A Bruising War for Resources Looms

How different will the 21st century be compared with the 20th for manufacturing companies? Perhaps radically different for businesses heavily dependent on natural resources, according to research firm McKinsey & Co. , which speculates that soaring population growth and dwindling supplies of hard-to-extract minerals could combine to jack up pricing of critical natural resources in coming decades.

Isn't the current global economic volatility challenging enough for businesses? Debt and other fiscal crisis in Europe, declining consumer demand, and a stubbornly high unemployment rate in the United States have already clipped sales in several segments of the electronics industry, and at companies like Dell Inc. and Hewlett-Packard Co. (NYSE: HPQ) that are heavily exposed to maturing markets. In China, manufacturing sank to a "9-month low" in August as export demand stalled following the implementation of austerity measures in various parts of the globe.

Such news can be deceptive. Notwithstanding the sluggishness in several parts of the economy and in several regions, demand for high-tech equipment continues to surge worldwide. As many developing nations actively implement growth initiatives and hook their economies to the rest of the world, demand for basic consumer electronic items, for instance, is growing exponentially. Many of these countries are bypassing several technology nodes to go straight for the latest and most innovative products. China, for example, is now the world's largest market for mobile phones and could within years eclipse the United States to become its biggest buyer of smartphones. The country now has more than one billion wireless phone subscribers, according to a Reuters report.

The other BRIC nations aren't that far behind. India's economy is being overhauled, and infrastructure improved, to make it more competitive in manufacturing. The country wants to replicate in manufacturing what it has done in the high-tech consulting and services sector and would like to be a viable location for manufacturers seeking a hedge against any disruptions in China. Wait. Russia -- after an extended 18-years long discussion -- has finally been granted admission as a full member of the World Trade Organization, giving it access to many more markets and opening up the local economy to foreign products. With this backdrop, demand for technology products, services, and other hardware is bound to surge globally.

This should be a cause for celebration, after all. With higher demand for products should come greater economic prosperity for all; a bigger cake for everyone. The problem, though, is that the ingredients for manufacturing growth -- crude oil, for instance -- are being tapped out in the places where they are easily accessible, forcing raw material providers to push into more difficult locations at a higher cost with the potential for elevated pricing. Rising population growth is also putting additional pressure on raw material production and consumption, according to McKinsey in a report titled "Mobilizing for a Resource Revolution." It further said:

From 1980 to 2009, the global middle class grew by around 700 million people, to 1.8 billion, from roughly 1.1 billion. Over the next 20 years, it is likely to grow by an additional 3 billion, to nearly 5 billion people. The world has never before witnessed income growth of this speed and magnitude: China and India are doubling their real per capita incomes at about ten times the pace England achieved during the Industrial Revolution and at around 200 times the scale.

In all likelihood, the expansion of the global middle class will continue the acceleration in demand for resources—energy, food, materials, water—that has taken place since 2000.

Demand will soar at a time when finding new sources of supply and extracting it is seemingly becoming more and more challenging and expensive, despite technological improvements in the main resource sectors. Compounding the challenge are stronger links among resources, which increase the risk that shortages and price changes in one resource can rapidly spread to others.

OK, similar concerns have been raised before, concede the McKinsey researchers. In previous centuries, people in Europe thought land was at such a premium that it could be exhausted. That didn't happen. Will it be different this time? Will resource depletion occur, and will surging demand for scarce raw materials result in a demand-supply and pricing crisis sometime in the next several years or decade? If these happen, what will it mean for manufacturers and the environment itself?

I'll have more to say about this in a future article. For now, I'll like to conclude by quoting McKinsey again:

Market forces, and the innovation they spark, could ride to the rescue in the 21st century too. However, the size of today’s challenge should not be underestimated as we enter an era of unprecedented growth in emerging markets. Our recently completed research on the supply- and-demand outlook for energy, food, steel, and water suggests that without a step change in resource productivity and a technology-enhanced expansion of supply, the world could be entering an era of high and volatile resource prices. Nothing less than a resource revolution is needed.

Of course, as a consulting firm, McKinsey didn't just identify the problems. It also offered up certain solutions to businesses and governments. I will expand on this in a forthcoming blog. I will also look more closely at what this means for electronics manufacturers, and how companies are strategically moving to guarantee supply of critical components and raw materials. You may be surprised how deep into the supply chain many are willing to go to assure not just survival but success.

Their success may be coming -- as in the case of one prime example -- at the expense of the competition.