Business

How war changed business

The war in Ukraine has already turned countless lives upside down. Now it is also turning business models upside down. With the exodus of Western multinationals from Russia and disruptions in Ukraine’s supply chain coupled with Covid-19 related disruptions in China, companies are having to rethink everything.

Challenges range from paying local Ukrainian employees (with cash shipments to Poland in some cases) to sourcing parts they sourced locally before the war (the response so far: slow and spotty). Among those who were badly hit German car maker that depend on components from Ukraine. Their plants are idle while they struggle to find a new system.

But even companies that have no suppliers or operations in the midst of conflict are realizing that they need to move from the assumption of unfettered globalization to more regional – or even local – centers of production and consumption. They also see the benefits of greater decentralization and system redundancy (namely, additional resources to provide backup support) to avoid future shocks. “The ongoing supply chain disruptions have now lasted longer than the 1973-4 and 1979 oil embargoes — combined!” said Richard Bernstein, CEO of investment firm RBA. This isn’t a blip, it’s the new normal.

Large companies that can afford to own more of their entire supply chain have moved towards vertical integration to offset disruptions and the resulting inflationary pressures. Businesses of all sizes are looking for ways to localize more production wherever their consumers are, no matter what country or region they are in. Many smaller “manufacturer” companies in New York have benefited from the pandemic by sourcing locally, but the technique has also been embraced by big brands that simply want more buffers against shocks of any kind – be they geopolitical or climate-related.

“Supply chains are under pressure and have been for some time,” says Arama Kukutai, Managing Director of a vertical farming Start-up called Plenty, which works with Walmart to grow vertically stacked fresh produce on-site in California, and with companies like Driscoll, the world’s largest berry producer. The two launched a new vertical strawberry farm on the east coast to avoid shipping costs and delays. “Companies like this want to reduce their reliance on long, complex supply chains and imports,” adds Kukutai. “Basically, you want to build where the customers are.”

This has been a trend in manufacturing for some time – particularly among private companies, which are more often family-owned, more deeply rooted in local communities, and have less pressure on quarterly results.

One is New Balance, a footwear company that last week announced a Massachusetts factory to meet growing demand for Made in America products, with more local suppliers to avoid shocks where possible. “Being private makes it easier to do more locally,” says CEO Joe Preston, “but I think coming ESG requirements will push more companies in that direction because labor issues are a big part of it.”

It is certainly becoming clear that the world is not switching to globalization as it did in the 1990s. Some industries, such as technology, will feel the pressure to change existing business models more than others. Witness Intel establish a major new chip manufacturing facility in Ohio as part of America’s greater technological decoupling from China, and now Russia, through chip export sanctions. The company is also investing in European regional foundry capabilities.

I wouldn’t be surprised if the war in Ukraine accelerated restrictions on “dual-use” technologies that can be used for either commercial or military purposes. A recent report by TS Lombard cites industries ranging from chips, telecom and IT equipment to aerospace, avionics, computers, electronics, sensors, lasers and their components as potentially needing to shift their supply chains and customer base to account for decoupling.

“Imagine cloud-connected smart vehicles uploading real-time data to satellites (e.g. Tesla/SpaceX) as surveillance devices that can be repurposed for warfare,” says the report.

This shift could certainly have a major impact on financial markets, as much of the growth of the biggest tech companies relies on their ability to seamlessly cross borders. But this influence will not go in just one direction. For example, witness the rise of 3D printing stocks, which have soared amid the pandemic. The industry was able to close the gap in the supply chains locally manufacture everything from PPE to medical and testing equipment to personal accessories, visualization aids and even emergency shelters.

The entire 3D printing market 21 percent increased from 2019 to 2020 and is expected to double by 2026. There are now a number of companies, like Austin-based Icon, that are making the transition from printing emergency housing to luxury homes. Given the complexity and carbon intensity of housing, with its multiple supply chains, this is a shift that could help curb inflation. As a 2020 article in Nature states, “3D printing buildings requires faster construction times and lower labor costs, and can use greener raw materials.” The resulting homes can “be easily transported and deployed where they need it most are needed”.

Even in times of war, disconnection, and geopolitical anxiety, remember that crises are opportunities.

rana.foroohar@ft.com

https://www.ft.com/content/742d7df6-0d74-424f-81c2-bcd4cbbdbfd0 How war changed business

Adam Bradshaw

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