2024-01-01 17:00:53
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(verb) the act of diversifying supply chains to avoid relying too heavily on one geography
In 2023, the G7 nations decided to drop the dreaded word “decoupling,” when referring to their policy approach to China, and pick up another, more benign phrase: “de-risking”.
The term “de-risking” is defined on the US state department website as “the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk”.
But since the pandemic and the war in Ukraine, risk has been associated less with the financial sector and more with corporate supply chains. The word de-risking is thus increasingly being used to refer to the ways in which countries and companies are diversifying their supply chains, by sourcing from multiple geographies and companies rather than just one. This makes sense, as supply chain disruption has been increasing in frequency for the last decade.
The classic example is that of Taiwan — until recently, 92 per cent of all high-end semiconductor chips were made in the island, which is particularly vulnerable to geopolitical strife and natural disasters. No wonder countries and regions such as the US, Europe and China are now building their own chip industries, as well as attempting to create more independence in areas such as rare earth minerals, electric vehicles, pharmaceuticals and other crucial goods.
The results so far have been mixed — a recent Bank for International Settlements report found that while supply chains were lengthening, they weren’t necessarily diversifying. This brings home the fact that these chains — like financial networks — remain far too opaque and difficult to track. The issue will remain a pressing one for leaders in 2024.
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