Globalization, geopolitics, and macroeconomics impact the movement of goods, how businesses grow, and the quality of life. Fernanda Kroup, Vice President and Head of Onyx Strategic Insights, gives her take on how things are looking this year and how current trends are affecting logistics in 2023.
Chris Parker: Hello everyone, and welcome to the Expeditors podcast, where we look at the logistics and freight forwarding industry through the lens of a global logistics provider. I'm your host, Chris Parker, and today we are talking about the state of globalization in 2023, the current trends and threats out there, and how shipping and logistics are absorbing the impact of changing policies and customer needs. With me today is the Vice President and head of Onyx Strategic Insights, Fernanda Kroup. Fernanda, welcome.
Fernanda Kroup: Thank you, Chris.
Chris Parker: So, Onyx Strategic Insights, what is that? Because that's a new thing for us here.
Fernanda Kroup: It's a new division of Expeditors that looks at supply chain strategy through the lens of geopolitics and macroeconomics. That's a mouthful. So, lots of companies are thinking about nearshoring or reshoring, sourcing, and production, so we help them think about the trade-offs. We help them think about what's going to happen in two, three, or five years and think through what options they have and make the best decision. So, we're here to help our customers actually plan better and achieve better outcomes in terms of resilience and efficiency.
Chris Parker: The way I understand it, then, you're kind of consultants on supply chains, but taking into account global activity. Yes?
Fernanda Kroup: Yeah, that's absolutely correct. Think about trade policy. It feels like a very abstract concept, but when you think about tariffs and protectionism, that's what we're here to do, to analyze where it's going and what impact that can have on our customers in the future. That's just one example. Labor costs and macroeconomic policy impacting consumption are all examples of things that companies need to bear in mind when they're thinking about sourcing production and demand planning.
Chris Parker: Excellent. Well, before we get started, I want to get just a little bit more background on you too. Would you mind walking me through your history, your background, your career that brought you from where you started and what got you interested in this field, and how you got to be Vice President and head of Onyx Strategic Insights?
Fernanda Kroup: I have a very unusual career because I'm an attorney by training, and I also studied international relations in college and got really interested in where the world is going. At its most fundamental level, it's thinking about the future and how that impacts everyday lives. And so, my first job was with the United Nations. After a few years with the United Nations, I moved to the private sector and started working for a management consulting firm, McKinsey. I worked there for a number of years, and I missed that geopolitical and macroeconomic analysis. And so, I moved on to a geopolitical firm called Eurasia Group. And then, last year, Expeditors approached me about starting this new division. I had done some projects in supply chains before, and I had always been passionate about how geopolitics and supply chains converge. And we've since been working to build Onyx to define what the value should be and what opportunities there were to support customers, and very happy to be here.
Chris Parker: Well, how about we get started with our topic today, which is all about globalization? To get started here, how would you describe the state of globalization now compared to 10 or even 20 years ago?
Fernanda Kroup: It is such a mess, isn't it? It seems like it.
Chris Parker: Where do we begin?
Fernanda Kroup: Where to begin? Maybe it's useful to start with what globalization is because many people will say, "Well, globalization is at an end, or globalization is just beginning." But nobody actually talks about what globalization is. And at its most fundamental level, globalization is about goods, capital, and people moving around the world. It's always been a part of human existence. From thousands of years ago to today, these three elements, goods, capital, and people, have always moved around. The difference across various periods in history is the degree of freedom that each of those three elements has. In some periods in history, you had goods flowing, pun intended, but then it didn't have a lot of global capital moving around. Sometimes it was people. You saw large patterns of immigration, let's say, at the beginning of the 20th century. We all have families that moved around, and that was quite important.
