00:00:07 Slowbalization and its implications.
00:00:39 Origins of Slowbalization and its relation to global trade.
00:02:27 External factors leading to Slowbalization, such as decreasing manufacturing costs.
00:04:56 Automation’s role in reducing production costs and its impact on international trade.
00:06:02 Advantages and challenges of local supply chains in a Slowbalization context.
00:08:00 The impact of bulk orders and supply chain optimization.
00:09:35 Environmental considerations and the efficiency of cargo shipment.
00:12:19 Globalization and its effect on companies’ operations.
00:14:02 Supply chains operating on a more localized level.
00:14:36 Interdependence between countries and the future of globalization.
00:16:02 Global dependencies and their impact on businesses.
00:17:21 Strengthening dependencies through investments and API improvements.
00:18:02 The lasting trend of slowbalization.
00:19:15 China’s increasing wealth and its influence on globalization.
00:20:20 Conclusion.
Summary
Kieran Chandler interviews Joannes Vermorel, Lokad’s founder, about “slowbalization,” the trend of slowing international economic exchanges. This shift started around 2012, with global trade growth now matching global GDP. Factors include decreasing manufacturing and transportation costs and increasing automation. The automotive industry has been a frontrunner in producing locally for local markets. The trend of decreasing production and transportation costs is expected to continue, leading to more localized supply chains. Despite slowbalization, companies continue to globalize and operate in multiple countries, with dependencies in technology and software remaining strong. Vermorel believes slowbalization will persist, driven by rising living standards in Asia and increasing technological interdependence.
Extended Summary
In this interview, Kieran Chandler discusses the concept of “slowbalization” with Joannes Vermorel, the founder of Lokad, a supply chain optimization software company. Slowbalization refers to the recent trend of slowing international economic exchanges, a shift from the long-standing trends of globalization. Vermorel mentions that the term was coined by an author writing for The Economist and that the turning point for this phenomenon was around 2012.
For three decades prior to 2012, global trade had been growing twice as fast as global GDP. This meant that when a country’s GDP increased by 10%, it would exchange 20% more with its neighbors. However, since the turning point, global trade has been growing at the same rate as global GDP, and now it is slowing down even further, leading to the concept of slowbalization.
Vermorel cites multiple factors contributing to slowbalization, including the ongoing decrease in manufacturing costs, transportation costs, and the impact of automation. As the cost of manufacturing goods continues to drop, consumers spend a smaller proportion of their income on imported goods, not because they are purchasing fewer items, but because the items are cheaper. This leads to a reduction in international trade.
Additionally, the cost of transportation, particularly for cargo shipments, has been decreasing but has now stabilized. This also plays a role in the reduction of international trade. Another factor is the increasing use of automation, which has led to productivity gains and has averaged out the opportunities for production among countries. As a result, it matters less where factories are located, and companies are more inclined to produce goods close to where they will be consumed.
The automotive industry, for example, has been ahead of other industries in following a strategy of producing locally for local markets. This strategy has become more appealing as production and transportation costs continue to decrease.
Chandler asks if this trend of decreasing production and transportation costs will continue, or if there will be a point where further reductions are no longer possible.
Vermorel talks about the increased productivity in terms of automation in various industries, including textiles, which is leading to a rebalancing of production closer to the markets where products are consumed. This shift is expected to decrease the volume of international trade relative to global GDP.
Local supply chains are becoming more advantageous due to increased productivity in production facilities, which reduces the competitive edge of producing in low-cost countries compared to more expensive countries like the USA or Germany. Mature industries are competing on product diversification and a greater range of options, which in turn complicates supply chain management. Having local supply chains with shorter lead times and less risk due to reduced forecasting requirements helps companies execute more diversified plans that are closer to consumer demand.
However, there are challenges introduced by local supply chains. When production is farther away, decisions are made less frequently and can be managed with less sophisticated software support. With local suppliers and more frequent decision-making, companies require more advanced software to automate the decision process.
Environmental considerations also play a role in the shift towards local supply chains. Although cargo shipment by sea is highly efficient in terms of energy consumption, the lengthy transportation times create opportunities for mistakes and waste. Overstock and understock situations may contribute to waste more than the energy used in transportation. Air transportation, however, consumes much more energy and fuel than cargo ships.
