COVID-19 and the global value chain - what happened in the garment industry?

The COVID-19 pandemic represents one of the most disruptive economic events since WWII, potentially triggering a long-lasting transformation of GVCs (global value chains). While some argue that GVCs will emerge from the crisis relatively unchanged, others foresee future GVCs as more diversified and transformed primarily through greater investment in technology and environmental and social sustainability. Certainly, as an unparalleled event in terms of magnitude and impact on virtually all facets of human and economic life, the pandemic is an extreme environmental shock critically testing GVCs and their actors (i.e., firms and institutions).

GVCs, defined as “the full range of activities that firms and workers perform to bring a product from its conception to end-use and beyond on a global scale”, enable multinational enterprises (MNEs) to leverage a global network to achieve lower cost, superior scale, and spatial flexibility. GVCs have been associated with the growth of the global economy over the past several decades and offshoring production networks in emerging economies.

A large-scale disruption such as the COVID-19 crisis leads to a long-term restructuring in a relatively short period of time (i.e., a single year). This is because it impacts multiple dimensions of the GVC context—specifically, the temporal, structural, and spatial elements of the GVC configuration of actors and processes. Whether or not the disruption-related dynamics lead to a permanent restructuring is a function of the relative strength of the counterforces that support GVC integration vs. disintegration as well as of the alignment between the new balance of power among GVC members and their capabilities.

GVC restructuring depends on the balance of countervailing forces that either aid or suppress the disruption-related dynamics. While the paradox perspective has been applied to GVCs in the context of tensions between efficiency and resilience. Paradoxical forces also characterize GVC dynamics under the condition of extreme environmental shock such as the COVID-19 disruption. The relative strength of such forces depends on the broader institutional environment—particularly the actions of institutional actors both at the local and global levels. The Bangladeshi government’s actions, along with the support of industry associations, have contributed to the solidification and acceleration of the long-term restructuring of the GVC, given their push for greater localization of raw material suppliers and incentives aimed to promote export market diversification. Clearly, the impact of institutions and policy cannot be underestimated when seeking to predict the impact of COVID-19 on GVCs.

Likewise, in seeking to predict the evolutionary consequences of large disruptions for GVCs, an inter-firm trust and digitalization are elements that can have a decelerating effect on permanent restructuring. Trust-building strategies on the part of the lower-tier suppliers and the sense of “we are all in this together” can act as an incentive to keep the GVC arrangements intact even in the face of global disruptions such as the COVID-19 pandemic. Likewise, digitalization can play a role as a force supporting the reconfiguration of and changes in the governance of GVC, as it causes a greater inter-firm integration of systems. This is consistent with conceptual research linking digitalization with GVCs’ transformation in both pre-and post-pandemic eras.

The permanency and magnitude of restructuring rest on the alignment of the changes in the power of the GVC members with their capabilities. Specifically, a crisis like the COVID-19 pandemic can disrupt the relative power positions of GVC actors and diminish (or increase) their control over certain processes, operations, and each other. However, whether or not this becomes permanent or reverses once the crisis is over depends on the development of new capabilities. In the context of the garment GVC, this is related to the upgrading of capabilities of Bangladeshi suppliers, allowing them to economically develop high-quality raw materials locally. Such upgrading enabled Bangladeshi manufacturers to substitute many Chinese suppliers with local suppliers. Likewise, Bangladeshi manufacturers were able to retain their power gained by developing capabilities related to innovating new products and capturing market opportunities. The move away from China as the primary source of raw materials was also aligned with China’s increasing focus on the manufacturing of high-value-added products and advanced technologies.

Global crisis such as the COVID-19 pandemic provides supplier firms in emerging economies with the opportunity to reshape the power asymmetry with buyers in advanced economies. In addition, Bangladeshi garment manufacturers aspire to be more than contract manufacturers and desire to develop entrepreneurial capabilities to pursue new opportunities in foreign markets. COVID-19 crisis provides them additional power to become more independent and influential players in the global garment industry, particularly if they adopt entrepreneurial, opportunity-seeking strategies.

GVC decoupling is a possible result of the increasingly bifurcated economic order, with the growing competition for technological dominance and increasing tensions between China and the West. COVID-19 disruption induced Bangladeshi firms to shift away from Chinese raw material suppliers primarily toward local suppliers, and this shift was strengthened as a result of the growing reluctance of European and US companies to work with Chinese suppliers as well as China’s strategic shift away from being a supplier of raw materials to becoming a developer of high technology and innovative products. The apparent decoupling from China is thus consistent with the ongoing global geopolitical shifts underlying the US-China trade war and the rise in protectionism but partially also with the prediction that GVCs will become more regional as a result of the COVID-19 pandemic.

While Bangladeshi firms may have gained more control over their upstream operations, overall, the relationships with their buyers and suppliers became more transactional (with price being the most important factor in securing orders). The digitization of the industry and the push by the Bangladeshi government for greater autonomy of local firms, and the development of local capabilities in raw materials, seem to be contributing to this trend. Specifically, the adoption of digital platforms that connect multiple potential buyers with multiple suppliers enables transactions with substantial investments in buyer-supplier relationships.

Source: COVID-19 and the global value chain: Immediate dynamics and long-term restructuring in the garment industry