An increasing number of companies are bringing their supply chains and manufacturing bases closer to home to reduce risks, avoid disruption, cut transport costs and benefit from government incentives, a report by DP World says.
A total of 96 per cent of company executives surveyed are reconfiguring supply chains because of geopolitical events such as the Russia-Ukraine war and US-China tensions, according to the latest Trade in Transition study commissioned by DP World and led by Economist Impact.
The number of companies shifting their manufacturing and suppliers last year — either to their home markets or nearby — doubled from 2021, said the survey, which was released on Tuesday at the World Economic Forum meeting in Davos.
"By bringing production closer to the final customer, firms can reduce the number of touch points involved in the supply chain and build greater resilience into the flow of cargo around the world," said Sultan bin Sulayem, DP World group chairman and chief executive.
"The next challenge that will alter these trends is an economic slowdown looming over regional markets. Agility, real-time visibility and end-to-end supply chain capabilities will be critical to ensuring companies can continue to find new efficiencies in an increasingly challenging environment."
The changes in operations come as the World Trade Organisation (WTO) expects the volume of world merchandise trading (an average of import and export) to increase by one percentage point this year, compared with 3.5 per cent growth last year.
Despite the shift by companies towards reshoring and regionalisation, diversifying supply is still the main strategy to reduce costs and increase resilience, 47 per cent of executives surveyed said.
"The shift to regionalisation and reshoring has been sharp but unsurprising, given the triple threat of higher costs, increased risks and government incentives or requirements to do so," said John Ferguson, practice lead for New Globalisation at Economist Impact.
"Furthermore, businesses in previous decades have only had to focus on the economic aspects of trade, being price, quality and delivery. Now they have to account for other non-economic factors such as resilience and sustainability, all of which is having a drastic shift in supply chains, which we are witnessing both in the survey results and global trade-pattern shifts."
Companies are also boosting inventory buffers, holding 10.1 weeks of inventories last year compared with 8.9 weeks the year before, the survey showed.
Business executives cited inflation as one of the biggest impediments to growth.
Inflationary pressures are the main reason for pessimism about global trade over the next 24 months, the executives surveyed said.
Average global inflation this year is forecast at 6.9 per cent, compared with 9.9 per cent last year and 6.8 per cent in 2021, according to The Economist Intelligence Unit (EIU).
The impact, both on the demand (in terms of reducing the purchasing power of consumers) and the supply (in terms of increasing input costs for businesses), will "reduce the profitability of businesses severely", the report said.
Thirty per cent of the executives cited rising inflation as the main reason for pessimism about global trade over the next two years — significantly higher than the 20 per cent who cited the recession, the survey found.