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Shortages. Not long ago, the idea of empty supermarket shelves was unthinkable in the developed world. But, for months now, it has been only too real. The Covid crisis, geopolitical tensions and catastrophic weather events increasingly disrupted the world's supply chains and logistics. Gaps and hold-ups gradually spread to affect every sector of the economy.
Back to global scarcity
How did we get here? In a world already plagued by multi-faceted geopolitical tensions – involving China, the US and Russia – and extreme weather events, the pandemic proved the last straw, bringing much of the world's industrial production to a grinding halt. Sectors from bicycle parts to timber to rare metals all felt the squeeze. Despite government rescue packages, household spending eventually stalled in the face of a general supply shortage that has held back global economic recovery. Difficulties sourcing raw materials have been worse for companies applying more responsible production methods. As demand for sustainable resources rises, prices have rocketed and some have become unobtainable. Price inflation has affected all players in the economy and is gradually feeding through to consumers. Chinese factory gate prices are up an average 13.5% year-on-year, the biggest jump in a quarter century.
Global supply chains
Our supply chains are globalised, as is our consumer society. Before they reach your wardrobe, your jeans may have travelled up to 65,000 km, one-and-a-half times round the world. Statistics like these show the sad truth of our consumer lifestyle. Cotton grown in Uzbekistan may be spun in Turkey and dyed in Bulgaria. The fabric may then be woven in Taiwan and the jeans sewn together in Tunisia before reaching the racks of a store in Switzerland. Another dawning realisation, raising echoes of British economist and philosopher David Ricardo and his theory of comparative advantage, is that we have become perilously reliant on the hyper-specialisation of certain countries. The last paracetamol factory in Europe closed in 2009, but it took us another decade to work out that more than 80% of global paracetamol output now came from India and China. The current crisis is laying bare the complexity of companies’ supply chains and their all too obvious inability to control them. This fragility exposes them – and us – to self-evident financial risks, but also to potential environmental and social scandals.
Managing our supplies
The winners in this scenario are often those firms who have built up good relationships with suppliers over many years, for example by paying well and on time. Better value chain management, involving simplifying or onshoring sourcing, makes firms more aware of social and environmental impacts and how they can minimise harmful externalities. Behind this challenge, lies the further issue of national sovereignty. France's Plan 2030, for instance, aims to build a circular economy that can safeguard national supplies of materials such as plastics, wood, metals and rare earths.
If companies can become more aware of their power to influence suppliers for the better, and their responsibility to manage their social and environmental impacts, Santa Claus may yet have plenty to fill the stockings in years to come. And, it goes without saying, we will be working alongside these responsible companies, supporting them through our engagement policy.
By Coline Pavot, Head of Responsible Investment Research, La Financière de l'Echiquier