Despite a decrease in international trade, many companies continue to globalize and operate in multiple countries. Vermorel observes that numerous clients are considering projects to unify their enterprise resource planning (ERP) systems across their global operations. In contrast, he does not see clients planning to split their ERPs into separate systems for each country. This indicates that even as trade slows down, companies are investing in efforts to create uniformity across their operations in different countries.
The conversation centers around the concept of “slowbalization,” which refers to the shift from globalized supply chains to more localized or regional ones.
Vermorel explains that slowbalization is occurring partly due to the increasing interdependence of countries, even as some governments implement tariffs and protectionist measures. He notes that while physical goods may move less between countries, the organizational and technological dependencies are still growing. This is exemplified by the fact that despite tariffs between China and the US, both countries rely heavily on each other’s technology and software.
The interview delves into the fact that even large companies that operate on a global scale are becoming more reliant on regional supply chains. Vermorel argues that despite the scale of these “local” chains, they still encompass massive markets of roughly half a billion people.
Discussing the role of technology in this interdependence, Vermorel highlights how open-source projects and cloud-based ERPs (Enterprise Resource Planning) systems like NetSuite facilitate real-time interactions between companies across the world. Both Lokad and NetSuite are examples of companies that invest in strengthening their dependencies through better APIs (Application Programming Interfaces) and connectors.
Regarding the future of slowbalization, Vermorel believes that this trend will continue, in part due to the rising standard of living in Asia. As countries like China become wealthier, their competitive advantage of low-cost labor diminishes, contributing to the shift towards more localized supply chains. Vermorel suggests that this trend may last for a few decades, similar to the three-decade-long period of increasing globalization that preceded it.
Vermorel argues that slowbalization is a lasting trend driven by stable forces, such as rising standards of living in Asia and increasing technological dependencies between countries. He does not anticipate a reversal of this trend and believes that protectionist measures, like tariffs, will only have a small impact on the overall trajectory of slowbalization.
Full Transcript
Kieran Chandler: Today on Lokad TV, we’re going to learn a little bit more about this concept and understand what it can actually mean for some of the supply chains in the world. So, Joannes, slowbalization sounds like a fairly interesting concept. What’s the basic idea behind this?
Joannes Vermorel: It was a term coined by an author writing for The Economist, describing a relatively recent trend of a slowdown in the amount of international exchanges. Despite recent events, like Trump battling with tariffs with China, it’s not that recent. I found a report from the IMF two years ago that pointed out that the turning point was in 2012. For the three decades prior, global trade had been growing twice as fast as global GDP. So, when a country was getting 10% richer, it would actually exchange 20% more with its neighbors. This process had been going on at an accelerated rate for the last three decades, but it reached a turning point where trade growth was just as fast as global GDP growth, but not faster. So there were more exchanges, but just because the countries were richer, not because they were having more intensity in trade. Now, it’s going slower than growth, hence the term slowbalization.
Kieran Chandler: You mentioned Trump and tariffs. What are the external effects that have led to this sort of slowdown, would you say?
Joannes Vermorel: It’s a combination of factors, although I’m not an absolute expert on this. One is that the cost of manufacturing goods has been going down and keeps going down, which means that in terms of trade, you’re always paying the same price for services like a haircut or a doctor’s visit, but the products you buy at the supermarket are getting cheaper. As a result, the proportion of spending on imported goods decreases, not because you’re buying less, but because those goods are cheaper. Additionally, there has been an ongoing decrease in transportation costs, although this is now relatively stable. The cost of containers for cargo shipments is very low and staying low. Furthermore, the increase in automation and productivity gains are kind of averaging out the countries in terms of opportunities to produce. If you have a factory that requires no labor, it doesn’t matter whether you’re producing in Bangladesh or in the US. It’s the cost to buy and set up the factory, which is a global price, and if the operating cost is the same no matter where you put your factory, then all that matters is being close to where things get consumed.
