Risks and Opportunities for the Manufacturing Sector as Deglobalization Looms

We stand at a historical crossroads. After enjoying decades of interconnected trade partnerships and economic growth, the tide of globalization is receding. Trade relationships are increasingly fragmented, with the spectre of a significant power standoff between the U.S. and China looming large on the horizon. The need to comprehend the economic implications of this evolving paradigm is more critical than ever.

Within the manufacturing sector, this shift is particularly pronounced. As a leader in manufacturing technologies, we must navigate this complex terrain. Manufacturing leaders are grappling with cyber risks, technological redundancy, and the socio-economic fallout of heightened automation.

An emerging challenge is the ‘splinternet’, a fragmented digital landscape with competing China-led and U.S.-led platforms, which could disrupt global supply chains and increase operational complexity. Adaptability, innovation, and foresight are indispensable for the CNC machining and manufacturing industry as we navigate this era of deglobalization.

Uncovering the Key Insights from RBC’s Global Report: Implications for the Manufacturing Sector

The consensus on whether we are still operating in a US-led world order or have already entered a multipolar world remains contested. Some believe we are in a bipolar struggle between the US and China, while others foresee a tripolar world with the US, China, and Russia as the leading powers.

The shifting economic influence globally presents an ever-changing landscape for industries, including CNC machining, demanding a strategic and adaptable response to navigate complex geopolitical tensions.

1. Embracing Realpolitik

Canada’s manufacturing sector must remain cognizant of the prevailing global inclination towards ‘sovereign development’ and ‘realpolitik.’ Governments across the world, spurred by national security interests, are progressively concentrating on fortifying their domestic capabilities in critical areas such as technology, energy, health, and food.

With China leading the charge in internal investment and R&D, the manufacturing industry stands at the precipice of transformation, with both opportunities in emerging markets and challenges from increased domestic competition.

2. Onshoring and Friend-shoring

A key observation from the RBC report is the growing emphasis on onshoring and friend-shoring. Western governments are incentivizing manufacturers to bring production operations closer to home or shift them to geopolitically friendly nations, in an attempt to mitigate supply chain vulnerabilities. This trend signifies opportunities for manufacturers to consolidate or extend their production bases in these designated regions.

3. Technological Innovations

There is a surge in R&D investments in critical technological innovations, notably in semiconductor supply chains and green energy. The West’s strategic pivot involves imposing trade restrictions with China in sensitive specialized and security areas. For manufacturers operating within these sectors, aligning with this trend could herald a period of growth and innovation.

4. Protectionism and Trade Fragmentation

The rising tide of protectionism, leading to ‘trade fragmentation,’ could pose significant challenges for manufacturers. Trade barriers and tariffs could inflate costs and disrupt international supply chains, presenting sourcing challenges for specific commodities. Therefore, manufacturers should gear up to navigate potential inflationary pressures and other trade barriers that may disrupt the industry’s landscape.

5. Moving Beyond Globalization

In a world that’s incrementally shifting away from globalization, manufacturers must recalibrate their strategies to keep pace with changing trade relations, the reconfiguration of international blocs, and heightened protectionist tendencies.

Actively managing assets for individual countries, industries, and companies becomes crucial in this scenario. While strategically important industries might see opportunities for growth, persistent protectionist tendencies could temper the pace of global economic expansion and equity market gains. Manufacturers need to adopt a proactive and dynamic approach to thrive in this new order.

Risks of Deglobalization and the Manufacturing Industry

In a global economy, corporations traditionally leverage their international reach to optimize capital, labour, and production, thereby increasing efficiencies, lowering costs, and enhancing their inherent value. The objective is to capitalize on the benefits of a global structure – a framework that is now being questioned due to increasing complications in transferring these production factors across borders. This reality raises a fundamental question: Is a global corporation the proper structure in a deglobalizing world?

Increasingly, global manufacturing companies face stiff competition from formidable local or regional competitors, rather than from other international enterprises. This intensifying rivalry, a byproduct of deglobalization, compels us to reconsider the organizational structure of multinational manufacturing corporations.

One alternative to the traditional global structure is a model where businesses operate as an assembly of independent, loosely affiliated, locally run companies or “subsidiaries.” In this proposed structure, knowledge transfer benefits from being part of a larger network, but most decisions regarding capital allocation and human resources are delegated to local entities. These independent companies may also gain from having the opportunity to list and trade as separate entities on both local and global exchanges.

For the manufacturing sector, the risk of this model lies in the potential loss of economies of scale and the challenges related to managing a plethora of independent entities. However, the rewards could be greater adaptability to local market conditions and regulatory environments and a stronger connection to local customers.

The adoption of this alternative organizational structure will depend on how industry leaders perceive the deglobalization trend – as an enduring phenomenon or a transient phase. If they view deglobalization as a lasting trend, it necessitates serious contemplation on restructuring the current global model to better align with the evolving world order.