Don’t Work the Good Horse to Death

The world seems to be falling apart at the seams—consider this a warning to supply chain managers in the “post-global” era. The US and China have a “trade war”, which really means a series of tit-for-tat tariffs. Economically, China no doubt suffers more, but “pain is pain”, as the saying goes, and U.S. supply chain managers will feel the pain both because of the direct impacts of the tariffs as well as how the rest of the world is also suffering.

Middle Eastern oil may be disrupted enough to impact world markets. This is a region of the world that seems on the surface very fragmented and fractious. Yet it is also held together by regimes and relationships that are rigid. Any small fire could spread rapidly and destabilize the region. There are a lot of fires in the Middle East, and with less coherent Western involvement to fight the fires, the risk of regional destabilization is higher than it has been in decades. Imagine the “crossroads of the world” suddenly becoming nearly impossible to cross. And then there's the reliance of China and Europe on Middle Eastern oil, and the fact that Russia stands to benefit from a disruption to oil supply…

Speaking of the EU, the EU is suffering economic troubles. Sweden often plays the role of bellwether for the EU economy, and with average household debt at 190% of income and rising unemployment, Sweden may be at the beginning of a little recession. Or a big one, depending on how things work out. And much of the EU may follow. The traditional European economic model is a mix of free markets and government subsidies, yet it seems that government involvement may be causing a lot of problems, perhaps because fundamental EU governance and economic policy lack of coherence. Nations are only willing to give up so much sovereignty for the common cause. Government involvement in the car industry was at least a contributing factor to “dieselgate” where the German government has 20% voting stakes in Volkswagen as one example, a situation exacerbated by the strong regulatory powers of a government desperate to make its investment pay off. Traditionally lucrative export markets like the U.S. and China hitting “peak car” increase the pain

It isn't just the automotive industry. The U.S. just won its suit against the EU regarding government subsidies to Airbus resulting in an unfair competitive environment against Boeing. News of Airbus corruption and bribery have been ongoing for two decades, and much of it involves heads of state and governments. Be wary of any industry in the EU where the government has not only a voice in governance but can back it up with heavy regulations—this would include supply chains affected by pharmaceuticals, telecommunications, parcel delivery, energy, banking, certain major transportation companies (such as Hapag-Lloyd in Germany), just to name a few.

Brexit is upon us. With so much uncertainty on this topic, and the embroiling of Boris Johnson in a variety of confrontations, it's hard to make a prognosis here, beyond the obvious uncertainty for the next couple of years.

Let's go back to China. It's future regional power and influence are virtually assured, yet it will experience a lot of turmoil. The country must survive a population bubble bursting and deal with its massive debt issue. The debt is the result of throwing money at problems, but of course money can't fix fundamental issues. How the government deals with its own people in its western provinces and in Hong Kong show that leadership lacks confidence. Along with heavy government control over the economy, this undermines the incentive for its own people to take risks and contribute fully to its economic well-being.

Western countries have already started reducing reliance on China, an eventuality that the country's strategists anticipated and proactively addressed by increasing influence across much of the world with the Belt and Road Initiative. Except, of course, that very little world trade moves by rail, and likely never will. Land-based transportation simply lacks the freedoms (and efficiencies) of open seas. The initiative doesn't seem to be working for other fundamental reasons. China in general is finding that its successful infrastructure expertise at home doesn't always work in unstable countries, and has had to write off large debt or take questionable concessions when some countries have proven unable to pay back Chinese loans. The most acute lesson from the initiative might be the impossibility of “prosperity by fiat” outside of its own borders, the impossibility of ordering economic self-sustainment in another country where no value proposition exists.

The U.S. also seems to be following a “prosperity by fiat” approach with a reliance on tariffs and bilateral agreements. Supply chain managers appreciate the importance of a systemic approach to create stability and prosperity. They also appreciate that such systems require constant tending. As Mattis said back in 2013, “If you don’t fund the State Department fully, then I need to buy more ammunition ultimately.” Decades of poor investment in the State Department and too much reliance on the military have undermined the global system.

There's an old saying, “A golden bit does not make the horse any better.” The upcoming election cycle will mean a lot of ideas, plans, Twitter pithy, and initiatives being tossed about to address the challenges of our times. Just as with a horse, focusing on the fundamentals—training, proper resource investment, basic research into supplier and customer markets, efficient use of resources—are the supply chain manager's best tools. It's going to be a bumpy ride. In a global world with corporate and political leaders accustomed to supply chain managers making things work, let's hope they don't work the good horse to death.

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