A world still reeling from the ongoing Russia–Ukraine war and a U.S.–China trade war is now grappling with uncertainty in the Middle East. How will a prolonged Israeli-Hamas war impact global supply chains and manufacturing?

The Middle East supplies much of the world’s energy. It transports it through several strategically important shipping passageways such as the Suez Canal, the Red Sea, the Persian Gulf, and the Strait of Hormuz. If the conflict remains localized and doesn’t expand to other countries, there may be minimal impact on oil prices, gross domestic product (GDP), and inflation. However, if the conflict escalates into a regional affair, the most obvious effects center around a long-term threat to global trade that might send a fragile economy into recession. Oil prices could jump as much as 75%. At the center of it all is the global supply chain, with huge risk factors centered around vendor concentration in one region of the world. 

Global industries feeling the impact of supplier concentration

When we consider “supply chain concentration risk,” we are looking at the risks incurred when relying on a limited number of suppliers or geographies for specific parts and/or services. If ignored, organizations can experience unplanned service outages, production disruption, reputational damage, costly transition to new suppliers, and ultimately higher costs.

For example, in 2022 a primary Toyota supplier faced a cyberattack that forced Toyota to shut down 14 factories for at least a week until the supplier got back online and could start shipping parts again. While larger suppliers may have robust cybersecurity in place, smaller suppliers may not.

You don’t need to look very long to find examples of increased supply chain concentration risk as a result of the Hamas–Israel conflict.

Although Israel is a small country, it plays a significant role in the global semiconductor chip industry. It has a reputation as a hot spot of innovation possessing many talented technology entrepreneurs that major tech firms are frequently courting. Now many of these tech entrepreneurs have been called into military service, abandoning their roles as tech leaders and taking up arms. That’s why the Hamas–Israel conflict threatens to disrupt the semiconductor industry and could lead to global chip delays.

For example, Intel, NVIDIA, and Apple all run production facilities in the country. Intel operates five major facilities in Israel, working on artificial intelligence (AI) and self-driving cars. Intel’s Haifa facility provides input into the company’s processors, which run the lion’s share of PCs and servers. Tower Semiconductor has a few factories in Israel mainly focused on the automotive industry, and Intel has plans to build a new factory in 2027 in Gaza. Even if facilities within Israel remain secure, they may not have the workforce to operate. Many major tech companies report losing many workers to the draft.

Intel has been working to reduce the fragility that comes with concentrating manufacturing in a single region. Its goal is to create 50% of the world’s semiconductor manufacturing in the U.S. and the EU by 2030. However, for now, Israel’s semiconductor industry may become a bottleneck if organizations have concentrated suppliers within the country. And supply concentration isn’t just a concern within the chip industry.

Already, India is experiencing pressure on its diamond supply chains because it gets its raw materials from Israel and sells the processed diamonds back to Israel. This has global implications as the natural diamond cutting and polishing industries in India have a 90% global market share. Because Israel acts as a hub for diamonds, it concentrates diamond imports and exports. With the conflict, this concentration went from convenience to bottleneck. India is now having to explore importing directly from diamond sources in places such as Africa. It may eventually find more competitive prices and higher profit margins. However, it took a conflict to start moving the industry toward diversifying suppliers and end markets.

Israel is also a major importer and exporter of integrated circuits and the products that use them. This means that products such as telecom network equipment, aerospace equipment, medical instruments, and other measuring instruments might experience significant disruptions. According to Hellenic Shipping News, Israel accounts for 14% of the EU’s imported processors.

Avoiding concentration risk with an adaptive supply chain

If there’s one thing the world has learned since the pandemic, it’s that ongoing supply shocks have become the norm rather than the exception. International labor movements, natural disasters, growing geopolitical unrest, a U.S.–China trade war, and a global economic slowdown create complexity and uncertainty in the supply chain. That’s why, increasingly, risks from supply concentrations are growing and causing disruptions. It’s no longer adequate to base supplier decisions solely on cost. Part of developing resilient supply chains amid disruption means looking at how adaptive your supply chain can become as the next supply shock arrives. Otherwise, any cost-savings will quickly evaporate as a concentrated supply base disappears, and procurement teams are left in “reaction mode” as they rush to find alternatives—sometimes no matter the cost.

It doesn’t have to play out that way. Procurement teams can offset concentration risks and avoid major disruptions. However, agility isn’t going to come from a better spreadsheet. Developing resilient supply chains means embracing digitalization. Digitalization taps into data and technology to improve visibility into everything from supplier health and part cost-savings opportunities to emerging risks and even supplier communications. AI and predictive analytics create incredible new efficiencies. In fact, it is difficult to imagine how procurement teams can succeed through so much uncertainty without the insights made possible by AI.

Because AI processes massive amounts of disparate data, teams gain insights they couldn’t dream of getting from a spreadsheet. Automated alerts help teams anticipate supply concentration risks and quickly find alternatives before a disruption occurs. Through systemic change and integration of digital platforms, any organization can better identify untapped cost savings, so even when cost isn’t the key driver, teams can balance risk and cost with a few clicks.

The supply chain has never faced so much ongoing disruption. The Hamas–Israel conflict is just the latest event highlighting the supply concentration risk many industries find themselves facing.