Supply chains will increasingly localize in 2023 in response to ongoing geopolitical risks. The Russia-Ukraine conflict, tension between China and Taiwan, and the US-China tech war will continue to impact supply chains in 2023. Food, energy, and technology supply chains will be deeply impacted by these disputes. Many multinational corporations will look to onshore production to reduce the risk of disruption, despite the higher costs of production that may result.

The US aims for more supply chain autonomy in strategic areas of technology

The US has already started to implement a protectionist technology policy, a trend that will intensify in 2023. In August 2022, the US passed the CHIPS and Science Act, which aims to increase investment in domestic semiconductor production. Close to 75% of global semiconductor manufacturing capacity is currently located in East Asia. However, by onshoring and building domestic capabilities, the US will have a shorter, and more robust semiconductor supply chain. On its side, China has initiated a complaint at the World Trade Organization, arguing that the export controls could destabilize global supply chains.

Following the announcement that TSMC’s second chip factory in Phoenix will be built next year, Joe Biden said “Apple had to buy all the advanced chips from overseas. Now we’re going to do more of their supply chain here at home.” TSMC was initially sceptical of manufacturing in the US due to the higher costs and lack of skilled labour. However, the CHIPS and Science Act opens up the possibility for billions of dollars in subsidies for TSMC, which will have helped the company reconsider. It also gives TSMC closer access to a core customer, Apple.

Relocation comes at a high cost

Onshoring industries will not always be feasible as an option for reducing supply chain risk. For example, Apple has started assembling the iPhone 14 in India instead of China to reduce its reliance on the latter. The zero-COVID restrictions in China (which have been recently loosened), threatened the stability of Apple’s supply chains due to the regular production disruptions at its key suppliers. Rather than onshoring, this is “friendshoring,” where supply chains are located in areas where there are better diplomatic ties.

The “friendshoring” strategy will be used further in 2023, as an effective buffer to the increase in geopolitical instability. However, there is the possibility of inexperienced labor forces and immature manufacturing networks in emerging economies which can make the relocation process difficult and expensive. New locations will need to be forensically examined in 2023, as customers are increasingly paying attention to the environmental, social, and governance (ESG) credentials of a supply chain. Relocating to areas with poor workers’ rights or unsafe working conditions brings the risk of significant reputational damage and a subsequent reduction in share price.  

In 2023, supply chains will have to localize or diversify to provide protection against geopolitical risk, or risk further delays and disruption.

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Read more here: Tech, Media, and Telecom Predictions 2023.