And then, particularly after World War II, you saw these large-scale investments moving around the world, multinational companies. What is different now from 20 years ago is that all of those three elements are under some sort of constraint. So, when we think about goods, and merchandise moving around the world, we think about protectionism and tariffs and this push to reduce imports. Everybody wants to reduce imports and increase exports, and everybody thinks about nearshoring and reshoring. Capital follows a similar trajectory today. So, you see a lot of investment being restricted or screened and lots of countries actually trying to keep investments domestically, and that is a problem. And then third, people, there are lots of concerns about immigration, lots of pressures there, and a lot of divisions around the topic. So, this is where today feels different from 10, or 20 years ago, which is that all of those three elements are under some sort of questioning or threat.
Because globalization has always been a feature of human history, this doesn't mean that globalization will end because there's never been a period where you didn't have globalization. You will see a lot of restrictions, but you will also see companies spotting opportunities, so if we think about a world where everybody wants to do everything domestically. "We don't want immigration. We want domestic investment, and we want to produce goods, if not nearby, domestically." That still leaves out a few questions. For example, what happens to raw materials? Some of them you're always going to have to import in one way or another. Think iron ore. It's the most basic level. But then, as a process like that begins to bear fruit, companies start spotting opportunities to perhaps start exporting again or start producing somewhere else. It's always a process, and we shouldn't take this as the end of history or the way things will always be, right?
Chris Parker: Sure.
Fernanda Kroup: These things are fluid. The other aspect that's really different today is that globalization needs to coexist with the political choices that various governments make. And we're moving from a world where the United States was dominant after the Cold War to a world where you have a lot of new powers emerging. It's not just China. It's Southeast Asia. It's not that the United States has necessarily declined; it's that others are catching up and catching up fast in terms of the size of their economies, their military capabilities, and their interests. So, because of that, when you see a world like that, there's a lot of competition that starts to happen.
Chris Parker: I was just about to say I would much prefer more competition, like healthy competition, than for one runaway leader because where does that leave everybody else?
Fernanda Kroup: That is true in theory, but governments competing are not the same as companies competing.
Chris Parker: Yeah, this isn't some nice game that everyone's playing.
Fernanda Kroup: Exactly, exactly. When governments compete, it means that they want to constrain each other's options, and that has an impact on companies and how they operate. So, all of a sudden, they can't maximize efficiency. There's a trade-off there because you are under pressure, so you don't have the same number of choices to make your production more efficient. You also have a lot of macroeconomic volatility coming out of COVID. So, we just came out of a pandemic. That hadn't happened in what, about 100 years since the Spanish flu. It means that governments, while they desire to compete with each other and attract as much investment as they can, they also have to contend with the fallout of COVID and inflation. We're seeing declining consumption and consumer confidence. So, you have to put the house in order while competing with other countries. So, that is a defining feature today. And so, whoever is able to put the house in order first stands a better chance.
Chris Parker: And so, what have governments and business organizations learned over the last couple of years as a result of all this?
Fernanda Kroup: Yeah, I mean, think about 2019 and then today, right?
Chris Parker: I don't even remember. That was a different age.
Fernanda Kroup: It's a completely different world. It feels like ages ago.
Chris Parker: It really does, yeah.
Fernanda Kroup: Companies were really caught by surprise. Managing a pandemic, if we remember all the first video calls and people trying to achieve some sort of business continuity, really exposed some of the vulnerabilities that companies had. So, some of them were sourced from one single country. Others were betting on one single geographic hub for sourcing and production. So that exposed to them certain vulnerabilities that they felt needed to be tackled. And lots of companies feel that they were too dependent on China or on Russia even.
And they felt that the world was shifting. That process that I described that now you have more powers competing, it became very real. The pandemic lockdowns were a very traumatic moment for the world. And then, even preceding COVID, you had a stepping up of the tensions between the United States and China and the sense that all of a sudden, you could have tariffs and something that nobody actually expected or lived with. People were used to a world where you had FTAs and the WTO, and the GATT. And so, a sense that the stability, at least from a trade policy perspective, was upended. Now most companies will see this as something that even precedes COVID. It's not necessarily two years ago. It's really five years ago when you first had the trade wars between the United States and China. And even before that, during the Obama years, when companies started to be really concerned about questions around intellectual property and having to share proprietary knowledge as a condition of operating in certain countries. That was already happening. So, this is the culmination of that process. And so, what companies have learned is that they can't rely on any stability in terms of policy, be it trade policy or industrial policy, or macroeconomic policy.
