Remaking supply chains

Remaking supply chains

Global supply chains have come under strain in recent years from geopolitical tensions and a series of shocks, including the pandemic and the Russian invasion of Ukraine.

• The media is no longer full of stories about order backlogs and supply shortages as it was in 2021 and 2022, but problems persist. Last week the Chartered Institute of Procurement and Supply reported record levels of concern about supply chain disruption among procurement managers caused by US tariff policies, US-China tensions and instability in the Middle East.

• The World Bank’s measure of supply disruption, which gauges delays at ports and in shipping cargoes, tells a similar story. Though down from January’s peak, the Bank’s supply chain stress index is running well above normal levels.

• Global shipping continues to face problems. Despite a ceasefire between the US and the Houthi rebels in Yemen, many shipping companies are avoiding the Suez Canal and the Red Sea and are taking the longer route around the southern tip of Africa to travel between Asia and Europe. Since Russia’s invasion of Ukraine, the Black Sea has become one of the world’s most hazardous shipping routes with vessels sometimes braving naval mines and missile strikes. Traffic through the Panama Canal is subject to water levels, which though improving, are below historical averages. 

• Modern supply chains, running on thin inventories, were predicated on forecastable fluctuations in supply and demand and on a peaceful world. It is no coincidence that the growth of international supply chains coincided with a period, from the early 1980s to 2008, of rapid globalisation and unusual economic and political stability. Today’s systems were not designed for the sort of volatility that seems to have become the norm. Supply chains are having to adapt.

• New terms – ‘reshoring’, ‘nearshoring’ and ‘friendshoring’ – describe how companies are repatriating production or moving it closer to home or to friendly countries, particularly in sectors such as energy or technology, deemed to be of strategic importance. Western governments are seeking to raise local microchip production and diversify sourcing of rare-earth minerals away from China. Tariffs provide an additional motivation, as was seen with Apple’s decision to shift production of its iPhone for the US market from China to India.

• Threats to supply are causing some businesses to reassess the balance between efficiency and resilience. Greater volatility and risk put a premium on security of supply, perhaps by diversifying suppliers, bringing them closer to home or by running higher inventories. For some companies speed of supply matters as much as security of supply. A survey of 500 US companies by the Reshoring Initiative released last month found that 43% of respondents would be willing to pay 10% to 20% more for products that could be delivered within one week as opposed to six. 

• A drive for greater autonomy and diversity of supply is creating new opportunities in sectors including energy, defence and technology. The decision by western governments to block Huawei from working on Europe’s 5G network has created demand for other suppliers including Ericsson, Nokia and Samsung. In the UK BAE has raised production of artillery shells, reducing the UK’s reliance on imports. Last month a Bank of America report found that reshoring had led to the creation of two million new US manufacturing jobs in the last 15 years, most created in the last five years.

• Reconfiguring supply chains for a riskier, more fractured world will take time. Whether it is possible to reconcile security of supply with the competitive prices and wide choice that consumers have come to take for granted remains to be seen.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 0.3% at 8,823. Markets reduced expectations of early US interest rate cuts following the publication of stronger than expected labour market data.

