Sigma 6/2020: De-risking global supply chains: rebalancing to strengthen resilience - Irina Fan, Head of Insurance Market Analysis
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sigma 6/2020: De-risking global supply chains: rebalancing to strengthen resilience Irina Fan, Head of Insurance Market Analysis
Welcome & Introductions
Your Panel of Speakers
Stephen Higginson
Head Customer & Distribution ANZ, Swiss Re Corporate Solutions
Irina Fan
Head of Insurance Market Analysis, Swiss Re Institute
Exposure:
Tropical Cyclone causing
wide area damage and loss
of attraction to island resort
Protection for the pure
economic impact unrelated
to physical damage
"A ship in port is safe, but that is not what ships are
built for. Sail out to sea and do new things"
~Grace Hopper
Swiss Re Institute | September 2020
Supply Chains: the key point(s) to remember!
4Driving forces: supply chain
changes are under way
“Underlying drivers, such as diminishing cost
arbitrage benefits, costly disruptions from more
frequent natural catastrophe events, new
technology and rising political risks, are
reshaping global supply chains. COVID-19 is
just an accelerator.”
Swiss Re Institute | September 2020 5Global supply chain disruptions: China in focus
In the world's largest 20 economies, 40-80% of exports are integrated into global supply chains
As the largest supplier of intermediate goods, China is at the core of GSCs and disruptions
The computer and electronic equipment trade is most vulnerable, with ~13% of its intermediate inputs coming from China
Participation of the 20 largest economies in GSCs Chinese intermediate input as a % of total global output excl.
(% of total export values added, 2018) China, by industry (2015)
80%
Computer and electronic equipment
60% Electrical equipment
Textiles & apparel
40% Non-metallc mineral products
Basic metals
20%
Fabricated metal products
0% Rubber & plastics
Machine and equipment
Germany
Japan
Turkey
China
Canada
Australia
Russia
Italy
India
UK
France
Spain
South Korea
Saudi Arabia
USA
Brazil
Switzerland
Netherlands
Indonesia
Mexico
Wood & wood product
Other transport equipment
Motor vehicles
Agricultural, forestry & fishing
Backward participation Forward participation 0% 5% 10% 15%
Note: Forward participation is defined as a country's domestic value-added content embodied in intermediate exports that are further re-exported to third countries, as a percentage of total exports.
Backward participation is foreign value-added content embodied in a country's exports as a percentage of total exports.
Source: UNCTAD-Eora database, Swiss Re Institute
6COVID-19 has instilled new urgency for restructuring of Global Supply Chains
Underlying drivers Accelerator Supply chain adjustments
Diminishing cost arbitrage advantages Diversification
(narrowing wage differentials) (geographic, suppliers)
Rising political risk
Relocation/parallel supply chain
(ie rising protectionism, trade war)
Social values
Reshoring/stay close to consumers
(ie ESG, equality, diversity & inclusion)
Increasing cost of business interruption COVID-19 Simplified supply chain
(ie natural catastrophes)
3D printing and digital manufacturing
Insurance and risk transfer solutions
(ie tailored products instead of mass production)
Source: Swiss Re Institute
7Globalisation has peaked before the Global Financial Crisis
As part of the overall fallout from the GFC, there been some tempering of the globalisation "spirit" over the last decade
Globalisation has fueled economic inequalities in advanced economies and contributed to populist shifts in many countries
Large free trade agreements such as the Trans-Pacific Partnership (TPP) and Transatlantic and Trade Partnership (TTIP) have not closed or
ratified due to protectionist shifts in politics
Global trade and supply chain participation Decomposition of exports in global value chains, % of GDP)
30% 65% % of GDP
30%
25% 60% 25%
20%
20% 55% 15%
10%
15% 50%
5%
10% 45% 0%
1999
2000
2001
2002
2003
2004
1990
1991
1992
1993
1994
1995
1996
1997
1998
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
1990 2000 2010 2018 1990 2000 2010 2018 1990 2000 2010 2018
World DM EM
Merchandise trade as % of GDP GVC as % of exports (RHS)
GVC Non-GVC-related DVA in exports
. Source: UNCTAD-Eora database, World Trade Organization, Swiss Re Institute
8Diminishing cost arbitrage advantages
China has lost its labour cost advantage over other Asian markets
There have also been improvements in ease of doing business elsewhere in Asia, in particular Thailand, Malaysia and Vietnam.
Ranking of emerging markets in Asian markets in terms of
Annual cost of manufacturing workers in emerging Asia (USD) logistics, ease of doing business and local procurement rates
12,000 Logistics Ease of doing Local procurement
Country
10,000 (2018) Business (2019) rate (2018)
8,000 China 26 31 66%
6,000 India 44 63 56%
Indonesia 46 73 42%
4,000
Malaysia 41 12 36%
2,000
Philippines 60 95 29%
0 Thailand 32 21 57%
India
China
Malaysia
Vietnam
Philippines
Cambodia
Indonesia
Bangladesh
Thailand
Vietnam 39 70 36%
Cambodia 98 144 6%
Bangladesh 100 168 24%
2012 2019 Myanmar 137 165 32%
. Source: JETRO, World Bank, Swiss Re Institute
9Economic growth and
insurance market
implications
“Relocation or reshoring will generate ~USD 1
trillion from additional exports and investments
to alternative locations and USD 63 billion from
new insurance premiums, as well as positive
growth during the transition. But ultimately,
long-term potential growth will be lower due to
efficiency losses.”
