Production has become fragmented into networks that are spread across various locations worldwide. Therefore, global value chains (GVC) refer to international production sharing, whereby production is broken into activities and tasks carried out by different countries. In the globalized world, production has become interconnected across borders, whereby other countries specialize in production.
Fragmentation of production has led to increased global efficiencies as each country focuses on and specializes in what they are good at. Nevertheless, fragmentation raises significant risks whenever an event occurs in one place that ends up disrupting production. The ripple effects are usually spread across borders with a potential impact on global production
The advent of the COVID-19 pandemic affirms some of the implications of global value chains, given the disruptions that came into being on the production and supply of goods across borders. Data from the United Nations Industrial Development Organizations indicate that 71% of the firms engaged in commodity production experienced input shortages owing to the pandemic.
Lockdowns and countries banning international travel affected the production of goods, as raw materials could not be moved easily. For instance, nearly 80% of Indian manufacturing firms experienced input shortages due to the coronavirus crisis. Most were forced to introduce process innovations to address input shortages triggered by global value chain disruptions.
The Russia-Ukraine conflict exacerbated disruptions in the global value chain as both countries are highly integrated in global production. Oil prices skyrocketed above the $100 a barrel level as Russia is one of the world’s largest oil producers. With the conflict, Russia was hit with sanctions and unable to export its oil and gas as before, resulting in an energy crisis in Europe and the world.
Ukraine is also one of the largest exporters of intermediate goods, including grains and fertilizer, and has been unable to ship most of its produce. Commodity prices, especially grains, have skyrocketed, given the deficit created by the global supply chain issues, resulting in a food crisis, especially in Africa. Food shortages especially grains and edible oils has been a big problem in the world, resulting in food insecurity in Africa and less developed nations
Additionally, value chain disruptions can occur in locations that produce strategic inputs. Therefore, disruption in one location can spread downstream through the value chain, affecting subsequent stages and later production of some goods. For instance, Ukraine accounts for a significant share of semi-finished iron products used in producing vehicles, refrigerators, and cutlery.
The ongoing conflict in Ukraine is already causing significant challenges to European firms that need semi-finished iron products to enhance the production of cars and refrigerators. The auto industry has been the most brutal hit, relying on wiring harnesses from Ukraine to develop car electrical systems. Shortages in semi-iron products and wiring harnesses are already cascading through automotive supply chains.
GVC Disruption Impact
Nevertheless, global value chain disruptions often spur input substitution and innovation as companies try to stay afloat amid the prevailing value chain disruptions. Amid the disruptions, some firms rethink their business models and devise creative ways of responding.
At the height of the pandemic, firms experiencing input shortages pursue transformation changes to mitigate the impact of the crisis. The changes included adopting new equipment that reduced the number of workers needed on the floor. There was also a production conversion that addressed the health emergency and the release of new products to meet changing market demands.
An increase in oil prices leading to energy costs due to the Russia-Ukraine war positively impacted some manufacturing firm’s productivity. Most of the firms scrapped their high energy-intensive equipment and pursued new electric equipment that is more productive and energy-efficient
Global value chain disruptions pose some of the most significant risks in a highly fragmented world, with countries specializing in what they are good at. The shortage of and an increase in the price of commodities is always the net effect of the disruptions.
Nevertheless, whenever such shortages come into play, some firms become more creative, using inputs more efficiently or replacing them with alternatives. It is one of the reasons why most firms have shifted their focus towards efficiency substitution and resilience to circumvent the effects of global value chain disruptions.