Economy

The end of globalization at bargain prices

The end of globalization at bargain prices
Written by on100dayloans

In the Volkswagen factories in Germany, some idle employees may wonder about the benefits of globalization. Or rather, on one of its fundamental peculiarities: long supply chains, based on the cheapest, just-in-time production costs.

For two years, they have discovered all his weaknesses. First, the confinement in China deprived them of components manufactured on site. Over the year 2020, the German car company produced 18% fewer cars than the previous year. Then, it was the lack of semiconductors produced in Asia, the following year, which prevented it from rebounding. Its production fell by another 7% in 2021.

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And this year? The shortage of semiconductors has not even been resolved that another part of the production chain has stalled since the Russian invasion of Ukraine. It is in this country that a large part of the electrical harnesses that transmit the current to various equipment in the car are produced. In recent days, the group has had to slow down, or even completely stop, the production of several series of its brands.

VW, iconic

VW’s struggles may be caricatured, but they are emblematic of the current situation for many companies whose supply chains have been tested for two years. Will this mark the end of the globalization process? Many experts predict it. In any case, it risks being transformed. And this will not be without consequences.

Also read: War in Ukraine puts an end to globalization, says BlackRock boss

Most of the hiccups of the past two years may seem temporary. But they will still induce changes, because no one, from the producer to the transporter, passing by the seller, wants to relive such a situation of chaos and shortage. The transformations will be all the more important since one of the conditions for a logistics chain spread out over the world is not met: transport costs have soared and have not yet fallen. Rising energy prices will not help.

Rethinking production chains

In fact, VW, like many others, has already started to rethink its production chain, as the company explained to the the wall street journal. The priority is no longer to find the most competitive supplier but the More reliable. There is also less and less talk of a “chain” but more and more of a “web” of supply, where companies will no longer be satisfied with one supplier but with several to deal with all eventualities.

Many are also considering repatriating production closer to their customers. This “nearshoring” according to the new jargon, Adidas is an example. In recent years, the sports equipment manufacturer has invested in largely robotic factories in Germany to reduce the cost of transport, but also because labor in Asian countries is no longer so cheap.

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But the example is not isolated. In the United States, where the manufacture of chips and semiconductors has largely declined in favor of Asian countries in recent years, the trend could be reversed. Several giants of area have announced massive investments to produce it on site. Intel, for example, wants to invest at least 20 billion dollars for a factory in Ohio (and several tens of billions in Europe, where they have just announced their establishment in Magdeburg in Germany). Taiwan Semiconductor (which supplies Apple’s chips), Samsung, Texas Instruments, ON Semiconductor will spend billions to increase, but also bring their production closer to their customers.

Finally read: Fabrice Zumbrunnen, boss of Migros: “Price increases are inevitable”

Finally, consumer pressure and their ecological awareness in the face of climate change will play an increasing role. Just like that of sustainable investors. Companies are aware of this. We have seen, in another register, how quickly many of them left Russia, while those who stayed are under the wrath of social networks.

Consequence of these transformations? The end of low prices for many products. In recent decades, globalization has played a fundamental role in keeping inflation low. This will be less the case if production chains change, if companies repatriate their production and if transport costs continue to rise. We may therefore be forced to consume less. But better. Which does not only have disadvantages.

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