GLOBAL SUPPLY CHAIN DISRUPTION
The Coronavirus outbreak initially started as a healthcare crisis in January 2020 but has quickly created a global supply chain disruption which forced manufacturers and suppliers all over the world to halt their operations due to the lack of parts and their just in time inventory and delivery systems. However, it has meanwhile also become a demand crisis for most industry sectors and many business experts and economists already agree that this combination will likely wipe out entire industries, no matter if it will take us several months or just a few more weeks to get control over the healthcare issue since even with a reopening of our businesses and stores in a few weeks it will only be possible to do so with a reduced capacity due to continued supply shortages and lesser demand for our products and services.
The service sector which is currently the worst-affected economic sector will sooner or later also have a further impact on most of the manufacturing sectors. For example, with the complete stand still of the tourism and travel industry, which is one of the largest industries in most countries and comprises more than 10% of global GDP it is still unclear how many of the businesses will still be out there in the coming months. Altogether it affects millions of companies and small business owners globally who are experiencing a major financial blow with millions upon millions of jobs that will be lost in the near future as it is unlikely for the tourism and travel industry to bounce back to what is was when the lockdowns and curfews are lifted and borders finally open so that people are able to travel to a foreign country.
These unexpected high unemployment rates in most countries will consequently cause a significantly diminished demand for countless products and services worldwide. Most major international airlines have already cancelled their orders for new airplanes over the past weeks and they don’t expect that they will have a need for new ones in the foreseeable future. Those companies in the aerospace manufacturing industry, including the ones down their supply chains won’t be able to keep their full workforce employed in the long run either, even with the concessions of governments to bail them out as it must be clear at this point that such significant cash injections cannot go on forever and throughout all industries.
And it won’t be much different in other industry sectors, such as the auto industry or the real estate market since with all the millions of jobless people around the world many will be discouraged or simply not able to afford a new car or buy a new home. There will be no spending power which will further worsen the economic situation and affect other industry sectors, including the finance and banking industry with additional job losses that could ultimately bring about the collapse of global economies and markets.
Meanwhile, calls for deglobalization and national protectionism are getting louder each day, not just from members of the public but also on a political level. The Japanese Government has already announced on 8 April 2020 that it will prepare a USD 2.2 billion stimulus package for Japanese companies to help them shifting their production out of China and back into Japan or into Southeast Asian countries. Similar steps were also reported a few weeks earlier in March 2020 by Apple, Google and Microsoft who are planning to move some of their hardware production out of China and into Thailand and Vietnam, which are currently considered the top locations for offshore manufacturing.
However, the big problem with reshoring, which refers to the returning of manufacturing operations to the home country, is that it only allows those companies to benefit from it who intend to sell their products mainly on the domestic market, have superior products or who are able to automate most parts of their production so they don’t have a need for a large and expensive workforce anymore. Otherwise they won’t be able to compete on price since consumers and businesses will become more price sensitive in times of financial distress. Most companies will therefore have no other choice than to relocate into an alternative location to benefit from a cheaper labor force that will also allow them to tap into new sales markets.
In this connection, there is a big difference between moving final product assembly out of China and moving the downstream manufacturing of raw materials and components out of China as the majority of raw materials and components in the global supply chain are produced in China as well. This means that if a company intends to diversify its supply chain and reduce the reliance on Chinese manufacturers it would still need to understand and mitigate the risks and implications of a complex supply chain restructuring. However, without having now the possibility to travel to a foreign country due to grounded planes and closed borders around the world it won’t be easy for companies to find new suppliers and at the same time do the required due diligence and inspections for a proper qualification.
Another important point to consider is whether a company is merely interested in contract manufacturing or wants to establish its own manufacturing in a foreign country in order to have more control about manufacturing processes, product quality, lead times and costs. Each strategy has its benefits and challenges and to fully understand which strategy is the best will ultimately depend on the company’s industry sector, goals and expectations.
At this stage there is still a lot of uncertainty for businesses but trying to simply sit it out and hope for best is the worst thing a company can do right now and there has to be a fundamental rethink how to approach this crisis and make necessary adjustments to save what can be saved. Rapid action and adaptation does therefore not only increase the chances for companies to survive the coronavirus aftermath but also give them an edge over the competition with the opportunity to emerge as a winner in the new global market.