Geopolitical tensions occupy the CEO and Board agendas to a degree I have not witnessed in my career, and the prospect of them diminishing anytime soon seems remote. Deglobalization, the sense that the inexorable march toward the integration of businesses, economies, and societies has come to an end, is on the top of everyone’s mind.
I spoke about these trends with Matt Murray, the just-retired editor-in-chief of the Wall Street Journal, and Will Lewis, the former CEO of Dow Jones and publisher of the Wall Street Journal, on a recent AlixTalks.
What once seemed inexorable is now uncertain. According to World Trade Alert, in the last half decade protectionist trade actions have outnumbered liberalizing actions by five to one. Britain has left the European Union. The U.S.-China trade relationship has become snarled and snarly; the U.S. government has earmarked $52 billion to subsidize domestic semiconductors manufacturing while banning the export of advanced technologies to China.
Global supply chains have yet to recover fully from the disruption the COVID-19 pandemic caused. Actions to reduce carbon emissions have, in some cases, been at odds with globalization. Internet restrictions, ranging from welcome privacy protection to unwelcome, outright censorship, are on the rise. Populist “my country first” sentiment is visible worldwide. Now even globalization’s most ardent constituency—the leaders of global business and finance—seem to be hedging their bets.
AlixPartners has been tracking deglobalization since the beginning of our research on disruption. Four years ago, we documented a jump in uncertainty, as tracked by the IMF.
We’ve called out the fact that trade has accounted for a declining percentage of world GDP—at 52%, it is now 8 full percentage points below its 2008 peak. We have tracked the disruption of supply chains, the impact of the climate transition on major industries, and other forces that have shaken the complacent consensus that economic and social integration would inevitably continue.
We can mark the end of that trend. But that doesn’t mean globalization is done. Instead, we are seeing a new, complex, hard-to-predict global economic environment. If globalization had been a soup, where different ingredients blend together, it has become a salad, where they retain their unique flavors and—dare we say it—have more crunch. In this environment, the businesses that survive and find a competitive advantage must address new priorities, manage new risks, advance new technologies, and devise and exploit a new economics of production. It would be unwise to continue bet—or invest—according to the old premises and principles of globalization. But it would be foolish to retreat from global markets.
Instead, large enterprises need to reconceive their global operations to account for three interlocking factors: regional realignment, reimagined operations, and resilience.
Regional realignment. Globalization’s superhighway has run from China to the West Coast of the United States, with a big secondary road from China to the European Union. That is changing in the aftermath of COVID lockdowns, tariffs, and growing geopolitical tensions, with the added impact of Russia’s invasion of Ukraine. The fastest-growing major American ports are all on the Atlantic or Gulf Coasts. Mexico and Southeast Asian nations especially are taking a greater share of both trade and investment with the United States, and over a broader set of products and services. Apple, for example, is setting up manufacturing facilities in Vietnam and reducing its dependence on China; while the governments of the U.S. Canada, and Mexico have agreed to coordinate semiconductor investment across North America. The reorientation of trade routes and supply chains has implications for OEMs and suppliers, distributors and logistics providers, insurance and other financial services providers—to name a few.
Reimagined operations. The first waves of globalization were all about cost and scale, as companies moved production offshore from high- to low-cost countries. In this regime technology served globalization by changing the economics of coordination—obliterating distance in collaboration, communication, and finance. Now, technology is changing the economics of production in ways that undo the cost advantage emerging economies had and, over the long run, make reshoring and nearshoring more attractive.
It takes time for business model and process innovation to evolve to exploit technology to drive productivity higher. But now smart factory tools like sensors or cameras can be integrated with AI algorithms or machine learning identify costly product waste and overages. Workforce optimization software can reduce or eliminate advanced economies’ labor cost disadvantage. Robot technologies have continued to become smarter. Net-net: Products can be manufactured closer to customers, in small, smart, agile factories that optimize working capital, diminish carbon footprints, and cut transport costs.
Changes like this require significant investment of both financial and intellectual capital, but the trend has begun. As it plays out, the supply and manufacturing networks of large corporations will look less like today’s hub-and-spoke configurations and more like honeycombs of smaller facilities located near markets.
Resilience. For a generation or more, supply chain experts have warned about the perils of high-speed, low-cost supply chains. Tight to the point of brittleness, lean to the point of anorexia, these operations work brilliantly if nothing goes wrong. In the last two years, what went wrong was everything, everywhere, all at once. Companies’ short-term reactions—triaging shipments, building inventory, raising prices—are now (for advanced companies at least) morphing into long term structural work to make supply chains more resilient.
Some of those strategic actions:
- Expanding supply base to include back-up suppliers in different countries or parts of the world;
- Bringing some critical elements of supply in-house or closer to home markets;
- Monitoring suppliers from Tier One to Tier Three for health, performance, and exposure to risk; and
- Designing agility into the supply chain by, among other things, building digitally powered “control towers” that can track component cost and availability in real time.
Among the 3000 people surveyed for the 2023 AlixPartners Disruption Index, executives from the fastest-growing companies are 20% more likely than their peers to say they have entirely shifted their approach to supply chain management by, for example, investing in AI and diversifying their supply base.
“Deglobalization” is best thought of as a set of trends and responses that work together to reshape the way businesses address global markets. There is more friction in the market. Some of that friction comes from political actions such as tariffs and regulations, some from business issues such as uncertain supply, some from investments by governments designed to boost one or more critical industries. Disruptive shocks from technology, climate change, war, and pandemic create additional friction and uncertainty.
It's not the job of any one business to bend the curve of history. The job of a business is to find opportunity in whatever market situation it confronts. The world is no less full of buyers and sellers looking to find each other; but the market connecting them will be less efficient, less linear, more fractal. That need not be bad news. As any alert businessperson knows, when everyone follows the same path to success, competitive advantage is quickly competed away.
The now-muddled map of globalization is therefore full of openings for those with eyes to see and the will to act. As enterprises look for a competitive edge, “Today’s globalization dynamic has the potential to create a revolution of system optimization,” according to Princeton professor Harold James, an historian for the International Monetary Fund.
Winning companies will be the ones that move—now—to turn that to their advantage.