And so, what everybody decided to do was to de-risk their supply chains. For years, the idea of global supply chains was motivated by a desire to achieve efficiency and low cost. And now, that has evolved into the need to achieve resilience. It's some sort of safety. So, companies decided to sacrifice efficiency for diversification. Right now, we're not even talking about whether to regionalize and nearshore or reshore sourcing production. It's how. That's where companies are at right now.
Chris Parker: In the goal to reach pre-pandemic, in the goal to reach that efficiency, low cost, I mean diversification, resiliency, being fluid, staying nimble, that does come at a cost. How has that changed the way things are now?
Fernanda Kroup: Globalization had an implicit deal in it.
Chris Parker: It was a common understanding.
Fernanda Kroup: Yeah, exactly, an unspoken understanding, which is, "We're going to offshore production and sourcing in order to make goods more affordable, better quality, and more widely available." And we've come to, as consumers, expect a level of availability and quality of goods at a much lower price than at any point in history. So, what's happening right now is that when you sacrifice efficiency for diversification and resilience, that has a cost impact. And that means that things become more expensive, and something's got to give either profitability or prices. And so, if we dig a little deeper into it, if we think about it for a second, so we're moving sourcing and production to countries that do not necessarily have the best labor costs or where developing the know-how will be hard. And then some of the countries that we're going to don't have the logistics infrastructure to be able to bear that increase in volumes.
So, there will be some bottlenecks. This is a period of adaptation and increased costs. So, we should expect some sort of short/medium-term volatility here. The idea that diversification is risk-free, I mean, we're finding out it's not true. There are costs involved. We're going into some sort of uncharted territory here. And even down to raw materials and inputs, supply chains are changing. Right now, we're talking about bringing mining back to Europe and advanced economies. People are trying to find technologies that mean that previously, you could only source from one country, and now you're thinking about inputs that are much more widely available. Think sodium batteries, for example. China has the technology and the know-how, but implicit in it is that sodium is much more widely available and much cheaper. Or think about wood; think about the push to recycle. Even in apparel, that means that we're trying to shorten supply chains even at the raw materials level.
But that comes at a cost. Now in parallel, you see a lot of push to develop technology and to automate to counter those costs. But while the technology catches up and investments catch up, you're going to have this messy middle of increased costs, uncertainty, and lots of learning. One thing to think about that's quite impressive is that this process was going much faster for Southeast Asia or Mexico, and Central America than for China 30 years ago. We have this expectation of things actually moving much faster than they have ever done. We made the decision; let's go for it. It's going to take a little while.
Chris Parker: All right. So then, what would you say is threatening globalization right now? There are a lot of things at play, a lot of changes happening. Is there anything that is going to negatively impact it in a massive way?
Fernanda Kroup: Yeah, I don't know that we can call it a threat to globalization because nobody can single-handedly stop globalization.
Chris Parker: Maybe a Bond villain or something like that.
Fernanda Kroup: It's just a feature of how we interact as societies. There's always some level of contact. Again, either goods, capital, or people, whether people want it or not. But we can talk about uncertainties to the patterns of globalization that are being built right now around regionalization and nearshoring. There's a big question about the future of work. Automation is a perennial question. So, does it mean that all of a sudden, you're just not going to need as many people, and therefore, you are going to have a lot of unemployment? It's a much more complex question than that because in previous periods when you had a lot of automation or a lot of technology being applied to industrial production, for example, it just meant that new jobs were created. So, the jobs that existed before were replaced with new jobs. And so, it's not necessarily true that you would see a decrease in demand for labor. It's just you need different kinds of labor because there are different jobs available.
