A new and more complex threat: How the Coronavirus is impacting global supply chain

Effect of Coronavirus on supply chain map
Source: Bloomberg

Tensions mount: The U.S.-China Trade War

US-China Trade War figures
Source: BBC

Since 2018, the U.S. and China have engaged in a trade war, imposing billions of dollars in tariffs on one another. Some U.S.-based companies with manufacturing operations in China have tried to stem the impact of these tariffs by shifting production. Blount, for example, has additional production sites in Brazil, which has allowed it to offset some of the negative effects of the trade war. But factories represent just one of the challenges in the supply chain. Corporations have also had to consider whether they have the labor, equipment and raw materials to relocate production in a financially viable way. So who’s actually winning the trade war, and when will it end? It’s hard to say.

Coronavirus: A new and more complex threat

As the U.S.-China trade war continues to play out, the outbreak of the Coronavirus (COVID-19) has posed an even greater threat, because of its impact on human life. As of this writing, of the almost 90,000 confirmed Coronavirus cases, 80,000 have been in China. While China has recently encouraged employees to return to work, it’s unclear when they will do so. For companies with operations in China, this has presented several interconnected economic and social challenges. Companies that sell products, such as luxury goods, in Chinese cities face the reality of declining sales. As Daniel Wong, Director of PSU’s Global Supply Chain program explains, “If people are not coming out of their apartments, a store’s sales volume is going to go way down.”

Total number of Coronavirus cases
Total number of Coronavirus cases, as of this writing.
Source: The Telegraph

From a manufacturing perspective, the repercussions are more complex and severe. China has a large migrant worker population, which means that there are millions of people who live in rural areas, but work in cities. For those workers with families, the choice to return to cities is especially daunting: If they stay away from cities, they may protect the physical health of their families, but endanger their economic livelihood, which would then impact their physical welfare. Sometimes employees don’t get to make the choice. In the Hubei province — the region with the most confirmed Coronavirus cases — the Chinese government issued a mandatory quarantine, which has prevented some employees who visited family there during the Lunar New Year from returning to work in their home provinces.

The absence of these employees has inevitably created a multidimensional crisis for companies and their supply chains. Apple, for example, relies on Chinese factories to make its products for global consumption. But the company also sells its products in China. It’s no surprise that Apple recently issued a Q1 earnings warning to investors. There is also a secondary effect. The iPhone’s chipmakers, for instance, have seen their stock prices drop in the wake of Apple’s declining sales. Even companies that don’t source finished products from China will be impacted because of China’s prominence in raw material exports.

It remains unclear just how much China’s economy will suffer as a result of the Coronavirus. One survey estimates that 40% of the country’s small to medium private firms will be out of cash in three months. Global markets are also increasingly concerned. Some analysts expect a loss of $1.1 trillion in global income this year. Because no one knows when the number of virus cases will begin to ebb, it’s impossible to predict the human and economic toll of the crisis.

What’s next?

As the world becomes more interconnected, it’s likely that epidemics like the Coronavirus will continue to impact companies. With that in mind, Wong recommends steps that corporations can take in their supply chains to help manage risk. From an operations standpoint, it’s important that companies diversify their production sites geographically, so that they are better able to withstand the disruptions that an epidemic might cause in a particular country or region. In addition to China, Wong cites Vietnam and Mexico as two enticing production centers. Vietnam shares a border with China, has a young population and low labor costs, and attracts a lot of foreign and domestic investment. Mexico offers a geographic advantage for U.S. companies in particular. “I think Mexico will be very attractive to U.S. manufacturers who want to produce products overseas, and sell them in the U.S. market.”

To support their employees, companies should promote health and wellness education and resources, especially for employees who work in close quarters. Doing so demonstrates corporate social responsibility, and makes financial sense.

While firms may not be able to fully prepare for the next epidemic, they can still be proactive about how they manage risk at each stage of their supply chains, while still supporting the needs of their stakeholders.

Daniel Wong is the director of PSU’s Global Supply Chain program. He has over 20 years of progressive leadership expertise in transportation, supply chain management, business system and strategy consulting. His background also includes studying the impacts of globalization, information technology development and business management frameworks.

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