Kieran Chandler: It’s interesting because for a couple of decades, some industries were ahead of others. For example, the automotive industry has been following a strategy of having factories producing locally for the local markets for decades. Is this reduction in production costs and transport costs a trend that’s really going to continue, or at some point are we going to reach as far as we could go with the reduction in these costs in terms of automation? I think we still have, I mean, the productivity in terms of form has increased tremendously on the production side. So, there are some industries that still involve having a fair amount of manual labor, like fashion, for example, textiles. Even that is getting more and more automated.
Joannes Vermorel: For example, one of the big things that gets imported from Asia is textiles. Probably, thanks to the progress of automation on one side and the increase of tariffs on the other side, there will be a rebalance in the decade to come of having production closer to the markets where the products are consumed. This will decrease the volume of international trade, at least relatively to the global GDP that might keep increasing in the meantime.
Kieran Chandler: What’s kind of changing then? Why are these local supply chains suddenly being so much more advantageous? Why is it becoming something that’s so much easier to work with?
Joannes Vermorel: It’s a matter of having better productivity in the production facilities. That means the competitive edge that you have in producing in the lowest-cost country is diminished, relatively to producing in a more expensive country like the USA or Germany. From what I witness, there are many industries that are now fairly mature, where things are not actually evolving as dramatically as they used to in the past. This means that you have to compete on having more diversified options, which in turn creates supply chain complications. For example, when Apple decides to have 20 colors for the iPhone instead of two, that means they need to keep 20 more references in stock, and they need to rebalance the stock across the network and everything. Obviously, whenever you add more options and extend your range of products, it creates a lot more complications to execute that plan. If you have a supply chain that is more local, with shorter lead times and less risk because you don’t need to forecast that far ahead in the future, that really helps to execute this sort of plan for a more diversified offering that’s closer to the demand.
Kieran Chandler: Obviously, having a local supply chain has its benefits. Are there any challenges that it also introduces?
Joannes Vermorel: Absolutely. If you were producing very far away, many decisions were made less frequently. If you pass two large bulk orders to your Chinese providers every year, for example, and every time you reorder, you pass one large purchase order, then in terms of quantitative supply chain optimization, you don’t have that many decisions to optimize. That means you don’t actually need sophisticated software support for those decisions because you’re taking those decisions relatively infrequently, and you can actually invest a lot of human time on those decisions. If you switch from passing two purchase orders a year to your Chinese supplier to making one purchase decision a week to a local supplier, then suddenly you are spending an order of magnitude more time. If you want to put the same amount of brain time, you’re spending ten times as much human time on the case to do the same thing. So that gives you a strong incentive to get support from sophisticated software so that you can bring a high degree of automation to the decision process itself, not just the prediction.
Kieran Chandler: That makes sense. How about environmental considerations? Is that potentially having an impact, making it a little less sensible to ship goods from one side of the world to another now?
Joannes Vermorel: Obviously, yes. The more transportation involved, the more waste you generate through transportation.
Kieran Chandler: How efficient is cargo shipment through the sea?
Joannes Vermorel: It’s a bit mind-blowing, but if you want to think of the engine power on a cargo ship, it would be the equivalent of having the electrical engine for an electric bike, but for a truck instead. That’s the ratio for a cargo ship. By the way, that explains why it literally takes days to reach cruise speed and why it takes like 150 kilometers to bring your ship to a halt. You have very little power. They have very big engines, but compared to the size of the cargo ship itself, it’s very small. In terms of energy consumption, they are incredibly efficient.
However, I believe that the bulk of the inefficiency is not in the fact that you have to spend power to transport the goods. It’s just that you need like ten weeks of transportation time, which means there’s plenty of room to make mistakes. You might be producing something that ultimately the market doesn’t need just because you’ve added ten extra weeks of lead times. If, when the cargo ship arrives at port, you end up having to discard half of what you’ve produced because it’s not fitting what the market needs anymore, then you end up with a massive amount of waste. I believe it’s hard to compute, but I suspect that the wastes are more on the overstock and understock path than on the pure energy part for transportation, at least as far as cargo shipments are concerned.