But that's just in the aggregate. In practice, what happens is that there are people that don't have the necessary qualifications or training for these new jobs, or there are entire regions that are left out. And that creates a lot of pressure and a lot of dissatisfaction. It's that period of adaptation that creates a lot of tension and a lot of uncertainty. What are the new jobs that will emerge? Is this possibly a new period where, unlike in the past, you're just not going to need that many people anymore? Then how does that interact with the fact that societies are getting older, people are living longer, and having fewer children? There are lots of theories about what will happen. One of the ones that I find most compelling is that people will have lots of careers in their lifetimes, that the old cycle, you go to school, then you work, then you retire, is not going to be the rule anymore. You're going to see-
Chris Parker: It's not so linear.
Fernanda Kroup: Those cycles multiple times. People work, they go back to school, then they take a year off. You're going to go through that cycle multiple times in your lifetime, but that is one possible outcome. But the way that societies are structured right now is that you need to work to make a living and to save for retirement. And there's some social safety net there, but even that is not guaranteed. So, that's a critical uncertainty there. The second is this new relationship emerging between the United States and other countries in the world. Throughout the course of history, you always see you have a status quo power, so a power that's dominant and is happy with the way things are. And then you have a revisionist power, so the power that's emerging or declining and is unhappy with the way things are. And it's always an uncertainty. What is this revisionist power going to do?
Russia, Ukraine is the best example of that. So, there are numerous questions about the future of Russia and the future of China. China is the power that's growing right now, but since nothing is certain, and there are lots of vulnerabilities in China right now and its economy and its demographics, could China become a little bit more like Japan, that stagnated for a number of years? Or is it more like South Korea? Or is it going to chart a completely new path? But is it going to be able to become a power on equal terms with the United States? That's a big question. But all of these uncertainties decrease our level of security and our level of cooperation.
And then a third source of uncertainty, there are many, but those are really top of mind for me, is just how much things will cost. We're used to goods being relatively affordable. There's this mass consumption society. But as we regionalize and as things become more expensive, as we decide that there are sustainability, for example, concerns that need to be taken into account, and that means that things just become more expensive no matter how you feel about sustainability, we're not ready yet for that answer. That begs the question of rising inequality across the world. You're going to have countries where you see a lot of investments, that high tech is prevalent, that are automating. They're increasingly producing even raw materials domestically and feeding their own domestic markets. And then you're going to see countries that don't have that. They're potentially left out of this new globalization, and that creates a lot of instability. So there's no answer for how does Africa, for example, connect with this new world? What is the future of Latin America? Are you going to see countries that are completely disenfranchised, and we can't ignore each other? And so that creates a lot of uncertainty also in terms of how do we make sure that as we regionalize, we're not creating even more potential for insecurity?
Chris Parker: I feel like we've covered relationships between countries. We've covered relationships between companies, manufacturers, and their customers. Let's bring in the shipping industry, the logistics industry. What are the relationships that they have, and how are they adapting to all this change? How are they absorbing the impact of these trends?
Fernanda Kroup: In many ways - shipping and logistics, and supply chains are just one of the most creative and dynamic areas in human activity.
Chris Parker: That's very optimistic. I love that.
Fernanda Kroup: You really need to think through how to manage what's thrown at you in the art of the possible. And I think number one is technology and how we can apply technology to be able to manage disruption. And even thinking further, what are the applications of AI to supply chains? There's a desire for more visibility. There's a desire for more predictability, which is natural when you see a lot of instability, and the desire for more control over outcomes, the just in time to just in case, which leads me to a second point, which is we're creating a lot of redundancy in supply chains today. So we want to have multiple hubs, a plan A, plan B, plan C, and we're investing a lot in that. Again, we're sacrificing cost efficiency for reliability and diversification.
