SUPPLY CHAINS NEED ANTI-VIRUS STRATEGY
In a time of global economic headwinds, the spread of Covid-19 is further exacerbating business conditions through labour shortages and logistical bottlenecks.
The Chinese government’s measures to quarantine workers, suspend flights and close ports to prevent the spread of the deadly virus have further disrupted global supply chains for a range of industries including the automotive, pharmaceutical and technology sectors.
China is the manufacturing hub of the world with US$2.7 trillion worth of exports. The city of Wuhan, where the virus originated, is a major logistics centre through which goods move. The suspension shipments and people being told to stay away from work are affecting not only Chinese businesses but also companies worldwide that are dependent on China for components and finished products.
Apple could produce 5-10% fewer iPhones this quarter because Foxconn, its key manufacturer, has been closing factories around China as a result of the epidemic. In Europe, Fiat Chrysler plans to halt manufacturing at its Serbian factory due to lack of parts shipped from China.
Consumer goods are also feeling the pinch, with the toymaker Hasbro and the athletic wear company Under Armour saying their operations could be hindered by the disruption to supply chains. Exporters who rely on China as a consumer market are also being affected.
Productivity and profits for multinational companies will decline if this situation continues. Even if businesses recover from the effects of Covid-19, the chances of future epidemics causing cross-border problems will only increase as global trade becomes more interconnected.
A health crisis like this is a wake-up call for companies to rethink their reliance on China, or any single market, and to build contingency plans and stronger risk management into their supply chains.
Diversifying supply chains across other manufacturing regions, such as Southeast and South Asia, as well as Latin America, is one important way of doing this. Many Chinese companies are also taking such steps.
Reconfiguring supply chains can be painful in the short term, but geographic diversification will yield long-term benefits.
Diversification would also enable firms to manage risks such as the ongoing US-China trade war, as geopolitical shifts are disrupting the global flow of goods and services.
Whether companies can build these supply chain contingencies will depend on their sector. For the electronics and automotive industries with which China is so closely integrated, the task will be arduous. According to UBS, China produces more than 80% of the world’s smartphones and notebooks, and 55% of all mobile handsets and computers, while accounting for 27% of global auto production.
As well, the cost and time needed to set up advanced manufacturing facilities can limit the opportunity of such companies to mitigate shorter-term challenges.
On the other hand, analysts are saying that consumer goods companies can relatively quickly build alternative plants elsewhere in Southeast and South Asia where production facilities already exist.
As uncertainty remains over how long the viral outbreak will last and how much it will cost in both human and financial terms, companies should start focusing today on what they can do to mitigate risks to both their products and people.
Suwatchai Songwanich is an executive vice-president with Bangkok Bank. For more columns in this series please visit www.bangkokbank.com