A Lesson in Supply Chain Resilience from West Berlin

At the end of the Second World War, Germany was split in to four zones by the occupying powers: Russia, US, Britain and France, with Berlin similarly split in to four zones even though it sat well inside the Russian zone. Stalin’s government wanted a weakened Germany so that it would not pose a future threat and felt justified in demanding reparations for the devastation left by the invading Nazi army. The British and American governments on the other hand, had a different view, and were concerned that if Germany were stripped of its assets and not helped to recover, it would once again, as after the First World War, become a breeding ground for resentment and even a revival of Nazism.

The gap between the western powers and Russia steadily widened and in 1948, the French, British and Americans laid the groundwork to merge their three zones into a new Federal state of West Germany with a new currency, the Deutschmark. The Russians claimed this breached the agreements made at the Potsdam conference and on the 24th. June 1948 the Soviet occupying powers closed all rail. road and water traffic into Berlin from the Western Sectors. Berlin had little in the way of food, medicines, and fuel stocks and even electricity, supplied from a power station in the Soviet zone, was cut off.

The only option was to break the blockade by bringing supplies in through the air corridors which, unlike land routes, were protected by an international agreement. This was the start of the Berlin Airlift which lasted for almost 11 months. There were major difficulties initially but eventually over 2 million tons of supplies were flown into West Berlin, scoring a major propaganda victory. Stalin failed to stop the creation of a West German state and in response created an East German State – a communist dictatorship.

Working in Berlin in 1979, I became aware that this was still an occupied city, when I saw a Russian Volga saloon driving around West Berlin carrying four Russian officers. The four powers still had rights of entry into each other’s sector. Although West Berlin had all the trappings of a prosperous European city it was in effect an island trapped inside East Germany. The lessons of the 1948 to 1949 blockade had been learned and West Berlin held strategic stocks of critical items and manufactured some locally, so that it could survive any sudden deterioration in East-West relations.

If we look at the UK today there are some interesting parallels with the West Berlin of 1948/49. We see a set of islands somewhat cut-off from its European neighbours with supply lines passing near and through actual and potential conflict zones, supply lines we saw grossly affected by the Covid19 pandemic.

Manufacturers suffered significant adverse effects from the disruption of international trade caused by the pandemic, with the flow of raw materials, parts and sub-assemblies seriously impeded, and the ability to sell finished products greatly curtailed.

Consequently, according to a survey by MakeUK, 46% of manufacturers believe they will “significantly or moderately increase supplies in the UK” in the next two years. Another survey indicates that nearly 30% of UK manufacturers expect to decrease supplies from the Asia Pacific region, while 19% plan to do so for EU imports.

 A lot of companies have been talking about making supply chains shorter, which means that irrespective of the cost, supply chains are closer to home, leaner and easier to manage.

The Government’s view appears to be that onshoring may not be easy to achieve; it may have unintended consequences in respect of factors such as the price of goods and tit-for-tat actions by other countries; and it may replace one form of vulnerability with another. In addition, it may have implications regarding the terms of international agreements.

Looking beyond the pandemic to the geopolitical environment, there are political vulnerabilities to supply lines, both real and potential. One can see conflict is again on the rise in Afghanistan and there are fears that international terrorism may increase now western troops have moved out. Tensions in the Middle East continue to cause concern with an attack on an oil tanker by the Iranians and their increasing nuclear potential, giving them the ability to destroy Israel. The Syrian refugee crisis with its large camps could well be a springboard to further radicalisation and terrorism. The Arab Israeli situation continues with no end in sight and there is on-going instability in Jordan and Lebanon. The vulnerability of the Suez Canal and UK trade to these conflicts cannot be ignored along with blockages to the canal either accidental or intended.

Closer to home the Russian invasion of the Ukraine and its annexation of Crimea, its increased military spend and activity along the borders with the EU is increasing tensions with Moscow. Natural gas supplies to Western Europe will no longer be dependent on a pipeline through the Ukraine, giving freedom to Russia to further squeeze Ukraine by reducing supplies to and through the country, even though Russia has said it will not do this. The high dependence of Germany on Russian gas supplies gives Russia considerable political clout. All-out war seems unlikely, but this looks set to rumble on and further accidents such as the shooting down of civilian aircraft can easily escalate the situation.

Greater stock holding of natural gas and liquefied natural gas from other sources seems increasingly important in the short to medium term alongside the move to greener sources of energy, in order to mitigate the effect of actions by Russia

China is continuing military activity in the South China Sea with occupation of the Spratly Islands, building airstrips and strengthening its navy with additional aircraft carriers. There is still a long-term plan to absorb Taiwan into China, but the one country two systems approach is unlikely to work after the way this model played out in Hong Kong. Whether this develops into an armed conflict, or an economic conflict is not clear, but China is clearly set on being the number one world power. The pandemic has already shown the vulnerability of supply chains from the Asia Pacific region which may become subject to a conflict between China and Taiwan.

Whilst the UK government is recommending caution on the level of onshoring, the West Berlin model of holding strategic stocks of finished product, part finished components and raw materials seems the most resilient and risk-free way forward in an unstable world. Individual companies need to act, but the UK Government also needs to act in setting and supporting stock levels for strategic items. It appears to be doing this with its rather secretive Project Defend UK, but its focus seems to be security and the military.