Akamaisation, friendshoring, nearshoring etc.

What's Akamaisation?

Akamaisation refers to the idea of companies going local in order to remain global. I had proposed this term as a parallel to the concept of deglobalisation. The concept of Akamaisation arises from the need for multinationals to adjust their international supply chains in response to changes in the globalisation landscape. Companies are leveraging Industry 4.0 advancements such as automated manufacturing, robotics, and IoT to create more agile and localized production processes in response to the developing geopolitical and economic competitions.

To provide a brief background, the good years of globalisation were marked by a concentration of production in labor-intensive countries, such as China and nearby countries like Taiwan, Korea, and ASEAN. This was due to factors like falling tariffs, technological advancements, and logistics optimisation. However, data suggests that this model peaked around 2012-13, a few years after the financial crisis. Both merchandise trade as a percentage of GDP and total merchandise trade measured in current US dollars has stagnated or declined after the recovery following the financial crisis.

The decline in trade is due to various reasons, including the unsavoury side effects of globalisation that were finally acknowledged by developed countries. The concept of hyper-globalisation, where capital and value chains cut across borders, has not proven to be a sustainable proposition in the long run, as the free trade of this type creates a losing side. The backlash by the increasingly frustrated population, along with the emergence of protectionist political leaders, is partially responsible for the shift away from the hyper-globalisation model. This trend is accelerating due to the geo-political realignments after Russia-Ukraine war and US-China tensions.

Image credit: Dall.E version2

In short, Akamaisation is a response to the changes in the changing globalisation landscape and is a solution for companies to remain global while adjusting their production processes to be more local and agile. By leveraging Industry 4.0 advancements and optimizing their supply chains, companies can remain competitive in a de-globalising world.

How's this different from Friendshoring?

Friendshoring refers to a business strategy in which a company outsources its production processes to a country that has close political, economic, or cultural ties with its home country. The goal of friendshoring is to take advantage of the favorable conditions offered by a friendly nation while maintaining a high level of trust, collaboration, and shared values. This strategy is often used to reduce costs, access new markets, and benefit from the expertise and resources of a partner nation. It can also help companies mitigate risks associated with offshoring to distant or unfamiliar locations. Friendshoring is often seen as a less disruptive alternative to offshoring or nearshoring, as it allows companies to maintain a close relationship with their suppliers and customers while expanding their global reach.

Akamaisation is different from friendshoring in the sense that production chains will splinter into countries based on the market size. This may include China for US firms like Tesla. China is not exactly a great friend of US (atleast now). So anything moving into China is not friendshoring, but it can be covered under Akamaisation. Friendhsoring would fail to explain why some firms would still keep their production bases in countries which may not be that "friendly" but Akamaisation does.

How's this different from Nearshoring?

Nearshoring refers to a business strategy where a company shifts its production or manufacturing operations closer to its customers or home market. This is usually done by relocating these operations from distant, overseas locations to countries that are in proximity to the home market, usually within the same or nearby region. The main goal of nearshoring is to reduce the costs and risks associated with long-distance supply chains, while still taking advantage of lower labor costs and other benefits offered by overseas markets. This allows companies to achieve greater control over their production processes, improve delivery times, and respond more quickly to changing customer demands. Additionally, nearshoring can also help companies to reduce their carbon footprint and contribute to the local economy by creating jobs and boosting economic growth in the host country.

This is typically true in US-Mexico context. I don't see such synergies in many other pairs. Nearshoring may not be strategic. e.g. US production chains may not leverage Cuba, though it is near but not a great friend. It may not leverage Canada though it is near and a friend but not exactly cheap. Akamaisation would acknowldge the importance of Mexico and Canada based on their labor cost and market size while accounting for the geopolitcs.

To conclude:

Akamaisation, as a term, better captures the concept of splintering production value chains compared to friendshoring or nearshoring. The term friendshoring implies a specific relationship between countries, while nearshoring suggests proximity as the main factor in the decision to move production.

Akamaisation, on the other hand, encompasses a broader range of considerations such as cost, quality, delivery time, and flexibility, which are all important factors in the decision-making process of companies looking to splinter their production value chains due to geo-political tensions or for other reasons.

Therefore, I believe a good term to use for splintering global value chains in today's context should be Akamaisation, which is more about keeping the production value chains near the markets by optimizing the size of production to cater to that particular group of markets.