In the past 30 years, the trend for companies to look for suppliers that can provide goods at the lowest cost has resulted in a shift towards sourcing from competitive markets, particularly in East Asia.
Yet if businesses have relied on a single sourcing location such as China, the risk of disruption to the supply chain is more likely.
Research by Resilinc shows that the world’s largest 1,000 entities or their suppliers have more than 12,000 factories in quarantined countries such as China, Italy and South Korea.
These global manufacturing and supply chains have been deeply shaken by the novel coronavirus pandemic, with many factories and logistics providers now facing travel disruptions, regulatory uncertainty and labour shortages.
It is expected that one result of the Covid-19 pandemic will be the re-localisation of supply chains
Even though globalised supply chains may be cheaper compared to a fully localised supply chain, the ramifications of political disputes, natural disasters and pandemics have exposed the fragility surrounding global supply chains.
Questions are therefore being asked about the risks of supply chains that concentrate manufacturing operations in particular regions of the globe.
It is expected that one result of the Covid-19 pandemic will be the re-localisation of supply chains.
Localising to mitigate risk
By centralising manufacturing facilities in the country where the consumers are being targeted, localised supply chains reduce the distance between companies and suppliers and, in turn, make these companies stronger and more resilient.
The benefits of localised supply chains range from, but are not limited to, quality enhancements, decreased transportation times, enhanced control and cost. Shorter transit times also ensure that fewer goods or a smaller amount of cash is trapped in supply chains at any given time.
However, it may not be possible to obtain all the necessary parts and accessories locally; therefore entities should focus on sourcing raw materials from multiple countries to mitigate the risk of supply chain disruptions in circumstances where a country faces a natural disaster or pandemic.
Weighing benefits and costs
In the UAE, Abu Dhabi National Oil Company (Adnoc) launched a localisation programme referred to as In-Country Value (ICV) in 2018, whereby investors with a better localisation score increase their probability of winning tenders.
The ICV system has also recently been adopted by Abu Dhabi Department of Economic Development, Aldar Properties and Abu Dhabi Ports.
The purpose is to enhance and diversify the country’s economy by ensuring that its local suppliers obtain goods and services within the UAE.
The ICV also entails a focus on the components that are most essential to the supply chain. The rationale behind this is to minimise the disruption to the local supply chain in the event that global supply chains are affected.
Suppliers must do a cost-benefit analysis, keeping in consideration factors such as cost, greater flexibility, supply chain control and increased probability of being awarded government contracts
Suppliers, nevertheless, need to be wary of the cost factors involved, since sourcing raw materials locally can be relatively expensive compared to the cost of importing raw materials from East Asia.
Hence, suppliers must do a cost-benefit analysis, keeping in consideration factors such as cost, greater flexibility, supply chain control and increased probability of being awarded government contracts.
UAE localisation expansion
In February, the Abu Dhabi Department of Economic Development (ADDED) also adopted an adapted version of the ICV. Other governmental bodies are currently scrutinising whether they should implement similar programmes. It is under consideration to roll-out the programme on a federal level.
Suppliers also need to take into consideration the Electrical Tariff Incentive Programme (ETIP), which was introduced in July 2019 in accordance with the Abu Dhabi Development Accelerators Programme ‘Ghadan 21’. Under ETIP, successful industrial manufacturing companies will be eligible for preferred electricity tariffs.
Suppliers should keep themselves updated with respect to the evolving requirements of ICV, as well as the introduction of new localisation programmes
The adaptation of ICV by different governmental bodies will ensure that businesses can use the ICV certificate for both Adnoc and Abu Dhabi-related bids. This, in turn, will increase the ease of doing business in Abu Dhabi.
Suppliers should keep themselves updated with respect to the evolving requirements of ICV, as well as the introduction of new localisation programmes.
There is also an increased possibility that similar localisation programmes would be introduced in other sectors, as well as by the governments of other emirates or possibly at a federal level.
It is therefore imperative that all businesses operating locally consider how they fit into this framework: whether localisation programmes, such as ICV, allow them to increase their probability of winning government tenders; how localised supply chains could ensure they are resilient to global supply chain disruptions; and, more broadly, what opportunities more localised supply chains could present.
About the author
Constantin Frank-Fahle is a multi-jurisdictional dispute negotiator in the GCC. He is the managing partner of Germela Law (Abu Dhabi) and advises clients on legal and tax-related corporate structuring, including localisation strategies. Constantin is also a lecturer in international business law at the International School of Management in Cologne, Germany.
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