the pandemic, with over 50% of respondents interviewed during lockdown claiming they found locally sourced ingredients more important than before the outbreak Perhaps most interestingly, the COVID-19 pandemic has changed consumer perceptions and priorities with regard to sustainability. Prior to the outbreak, the term was used as a synonym for environmentalism. Now, however, consumers report expanding their definition of sustainability to include how companies treat employees and interact with their local community.    Company Reactions  Companies have had to make changes in line with changing consumer sentiments and have done so in ways that can be broadly categorized into four areas of action.   1- Addition of Sustainable/Ethical Labels Leading food companies and retailers are growing their share of assortment with sustainable claims. Nestlé, for instance, has been purchasing more local and healthier food labels to offset declines in some of its mass-market brands.  Another example is Dutch supermarket Coop’s switch entirely to Fairtrade bananas. German retailer Lidl’s has done the same across several European countries, and Nespresso has also expanded its sourcing of Fairtrade goods.    2-ESG Commitments Companies are increasing or shoring up their commitments to ESG policies and plans. Unilever, for instance, had already established sustainability goals that included net-zero emissions from its products by 2039, and investments of $1.1 billion in ESG-friendly initiatives over the next ten years. It recently added to these goals by announcing plans to label all its products with information on how much greenhouse gases they generate throughout the entire value chain of their production.  Further examples include Zara’s 2020 pledge to use 100% sustainable fabrics by 2025, H&M’s recently stated commitment to achieving the same goal by 2030, and Adidas’ commitment to phasing out virgin polyester by 2024. Finnish grocer Kesko serves as another example, with its aim to become carbon neutral by 2025 and achieve net zero by 2030. 3-Sustainable Packaging Other companies are increasing their focus on sustainable packaging, to reduce their use of plastics. Giro Pack, for instance, has developed compostable bags that are produced using plant-based or organic materials.  In April of 2021, P&G announced that Old Spice and Secret deodorants would appear in plastic-free packaging in certain stores, as part of a 2030 goal to reach 100% recyclable or reusable. Nestlé has also reported strong progress on its commitment to make 100% of its packaging recyclable or reusable by 2025, and to reduce its use of virgin plastics by one-third, by that year.  4-Social Impact Initiatives Other companies have chosen to prioritize initiatives that aim to produce positive social impact. Germany’s REWE, for instance, along with Portugal’s Jerónimo Martins, launched initiatives to better integrate migrants into the labor market and promote intercultural cooperation. Similarly, Swedish furniture giant IKEA recently broadened its social impact by committing to employ refugees at production centers in Jordan — part of the company’s stated long-term goal to employ some 200,000 disadvantaged people around the world.   Outlook Going forward, increased, and rising awareness, the influence of social media, and regulatory initiatives with regards to sustainability are expected to drive the market. While no company can expect to be immune from these influences, the pressure to act will be felt most keenly by companies operating in certain consumer goods sectors, such as food and beverage, and fashion.  According to the Ethical Food Global Market Report 2021, the global ethical food market is expected to grow from $542 billion in 2020 to $574.42 billion in 2021, before reaching a projected $727 billion in 2025. The global ethical fashion market is expected to show even greater rates of growth, going from $6,345.3 million in 2019 to $8,246 million in 2023, before growing further to $9,808 million in 2025 and $15,173 million in 2030.  Smaller though significant increases in market size should also be expected across almost all categories of sustainably produced consumer goods, and if the shifts that have taken place over the past decade are any indication of the decade to come, the importance to consumers of sustainability will only continue to grow.   Consumers have shown that they have become far more attuned to how brands speak and more importantly, how they behave. With consumers focusing more on sustainable, socially, and environmentally responsible consumption, companies will need to demonstrate that they’ve changed with the times. Only companies that can prove they meet the new, more ethical consumer standards will be able to thrive in a more sustainability-conscious world.   Author: Omar Elkayal   Sources:  Mi3, 12-Oct-21, As Australia re-opens, brands truly delivering social good, localism and sustainability will roar ahead Euromonitor International, 20-Aug-21, Ethical Claim Potential Index Identifies Top Market Boston Consulting Group, 11-Aug-21, Sustainability Matters Now More Than Ever for Consumer Companies, 1-Aug-21, Global Ethical Food Market - 2021-2028 ThinkwithGoogle, 1-Aug-21, How localism is driving brand engagement with consumers across the globe Euromonitor International, 1-Jul-21, Where to Play and How to Win? Mapping the Opportunity of Sustainability in Packaged Food Mckinsey, 14-Jun-21, The path forward for sustainability in European grocery retail Blend, 22-Mar-21, The Newest Fashion: Sustainability and Ecommerce Localization NYU Stern, 1-Mar-21, Sustainable Market Share Index 2021 Mckinsey, 12-Feb-21, The ESG premium: New perspectives on value and performance  Mckinsey, 26-Jan-21, NEF Spotlight: The path forward for retail’s sustainable future Businesswire, 11-Jan-21, Global Ethical Fashion Market Report 2020: Opportunities, Strategies, COVID-19 Impacts, Growth and Change, 2019-2030 Boston Consulting Group, 1-Jan-21, Are Consumers in the Gulf States Ready to Go Green? GlobalData, 17-Nov-20, Localism will show high relevancy after COVID-19 pandemic has subsided Boston Consulting Group, 14-Jul-20, The Pandemic Is Heightening Environmental Awareness McKinsey, 1-Jun-20, The State of Fashion 2020 Fair Trade International, 10-May-19, Shoppers are demanding sustainable options – are companies getting on board? NielsenIQ, 10-Jan-19, A natural rise in sustainability around the world ATKearney, 1-Sep-18, Competing in an Age of Multi-Localism

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