I think that a third trend here is logistics and supply chain professionals are asked to expand their knowledge base dramatically and be more aware of a number of risks that were not as relevant before. And so they're asked to be knowledgeable and almost experts on a number of issues, from geopolitics to macroeconomics to infrastructure in different countries around the world. So that pressure to have a lot of market intel, to be able to move fast and then to be able to mitigate risks, shape our expectations where we can't do anything about it, and then find different ways and different paths, is real.
Chris Parker: That puts a lot of strain on an industry, then, no?
Fernanda Kroup: It is quite stressful for everybody right now. But I do think that we're coming together, and we're spotting opportunities to work together in ways that we hadn't thought about before. I do think that there's a sense of community here that we're trying to make sure that we're meeting society's needs and that we're getting goods to the people that need them on time with the quality that they expect. And so we're trying to find creative ways to do that. It's a lot of work, but I do think that there's a sense of supporting each other in this. Certainly, Expeditors, that's the vision that we bring to it, is to help our customers actually be able to navigate this. And Onyx is one of the expressions of that commitment that Expeditors has.
Chris Parker: This is a question I have here, and I feel like it's going to be no, as we've just talked about this, but I want to hear your explanation on it though. Are we seeing the end of globalization? And I guess another way to look at it is, as we've been talking, I think of globalization as almost a state of the health of the global community. And so if we were to look at this as a body, how healthy is the global community, the body right now?
Fernanda Kroup: Well, it's experiencing a shock to the system. Some of its self-inflicted, but certainly a shock. But like any organism, it tries to find different pathways. So, it's not the end of globalization. I don't think humanity would survive without it, without talking to each other and investing in each other. You already see companies trying to find different pathways. So you see Chinese companies, for example, nearshoring to Mexico. You see the United States thinking about how best to build its relationships in Asia through investment. And you see companies thinking about how best to reorganize themselves around this new reality. Adaptability is a key feature of companies and societies, and we're seeing that right now. And so it's not the end of globalization, much like there was never a non-globalized period in recent human history, but it's a different pattern. But there's always going to be a movement where, and you see this pendulum in history where we say, "Let's be global. Let's expand. Let's go to new countries or new regions. Let's move people there."
And then the pendulum swings back to, "Oh no, that's too complicated, too uncertain, too unsafe. And so let's just do everything as much as we can domestically," and this push to isolate. But inevitably, the pendulum swings back. And so we need to have a long-term view here that in the next ten years, one of the potential outcomes is that we decide that it's just unsustainable to regionalize everything, and there are different global alliances across countries that emerge. So everything is transient. And some companies, for example, might as well decide that reshoring is not for them and that, all things considered, and when you do the math on all the costs and all the risks, it still makes sense for them to be in China or to source from China.
Certainly, what we're seeing, at least when we think about logistics and supply chains, is the emergence of different models of regionalization, reshoring, and nearshoring, and it all depends on know-how and the size of the market, and the size of the players involved. So, for example, you take intermediates and even auto, for example, these are industries that have a long track record of shifting production around and testing new markets. They have a lot of know-how, and so they're more dynamic in terms of their ability to shift production. It's not cost-free, and it's difficult, but they do have the know-how, and so you're going to see a faster regionalization there.
Whereas for other sectors, for example, high-end industries, apparel, and high-end consumer goods, you rely a lot on the know-how of your suppliers. There's a quality question there. And so their ability to just reshore or nearshore is very much constrained by the structure of their markets. And then you have everything else in between. So it will be different answers to different industries. Technologies, for example, may come to the conclusion that reshoring completely is what makes sense because they're able to automate and because they're just much more exposed to being sensitive industries with national security implications. It really very much depends on the sector.
Chris Parker: So, then what do you hope companies would do to keep up with all these changes with this? It feels like growing pains right now. What can companies do to keep up with that and navigate through these growing pains?