When it comes to transporting goods through aircraft, obviously it’s a completely different matter because aircraft consume a lot more energy and fuel than cargo ships, especially if you count in terms of kilograms or cubic meters of goods that you want to move around.
Kieran Chandler: Globalization has really changed the way that a lot of companies operate, spreading new technology around the globe and companies are now operating across hundreds of countries. How do you see globalization changing the way those companies act?
Joannes Vermorel: That’s a very interesting question. From what I see, even if the amount of trade in dollars is going down for the reasons we mentioned, I can still see that many companies are more globalized than others. Among our clients, we have probably something like a dozen companies that are considering a project, one way or another, of having one ERP system for all of them. So, there are still a lot of companies aiming for that. In contrast, I do not see any of our clients that would have the opposite plan, which says, “Oh, we have one ERP, we want to split that into one ERP per country.”
So, it’s interesting. Even if the amount of trade is slowing down between countries, the companies that operate across many countries are still investing a lot of effort to bring some kind of uniformity across all their operations at a global scale, and thus have one applicative landscape to rule them all. We’re still talking about having supply chains that are local to continents like North America, Europe, and Asia, and maybe India. We are still talking about having blocks of half a billion people, so it’s local just in the sense that you’re only talking about half a billion people markets instead of thinking about five or even seven billion people markets.
Kieran Chandler: So what you’re saying is, these kind of companies are very dependent on different countries and it’s very difficult for them to work on their own.
Joannes Vermorel: Exactly. Even in terms of interdependence, the interesting thing is that I believe the world is still heading for more.
Kieran Chandler: And more dependencies between countries. Even if China and the US are putting a lot of tariffs in between, it’s very interesting because, for example, most of the software that is being used in China to operate everything is still based on US production. So you see, even when they have problems, in China, I would say it’s a rough estimate, but something like probably 80-90% of the servers now run on Linux, which is, I would say, completely driven by North American companies much more than being driven by Chinese companies. And if you look at American companies, they are extensively leveraging computing hardware that was manufactured in Asia. So even if there are tariffs in between, I do not see that changing anytime soon, and I believe that it’s still accelerating.
Joannes Vermorel: It’s really interesting, this concept of dependency on so many different countries. From a Lokad perspective, we are incredibly dependent on staff that are located far from our headquarters in Paris. We depend on open source projects that are developed by people all over the world. Gradually, we are becoming even more tightly coupled in many subtle ways. For example, for all our clients who are now using cloud ERPs, like NetSuite, it’s not just being dependent on getting a copy of open source software that we put into Lokad. If we have an integration with a web ERP, it means that we have real-time dependency with vendors that are far from us. Both Lokad and, for example, NetSuite invest in this coupling. NetSuite invests in making their API better, faster, and more open to a wide array of partners. Lokad keeps investing in having better connectors to leverage those APIs when they are available. In a way, we are tightening the dependencies and making them stronger over time through these investments.
Kieran Chandler: If we start bringing things together now, in terms of slowbalization, is this a trend that you can see continuing, or would you say this is just a little blip, and we’re going to go back to a globalization approach, which has done us so well over the last few decades?
Joannes Vermorel: I believe that it’s going to be a lasting trend, also because, fortunately, the standard of living in Asia is rising rapidly. China was incredibly competitive while labor was super cheap. As China becomes richer, this advantage is thinning, which means that there won’t be such a competitive edge in outsourcing things to China, for example. The fact that China has been getting richer, although there might be a big bubble in the housing market that might burst, and they might have a recession for a while, I don’t think that’s going to change in the short term. The forces that are driving slowbalization will still be there, and just as we had three decades straight of intense globalization, I would not be surprised if slowbalization lasts for a couple of decades after that. I don’t think anybody knows for sure, but the driving forces are stable, and there’s no reason to expect any kind of reversing trend. I also don’t believe that tariffs, as orchestrated by certain governments, will do more than just a small acceleration of what is otherwise a lasting trend.
Kieran Chandler: Let’s wrap it up. Thanks for your time.
Joannes Vermorel: Thank you.
Kieran Chandler: That’s everything for today. Thanks very much for tuning in, and we’ll see you again on the next episode. Bye for now.
