Experts at Esade find that “globalization is gradually slowing down”
“Globalization is gradually slowing down”. This is one of the findings of the second conference organized by EsadeGeo and the Esade Center for Corporate Governance entitled ‘The end of the global supply chain?’ with speakers Alicia García-Herrero, senior fellow at Bruegel; Miguel López-Quesada, former president of Alcoa Spain; Belen Romana, independent board member of Santander, Werfen, Six and BME; and Angel Saz-Carranza, director of EsadeGeo. The conference addressed key issues related to value chains, with emphasis on competitiveness, an area in which China has a major impact of the rest of the world, and corporate governance.
China has a plan
Value chains are becoming shorter and, in terms of value added, trade is becoming less globalized because of the shrinking volume of transactions. “For many companies, this is setback to their business that adversely affects their competitive edge,” said Miguel López-Quesada.
At present, China accounts for 21% of manufactured exports and 30% of intermediate products. In a world where value chains are less integrated, China is the country least affected and the one that gains the most in relative value (more centralized value chains) thanks, to a great extent, to the nationwide program that it began to implement several decades ago: a program that overrides changes in government.
But in some instances, this Chinese centralization is so extreme that it creates a critical dependency. This is the case when the supply of key materials production is not monopolized, such as rare materials, and in the refinery industry too. There is obviously an inherent risk in depending on a single country. For example, can China generate green energy for everyone? It is falling behind target. What would be the fallout of deliberate or unwanted disruptions such as a climate catastrophe that prevented materials from reaching production lines? The Taiwan microchip crisis was the result of a climate catastrophe.
It would be a mistake to emulate the Chinese model because it is inefficient. “But if something works, let’s copy it,” says Alicia García Herrero.
Board decisions
“Geopolitics has always been a part of boards of directors,” says Belén Romana, “it’s just that now it makes more noise. It used to be a collateral issue, but now, it’s a focal point of discussions.”
To address today’s business challenges, we must understand that two sorts of changes are under way. The first one is structural and involves China, but also the emergence of global south countries (a group of countries that believe they can play another role in the world). The other sort consists of abrupt, short-term changes, such as the pandemic, which highlighted what happens when value chains suffer, and similarly today’s scenario in the Red Sea which forces goods around the globe to seek out different, longer routes to avoid the conflict in this area.
So firstly, companies must strike better agreements with their suppliers to position themselves at the beginning of supply chains. It is not just about the best price, but also about getting the most reliable supplier in the long term. Manufacturing savoir-faire matters too. The Chinese no longer copy: they have learned how to create. Finally, companies need different value-chain strategies to cope with abrupt changes. In other words, a lot of resilience and long-term suppliers are what is needed.
Meanwhile, “boards must be diverse in terms of industries and countries, and be able to think outside the box,” said López-Quesada. “They must even,” added García-Herrero, “understand the political framework of boards. In Asia, for example, board membership is geopoliticized. There are no Western directors in Asian companies, but Western companies do have Asian members on their boards.”
Multilateral institutions around the globe
Against this backdrop, there is obviously a need for multilateral institutions that lay down common rules and provide a space where companies can settle their differences. “The present-day approach of the World Trade Organization is inoperative,” according to García-Herrero.
Finally, concluded, García-Herrero, “It must be said that, in Europe, we make matters complicated for ourselves by applying sanctions in many areas. This does not happen in Asian countries: their priority is to safeguard their competitive edge.”
