Four years ago, the COVID-19 pandemic exposed the physical frailties of global supply chains.
Today they stand at the frontline of global disruption, with geopolitical developments forcing full-scale strategic realignments.
Wars, economic sanctions, a growing threat of tariffs, and muscular industrial policies around the world are putting more strain on supply chains today than they have felt in decades. Some 59% of CEOs of New York Stock Exchange-listed companies surveyed by the Oliver Wyman Forum in 2024 said they plan to de-risk their supply chains within two years. Many have already felt the impact of unforeseen disruptions from suppliers several steps upstream. Our analysis of Marsh McLennan clients shows that 65% of companies have a critical bottleneck somewhere in their supply chain network.
Companies in the years ahead will increasingly find that they are managing not just their own operations but also an expanding ecosystem of interdependencies. As disruptions intensify, regulatory and reputational pressures around sustainability, human rights, and other issues are also increasing.
But supply chains are no longer a Pandora’s box. The advent of breakthrough technology is enabling deep insight and agile oversight. As a result, business leaders can cut in half the sales they lose to disruptions at supply chokepoints.
A new era
Decades of rapid globalization, lost manufacturing capacity in most high-income economies, and extensive outsourcing have created critical dependencies. Asia now accounts for 82% of global semiconductor fabrication capacity, according to multiple industry reports, as well as more than 60% of active pharmaceutical ingredients production, according to European Fine Chemicals Group.
China’s dominance is particularly stark; it produces three-quarters of all lithium-ion batteries for electric vehicles and controls three-quarters of global lithium refining capacity, according to S&P Global.
Dependencies like these expose companies to disruption as the risk landscape changes, and companies are already taking steps to respond, resulting in major trade flow swings. For example, many multinationals are adopting “China plus one” strategies to mitigate geopolitical and economic risks. This shift is already gaining momentum: 2023 USAFacts data show that China lost its position as the United States’ top trade partner to Mexico, while EU Eurostat data show that China’s share of EU imports has declined since 2020 as India and Turkey have gained ground.
Alternative manufacturing hubs
Since reshoring has still been the exception — only 16% of CEOs of NYSE-listed companies planned to re-shore their supply chains domestically as of 2024 — a new group of manufacturing alternatives has emerged across Asia, Latin America, and the Middle East. These countries offer sufficiently developed infrastructure, attractive incentives, and strategic geographic locations with reduced exposure to trade conflicts. Their share of global greenfield foreign direct investment, based on FDI Markets data, grew from 26% in 2019 to 32% in 2023, allowing them to expand their manufacturing base. Some of our clients have achieved improvements of three to five percentage points in earnings before interest, taxes, depreciation, and amortization (EBITDA) after thoughtful transition to lower-cost locations like Vietnam.
However, this diversification comes with complexities. Chinese firms are also de-risking — mainly, from tariffs — and ramping up investments in the same alternative locations, which could lengthen supply chains without diminishing Western reliance on China’s manufacturing.
Corporate efforts to rewire supply chains often fall short due to limited upstream visibility. Most companies are oblivious to who their suppliers’ suppliers are, which means the true dependencies and risks remain unknown. When we analyzed a sample of Marsh McLennan clients, we found that dependency on China grew up to 150 times when we extended the analysis to second- and third-tier suppliers.
Many categories of shocks
Resource scarcity and concentration present an emerging challenge, often exacerbated by geopolitics. In December 2024, Beijing banned exports of a set of critical minerals to the United States following Washington’s new chip export controls, potentially reducing US GDP by $3.4 billion based on the US Geological Survey. The number of water-related conflicts has surged by 25% in the past five years compared to the previous decade, with one in five companies now facing water-related supply chain risks worth at least $77 billion, according to the Pacific Institute.
Beyond mitigating geographic concentration, companies could face an array of shocks from wars, targeted attacks, pandemics, and climate change that could wipe out large percentages of yearly earnings in many industries. The 2023 Houthi attacks on Red Sea shipping led to a fourfold increase in global shipping costs within six months. A 2021 drought in Taiwan forced TSMC to reduce water usage, triggering a semiconductor shortage that cost automakers $210 billion in revenue.
Making matters worse, supply chain insurance remains scarce due to limited transparency, making it difficult to assess and price risk effectively. Accurately modeling risk requires detailed asset data to understand specific sites’ importance, replaceability, and downstream dependencies.
The path forward
Today’s supply chains have unprecedented vulnerabilities, even for companies that only operate domestically. Faraway floods, earthquakes, and conflicts affecting seemingly innocuous subcomponents have dominoed into major product interruptions. Traditional supply chain mapping methods, which rely on costly manual processes and supplier disclosures, make crises look unmanageable.
However, this no longer has to be a game of whack-a-mole. Breakthroughs in harnessing technologies like geospacial intelligence and network mapping AI provide companies with more tools than ever before. Businesses can now trace connections beyond direct suppliers and understand how risks flow through their networks. Leading companies are scaling this technology to anticipate what is coming and then optimize how to absorb shocks when they happen — including building focused risk programs with innovative insurance approaches. This requires disciplined preparation coupled with a willingness and ability to make quick decisions.
Rewiring supply chains for the modern era requires this combination of technology, expertise, and organizational realignment, which allows companies to start regaining control of the risks they never knew they always had.