‘Megatrends’ are set to radically transform global value chains — which have been central to driving the world’s economic growth — and will cause ‘transition pain’, a UN expert said.
Simon Zadek, principal and project catalyst at the United Nations Development Programme (UNDP), and co-author of a UNDP/WEF report titled Reshaping Global Value, told Expert Investor: “Every developing country, indeed, every country, is today locked into these super highways and will experience massive transition pains [caused by megatrends].
“For countries with sophisticated, complex and dynamic economies and work-forces, this pain may be less. For countries with simple economies, often commodity and low labour cost-led, the pain will be far greater.”
According to the report, the three megatrends that will disrupt production systems and redefine global value for nations are: emerging technologies; the environmental sustainability imperative emerging from the accelerating global climate emergency; and the reconfiguration of globalisation.
The combined effect of these trends, Zadek believes, will lead to a retreat of global value chains.
Value chains and growth
The report says multiple analyses have studied individual disruptors and their implications, but none has explored the “possible quantum shift that could arise from the interplay of megatrends”.
It therefore aims to close this gap by providing a ‘strategic value framework’, through which it analyses three megatrends and quantifies the likely extent of global value chain reconfiguration under different disruptive scenarios.
Potentially, a value loss across end-to-end value chains with a maximum of -40% at the lower end and +70% at the upper limit could occur, it says.
Global value chains are now “an essential engine of global economic development and GDP growth”, the report adds.
While global value chains have not helped all countries in the global trade system, it explains, “emerging economies have particularly benefitted from the offshoring of labour-intensive stages of manufacturing, heightened international mobility of technology and favourable national and multilateral economic reforms”.
Demand and supply are expected to shift to the South, with emerging markets projected to represent nearly 60% of global demand for manufactured goods in 2025.
At the same time, the report predicts, many developing countries will move to produce finished products closer to the consumer as the distribution of production nodes has widened and fragmentation has matured.
Megatrend emerging technologies
The report points to artificial intelligence (AI), robotics and the ‘internet of things’, which, blended with additive manufacturing, could allow “entirely new possibilities” for companies, products and locations.
Technologies will enable manufacturers to bring much or all of their production back to their home bases and switch to just-in-time models, the report finds.
The gap between high-skilled and low-skilled workers is, however, expected to grow as high-skilled workers fill well-paying jobs while manual and agricultural workers could be displaced by AI-enabled robots.
“Developing countries are often heavily weighted towards the upstream stages of global value chains, where profit margins tend to be lower than in the downstream global value chain segments closer to the customer,” the report says.
“In addition, players contributing raw materials and low-skilled labour to global value chains are often highly susceptible to being undercut on price.”
Supply chains are also under increasing pressure to become more sustainable.
Stephanie Maier, director for responsible investment at HSBC Global Asset Management, told Expert Investor: “In today’s interconnected and global economy, we are seeing increasing scrutiny on company supply chains from consumers, regulators and investors.”
Maier points to issues such as forced labour, child labour and unsafe working conditions and linked reputational risks and operational costs from poor labour practices.
The UN report, however, specifically identifies environmental impacts. Rising impacts of climate change will prompt governments to legislate on companies to internalise their polluting environmental footprint, with, for example, clean-air taxes.
This, it believes, will increase the costs of long-distance supply chains and result in their becoming shorter.
The UN report goes on to call on governments and businesses to collaborate and understand the risks and opportunities associated with transforming global value chains and respond flexibly.
New approaches are required, it says, to ensure an orderly, inclusive and sustainable transition, supported by a new generation of public-private partnerships.
Eduardo Tugendhat, director for thought leadership at impact management firm Palladium – which structures financing for aggregators, companies or co-ops that organise producers in emerging countries in competitive ways – explains that they seek to gain a “longer term commitment” from the end-buyer to purchase from suppliers.
“It’s [about] how to dramatically increase their productivity and their efficiency,” he continues. “By capturing that additional value, it pays back the financing, provides higher incomes for the people – these smaller-scale producers – but still provides a quality or even better product for the end-buyer, and certainly one that is more reliable and more transparent.”
As an example, Tugendhat points to a sustainability bond, worth $95m (€85.8m), which was issued in February 2018 to help finance a sustainable rubber plantation in two provinces in Indonesia.
The net proceeds of the sustainability notes will be used to extend a 15-year loan to Royal Lestari Utama, a joint venture between Barito Pacific and Michelin, which produces sustainable natural rubber.
The transaction was conducted as part of the Tropical Landscapes Finance Facility, a partnership between the UN Environment Programme, the World Agroforestry Centre, ADM Capital and BNP Paribas, which aims to bring long-term finance to projects and companies that stimulate green growth and improve rural livelihoods in Indonesia.
The project covers 88,000 hectares and will create natural habitat protection zones, including the creation of a critical buffer alongside the Bukit Tigapuluh National Park. At maturity, the plantation is expected to create some 16,000 jobs.
While Zadek sees the transition as an opportunity “to localise economies, decommoditise cross-border trade, and advance sustainability considerations in shaping the next era of globalisation”, he also warns it “may be lost through denial and inaction”.
“It will happen to everyone, and it will happen in unexpected, indeed quite unpredictable ways,” he believes. “Alternatives to meat will disrupt many economies, as will mass customisation.
“And such structural changes may be accelerated by populist tariffs and geopolitical tensions – President Trump may be right about the direction of travel, even if it is for the wrong reasons.”