Swiss Re Institute | September 2020 10Globally, industry sectors most likely to move ……
Non-economic factors such as national strategic priorities are becoming increasingly important in decision-making
Economic Non-economic Share of export (%) Market
factors factors with shift potential capitalisation
low high USD bn
Pharmaceuticals 1 4 38 60 6’044
Apparel 4 1 36 57 868
Communication equipment 1 4 34 54 2’720
Medical devices 2 3 37 45 2’760
Transportation equipment 3 1 29 43 564
Textiles 4 0 23 45 113
Furniture 4 0 22 45 90
Aerospace 1 2 25 33 1’137
Computers and electronics 3 1 23 35 111
Electrical equipment 3 1 23 34 1’519
Machinery and equipment 2 1 19 25 1’332
Automotive 1 2 15 20 1’611
Semiconductors and components 0 4 9 19 2’570
Chemicals 0 1 5 11 2’477
Note: Non-economic factors include policy driven shifts (eg, essential goods for national security). Market capitalisation as of13 August 2020. High Low
Source: Risk, resilience and rebalancing in global value chain, 6 August 2020, McKinsey, Thomson Reuters, Swiss Re Institute
11Potential impacts on economic growth and insurance
The new dynamics will generate USD 1 trillion from additional exports and investment to alternative locations during the 5-year transition
Global GDP will gain by 0.2% per year during the transition, but long-term growth potential will be lower due to efficiency losses
New insurance demand will increase global insurance premiums by USD 63 billion during the transition
Potential winners Our growth stimulation model
Relocation to Reshoring Additional GDP
Trade Insurance
USD billion investment effects
Effect premium
1 Vietnam US needed p.a. (%)
2 Cambodia Germany Relocation to countries 200 287 +0.70 26
3 Malaysia France
Re-shoring countries 100 406 +0.20 37
4 Thailand Italy
5 Philippines UK World 300 694 +0.21 63
Note: Relocation countries are ranked by relative attractiveness; see Note: (i) We assume that China loses 20% of value-added exports to 20 lower-wage emerging markets and another 10% to re-shoring to advanced markets over
"Production relocation scorecard“ on slide 20 or Table 2 in report. Reshoring a five-year transition period. (ii) There is need for additional investment in plants and equipment to expand production in the new locations. We assume a capital-
countries are ranked by 2018 volumes of intermediate goods imports. to-output ratio around 1.4 for the emerging economies and around 4.1 for the advanced. (iii) We assume China will take policy reaction to fully offset the negative
Source: Swiss Re Institute impacts of the trade diversion and shift the production capacity to produce for domestic consumption and/or new export markets.
12Adding resilience to global supply chains
Supply chain risks Risk mitigation Examples for risk transfer via insurance
• Business interruption (BI) and contingent business
• Redundancy of interruption (CBI); Cover for losses or extra expenses resulting
Catastrophes from physical damages at own premises (BI) or at the premises of
suppliers, factories,
a customer or supplier (CBI)
clients
• Increased inventories
• Non damage BI (NDBI) and supply chain insurance; Cover for
Failure of transport and • Simplified production
non-physical damage events (at suppliers) and resultant business
communication networks processes
interruption
• Regionalization and
reshoring
• De-coupling of • Political risk resulting from interference and/or currency trade;
Interruptions in financing geopolitical spheres of e.g. covers for currency inconvertibility risks
interest
Triggers demand
for commercial • Regulatory impairment covers; e.g. non-approval and
Regulatory & political risks insurance certification from regulators in pharmaceutical manufacturing
13The role of technology in supply chain risk management
Role of Technology New opportunities Swiss Re Partnership
with Microsoft
• End-to-end data platform to • Digital marketplace – Digital Market Centre to help develop
reduce operational risk efficient distribution of large-scale tools that predict and
insurance products manage risks:
• Data security and sharing of
critical information across the • Digital risk as a service – • Initial focus on automotive industry,
supply chain Servicing risk with event- industrial manufacturing and
natural catastrophe resilience
triggered, data-driven digital
• Examples: services and claims processing
• Low-cost sensor solutions • Assessment of business risks with
• Advanced data analytics • Resilience as a service – a focus on complex, interconnected
systems and their wider
• Blockchain 360 ο risk intelligence in real- implications for society,
time governments and economies
14Key takeaways
The urge for Macro trends in reshaping the global supply chains were in place already pre-
Global Supply Chain COVID-19. The ramping up of US-China trade tensions and COVID-19 instils greater
resilience urgency for Global Supply Chain resilience
Parallel supply chains will emerge. We estimate they will generate ~USD 1
Opportunities
trillion from additional export and investments globally, boosting growth and
during transition adding USD 63 billion from insurance premiums over a 5-year period
Medium-term global growth is expected to increase, but longer-term economic
The trade-offs in growth will be adversely affected. The adverse impacts on growth will be larger,
the long-run should politics lead to more friction in the trade of goods and services, lowering
productivity growth
15"We must free ourselves of the hope that the sea will
ever rest. We must learn to sail in high winds."
~Aristotle Onassis
Swiss Re Institute | September 2020Thank you!
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Stephen Higginson Lisa Matthews
Head Customer & Distribution ANZ Customer & Distribution Manager ANZ
Stephen_Higginson@swissre.com Lisa_Matthews@swissre.com
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