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KNOWLEDGE HUB

Over the past few decades, production has become fragmented into networks across multiple locations. This system of international production sharing, has led to the development of global value chains (GVCs), where production is broken into activities and tasks carried out in different countries.

Allowing production to cross-borders to where a product can be most efficiently made has opened up inclusive trade possibilities for developing countries seeking to industrialise. In this regard, GVCs have significantly contributed to global prosperity as production for exports contributes to economic growth, job creation, income generation and tax revenue. In addition, participating in a GVC also opens considerable opportunities for knowledge transfer, resulting in the improvement of product quality, facilitating operations and processes, and fostering involvement in higher value activities in production. Yet despite all the benefits, GVCs rely on functioning supply chains, which have been badly affected by the coronavirus pandemic. Consumer fear led to stockpiling causing some suppliers to struggle to meet demand, yet GVCs in most industries ground to a halt as countries went into lockdown.

One of the central reasons COVID-19 has caused such disruption to GVCs is that the virus struck key GVC hubs including China, Europe and the U.S. For example, industrial production in China fell by 13%% in January and February as it weathered its peak of cases, and according to official Chinese trade statistics, the country’s exports dropped by 17 per cent over the same time period. Such a seismic upheaval left countless GVCs without the core parts needed to complete production of a whole range of products. For example, Fiat Chrysler Automobiles announced in mid-February that it was temporarily halting production at a car factory in Serbia because it could not get parts from China, whilst Hyundai has made a similar announcement for factories in Korea as parts and components were grounded as international air travel was put on hold.

COVID-19 has held a spotlight up to GVCs, forcing fractures in global supply chains to open into significant fissures under the pressure of the global pandemic. To get the global economy back on track, and also to put up the strongest fight against the virus, GVCs in every industry need to find a way to begin operating again.

In the search to find a way to rapidly repair GVCs, industrial analysts predict that the coronavirus pandemic could be a tipping point in the transition to new technologies that strengthen GVCs. Whilst many digital platforms that aid efficiency along a supply chain exist, implementation of this technology has remained within the largest of companies and the most advanced GVCs. However, as the virus disrupts industries far and wide, it is likely that manufacturers along GVCs will finally turn to technology to enable digital restoration and strengthen their resilience against future events.

One such technology is blockchain, a list of records, or ‘blocks’ linked using cryptography with automatically assigned timestamps and transaction data that cannot be tampered with. The benefits that blockchain technology presents – such as improving the ability to anticipate risk, greater visibility and coordination and managing growing product complexity – make it well placed to ease the disruption caused by the coronavirus. Indeed, such is the potential of blockchain that the US Department of Homeland Security (DHS) recently listed blockchain managers in food and agricultural distribution as ‘critical infrastructure workers,’ showing the growing importance the technology has to play in industry and other corners of the economy.

In discussing what is needed to restore GVCs following the pandemic, several experts have reiterated the need for more visibility along the chain. Blockchain answers this need by facilitating the ability to ‘track and trace’ up and down a supply chain, resolving inefficiencies and mitigating risk. As Rebecca Liao, cofounder of SKUchain, which develops blockchain-based supply chain software says; “Even during normal times, a lack of visibility can hurt a supply chain’s efficiency. Blockchain provides oversight across every activity, allowing producers to monitor their supplies accurately and securely.”

For instance, traditionally, companies that sell finished goods are only privy to production and shipment schedules for their tier 1 suppliers, with little to no knowledge of suppliers further up the chain. This leaves them blinded to issues of availability or timing of components or parts. Digitizing supply-chain management through blockchain improves the accuracy and flexibility of supply-risk management allowing every link to prepare for supply issues as they arise.

Blockchain also serves to build and reinforce trust. Blockchain is “uniquely suited to verifying, securing and sharing data, which makes it ideal for managing multi-party, inter-organisational, and cross-border transactions,” say Remko van Hoek, a professor of supply chain management in a recent Harvard Business Review article. Indeed, “you can drive completely new levels of transparency with blockchain, and also do bidirectionally, which has historically been very hard to do,” said head.

That is not to say that blockchain alone will solve all GVC issues. Barriers to adoption including costs, privacy concerns and worker skill levels are preventing many organisations – particularly smaller entities – from joining the digital revolution. For example, in some instances, suppliers are reluctant to reveal information about their operations, pricing and sourcing to their customers that is necessary to build an effective digitalised supply chain through blockchain. However, blockchain technology is now advanced enough that ‘smart contracts’ powered by blockchain are able to give firms precise control over who sees their data and under what conditions.

In addition, where blockchain was viewed by many as too expensive to implement, improvements in technology are lowering the cost of digitising supply chain activities and levelling the playing field for small and medium-sized enterprises. As Nadia Hewett, Blockchain and Digital Currency Project Lead at the World Economic Forum USA, explains; “Where previously small players may not have had access to the resources required to unlock the value, technology has now evolved so more entities are being encouraged to join the blockchains and build resilient supply chains.” This is crucial in building future resilience as if chunks of the GVC are not digitised, key pieces of information are missing and the GVC blockchain cannot run efficiently.

Indeed, understanding the importance of building an inclusive recovery from the pandemic, a consortium of blockchain proponents including the Centre for the Fourth Industrial Revolution Network Fellows and the World Economic Forum have released a ‘Blockchain Deployment Toolkit,’ as a guide for organisations to develop and deploy blockchain solutions that will help protect GVCs from future shocks.

The toolkit is the result of research into blockchain technology from industries around the world, choosing the very best applications and practices of blockchain deployment to provide instructions on how to create a network capable of contributing to and benefiting from blockchain as a shared, distributed ledger. As the toolkit explains, building new, digital ecosystems through blockchain will facilitate more resilient and secure supply chains against macro changes. This could be particularly useful in the food industry, for example, which has suffered more than any during the global pandemic.

In addition, the report highlights that digital ecosystems powered by blockchain could signal the beginning of an entirely new mindset in manufacturing GVCs. As Jesper Mathias Nielsen, of Deloitte explains, blockchain enabled ecosystems “require managers to think about business challenges in a new way. The traditional focus on maximising profits within the boundaries of the company may be the very thing that keeps companies from engaging and succeeding.”

However, building a truly resilient GVC requires more than blockchain. “We’re not saying that blockchain will fix everything,” warns IBM’s head of blockchain Rupert Colchester, “You can’t just install blockchain and suddenly, miraculously, you have no problems with supply chain, but it does provide transparency and the necessary levels of data to identify problems immediately.”

Consequently, to restore global economies and recover from the disruption of COVID-19, manufacturing organisations must look at how blockchain technology can be installed along with other value-added technologies, such as Artificial Intelligence (AI) and robotics, that maximise efficiency, sustainability and ethical standards, as only through true digital integration can GVCs be made truly resilient.

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