Fernanda Kroup: What I hope is that companies will ask questions before jumping on some sort of bandwagon. What sort of regionalization makes sense to them? Regionalization makes sense to a lot of companies because it is an answer to pressures from politics, lots of volatility, sustainability questions, and mandates. So shortening supply chains, in theory, makes sense, but what I hope is that they'll ask questions about what makes sense to them and that they will build their knowledge base to be able to make the best decisions. Because even if you're talking about the simplest sourcing arrangements you can think of, the most transient ones short term, it still requires a lot of time, investment, and commitment. And so, it's important to ask lots of questions and consider different options, even the ones that are not on the table right now, so that you make the best decision. So one thing to add here is also that I hope that companies are not just asking questions about today, but about where the countries that they're considering right now will be in two, three, five, ten years, depending on what their investment cycles are, from the most opportunistic to the longest type of CapEx you can think about because that's what matters.
Chris Parker: It's a company's sustainability, right? It's how they operate sustainably for themselves.
Fernanda Kroup: It's about being able to have the capabilities or the support to be able to think about the future. These countries will change a lot. Not all of them will succeed. If anything, nobody can be sure that any particular country will be able to be a great source of production base in 10 years. So, you need to be able to think about the future and forecast where these countries will be. There's also being open-minded about certain countries that don't seem like a good option today, but that if you're thinking about the long term, they'll be at a different position, or they might be coming from left field. So, there are lots of questions around Central America or North Africa today, and one way to beat the competition is to be open-minded and ask questions but think about the future ahead of time.
Chris Parker: Last question for you here is, where do you feel the most optimistic? What helps you sleep at night? You're saying, "Okay, I don't have to worry about that particular part of this topic." For those of you listening, Fernanda looks very, very uncomfortable. She looks very unsure.
Fernanda Kroup: Well, I think part of it is because it's my job to worry. I think political systems are changing. We're going through an age of demographic shocks. Countries of democracy or not, or everything in between is a reflection of society, and demographics have a lot to say here and where people live, who they are, that reflects in their preferences, what they believe in, and that reflects itself in politics and at its most fundamental level how a country functions. So, that's changing. And then, if you think about geopolitics as this big chess board, that's changing too right now.
We see some patterns. We talk about a multipolar world with lots of new powers competing against each other. The revisionists, as I said before, and the status quo powers that are changing. Just those two already tell us that it's impossible to take anything for granted. What I do believe, though, is that people have the ability to adapt and to apply creativity to intractable problems, and so we'll always find a way to operate. You have to be different, and it will involve innovation, but we do have the ability to adapt to most situations.
We see some patterns. We talk about a multipolar world with lots of new powers competing against each other. The revisionists, as I said before, and the status quo powers that are changing. Just those two already tell us that it's impossible to take anything for granted. What I do believe, though, is that people have the ability to adapt and to apply creativity to intractable problems, and so we'll always find a way to operate. You have to be different, and it will involve innovation, but we do have the ability to adapt to most situations.
Chris Parker: I take comfort in that. We are pretty amazing creatures. Fernanda, thank you so much for talking to me about this. This was truly a very fascinating talk, and I'm really excited to go into editing for this one, just to relearn this all and to listen to this again, so I really appreciate the time. If there was a book that you could recommend, is there anything around this topic that you think is great for people to read?
Fernanda Kroup: There's a book called The 100-Year Life, which is fascinating at a personal level about how people's lives will change or how they can change as a result of us all living longer.
Chris Parker: Cool. I'm going to go check that one out. Once again, Fernanda. Thank you so much. This was really fun.
Fernanda Kroup: Thank you.
Chris Parker: Thanks for listening to today's episode. If you've got questions or want to learn more about today's topic, check out the show notes for more information. And before you go, make sure you're subscribed on whatever podcast app you're using so you won't miss the next episode. To learn more about Expeditors, you can find us on LinkedIn, Facebook, Instagram, and Twitter, or simply visit us at expeditors.com. Take care, and I'll see you next time.
