Servicing the supply chain: Value-add despite ongoing barriers for business

Global services trade continues to chart a path of growth, largely due to increased digitally delivered services, which grew 8.1% on average per year in the period between 2005 and 2022, outpacing goods (5.6%).¹ In 2024, the outlook for global services trade, as with goods trade, is looking more positive than in recent years. With the lingering impacts of the covid-19 pandemic still being felt, the reconfiguration of supply-chain trends, such as diversification and nearshoring, have benefitted some markets through increased outsourcing of investment into a range of services sectors, including the financial and telecommunications sectors.²

Services play a critical role in enabling global value chains. Manufacturers are increasingly finding value-add by embedding services within their exported products and supply chains, allowing them to be more competitive in a global market. This means of delivering services uses manufactured goods as a central platform, complemented with services ranging from call centre and IT support to software and research and development services. It can also allow for greater participation of developing and emerging economies as businesses look to reduce costs by outsourcing these services. Indeed, the services value-add as a proportion of exports for non-OECD members was as high as 41% in 2018.³

However, there are challenges associated with achieving effective use of services within the manufacturing supply chain, creating barriers for businesses looking to innovate products or expand their market offering. Dmitry Grozoubinski, Founder and Director of Explain Trade, explains this trend as ‘situational’. Mr Grozoubinski emphasises, “This is about smarter design and working out where outsourcing doesn’t raise as many challenges, but is still beneficial due to cost saving and diversification across time zones.”

Finding transformation as a value-add for service success

With ever-growing pressure for companies to continue evolving within a competitive business environment, improving efficiencies through the adoption and implementation of new technologies and digital services will be key.

To do this, businesses must be willing to find new ways forward and embrace change. This was reflected in the survey responses of business leaders: the top priority when embedding services as a value-add was to increase research and development to achieve greater innovation of products (36.6%). Investment in extensive research and development is common within manufacturing, but done in the context of innovating to improve products and processes, particularly through the use of technology, is where businesses will find future growth opportunities. For instance, the survey results indicate that businesses are already using 3D printing to enhance product customisation (30.7%), started using it in 2023 (27.8%) or intend to begin using it in 2024 (24%). This demonstrates ongoing investment from companies, small and large, in research and development of manufacturing technology that will allow for the production of innovative and competitive products.⁴

Just as more innovative products create value-add for businesses, so does enhanced customisation. The use of predictive analytics and/or data collection to increase personalisation was also a top priority for survey respondents (31.3%), and for good reason. These insights provide scope for enhanced customer experience, increased productivity and improved quality of products.⁵ More broadly across manufacturing, predictive analytics can also be used to reduce costs, highlight inefficiencies, forecast growth and revenue and generate real-time production insights.⁶

Leveraging embedded services to improve not just internal processes and efficiencies within manufacturing, but also the end product, has potential to drive cost savings and improve product quality, whilst promoting competition in the global market. One example of this is Haier’s use of embedded services. This Chinese appliance company utilised data analytics and artificial intelligence to improve manufacturing efficiencies and increase defective component detection.⁷

Breaking down behind the border barriers for service-led opportunities

Although the value-add is clear, barriers still exist for effectively embedding services into the manufacturing supply chain and addressing these will be key to businesses achieving growth and improved efficiencies. Notably, the top four barriers selected by survey respondents relate to jurisdictional rules and regulations: too many or unclear sector-specific regulations (33.8%); rules related to commercial presence requirements (26.2%); rules related to immigration and/or lack of access to skilled labour (23.1%); and rules related to data localisation and privacy (23.1%).

These are not new challenges, however, and are common across regions and company size, though SMEs are often disproportionately impacted. The avenues for addressing these specific barriers are limited, generally requiring legislative and/or regulatory change at either the domestic or international level.

As the value-add of embedded and intermediate services are better realised by businesses and governments alike, there is, perhaps, positive change on the distant horizon. The WTO reports that of the 123 services trade measures introduced by members in 2023, most were designed to facilitate and liberalise services trade.⁸ This is important, albeit modest, progress. As markets look to build on services growth, including establishing more comprehensive digital infrastructure, businesses will naturally look to business environments with lower transaction costs and fewer regulatory barriers.⁹

Mr Grozoubinski builds on this point, highlighting that the success seen in the past, by manufacturing hubs such as China, was greatly aided by infrastructure and trade facilitation. For services components of the supply chain, this can also be true. He notes that “digital infrastructure is easier to build than ports”, which creates opportunities within the supply chain for services to become more accessible in a range of markets.

There are opportunities, now and into the future, for manufacturers and service providers who can recognise the changing shape of services trade and build a strategy around it for a more competitive market offering. Whilst implementing transformation and embedding services across manufacturing can present challenges for businesses, these can be eased through collaboration with both industry stakeholders and governments, which can provide joint solutions, incentives and greater access to capital.