Economics

• The Trump administration will begin notifying trade partners of their tariff rates on imports to the US after the 9 July deadline, with the possibility that tariffs against some countries could be higher than those initially imposed on 2 April
• European Commission president Ursula von der Leyen said that the EU and US are working towards reaching an “agreement in principle” before the 90-day pause of president Donald Trump’s ‘reciprocal import tariffs’ regime ends on 9 July, as a final deal would be “impossible” before then
• The US dollar fell nearly 11% in the first half of 2025, the worst start to the year since 1973, amid investor concern over the US’ trade policy and public debt sustainability
• The US added a greater than expected 147,000 jobs in June, a sign of resilience in the US labour market
• Mr Trump said that the US has agreed a new trading arrangement with Vietnam
• China criticised the deal between the US and Vietnam, saying it will take “resolute countermeasures” if the deal is found to impact Chinese interests
• US legislators passed Mr Trump’s tax and spending bill. It is expected to add over $3tn to public deficits over the next decade
• US-Canada trade talks advanced following Canada agreeing to scrap a proposed digital services tax which would have impacted large US technology companies operating in the country
• UK real household disposable income per head fell by 1% in the first quarter this year, the largest fall since 2023, due to higher inflation and taxes
• The UK government reversed key elements in its planned welfare reform bill following opposition from Labour MPs. The concessions leave a £5bn gap in the government’s fiscal plans prompting speculation that the chancellor will have to raise taxes in the October budget
• UK bond yields saw their largest one-day rise since April on speculation about Rachel Reeves’s position as UK chancellor, then subsequently fell following UK prime minister Keir Starmer’s reassurance that Ms Reeves will be chancellor for “a very long time to come”
• UK house prices unexpectedly fell in June by 0.8% in May compared with the previous month, according to Nationwide, the largest fall since January 2023
• The UK’s Financial Conduct Authority announced a “once in a generation” change to the financial advice market, allowing companies to offer general guidance to customers without meeting the complex requirements currently needed to offer personalised financial advice
• UK business confidence remained weak in the second quarter of this year, according to the British Chambers of Commerce, with higher taxes since April being the biggest concern for businesses
• UK car registrations increased 6.7% in June compared with the same month last year, with electric vehicles comprising 25% of all new sales
• Funding in the first half of 2025 for new listings on UK stock markets fell to their lowest level since records began in 1995, highlighting concerns over the UK stock market’s attractiveness
• Euro area inflation increased marginally to 2% in June

Business

• Microsoft unveiled an AI-powered medical tool that they claim to be more accurate than human doctors in diagnosing complex health conditions, potentially supporting stretched healthcare systems
• Google announced plans to buy electricity in the 2030s from a proposed fusion power plant that would be the first of its kind to be connected to the US national grid
• Mr Trump suggested the US government should investigate subsidies provided to tech entrepreneur Elon Musk’s businesses following his criticism of the government’s tax bill
• Airline company Air France-KLM said it will take a majority stake in Scandinavian Airlines, the joint flag carrier of Denmark, Sweden and Norway
• Spanish bank Santander agreed to buy UK rival TSB for £2.65bn
• Investment bank Macquarie will provide £1.2bn of equity funding for UK utility company Southern Water amid ongoing financial difficulties
• Energy regulator Ofgem approved £24bn of investment into the UK’s gas and electricity networks by 2031 in attempts to boost UK energy security
• The UK government called for an investigation into the insolvency of Prax Group, owners of the Lindsey oil refinery

Global and political developments

• International mediators proposed a two-month ceasefire between Israel and Hamas and a route to end the conflict in Gaza ahead of a meeting between Mr Trump and Israeli prime minister Benjamin Netanyahu, the FT reports
• Russia launched a large-scale drone and missile attack against Ukraine, primarily targeting the Ukrainian capital city, Kyiv
• Mr Trump said that Russian president Vladimir Putin is “not looking to stop” the war in Ukraine following a recent phone call between the leaders
• Elon Musk announced that he has formed a new political party to fight the “one-party system” that governs America
• The Trump administration said that Harvard University is in “violent violation” of civil rights law in failing to prevent the harassment of Jewish students, the latest development in a spat between the government and US universities
• Russia became the first country to resume diplomatic relations with Afghanistan following the Taliban retaking power in 2021
• Brazil and Mexico began talks to enhance their economic relationship amid recent global trade uncertainty
• The UK government unveiled its ten-year strategy for the NHS, focused on digitising the NHS and moving care from hospitals into the community
• MP Zarah Sultana who recently resigned from the Labour Party announced plans to form a new political party with former Labour leader Jeremy Corbyn

And finally… in Australia, a domestic flight from Melbourne to Brisbane was delayed by over two hours due to stewards finding a stowaway snake in the luggage hold. The snake, initially thought to be venomous, was eventually captured and the flight was able to take off – Boeing constrictor