The impact of coronavirus has been swift and devastating to those directly affected. However the indirect consequences of coronavirus to global systems and networks could add further pain. Specifically, what impact will coronavirus have on global supply chains?
What impact has it already had?
Analysts have warned that manufacturing activity in China could face significant disruption due to coronavirus. IndustryWeek states that Apple has 10,000 direct employees in China with almost all of the company’s flagship iPhone products made in the country. Business Insider reports that US car manufacturer Ford relies on nine auto manufacturer facilities in China.
Indeed, auto manufacturers could be hardest hit. The Financial Times reported in early February that EU and US carmakers were “weeks away” from a China parts shortage. Hyundai has already closed a plant in South Korea due to supply chain problems relating to coronavirus.
SARS was very different
Making comparisons to the SARS outbreak in 2002/2003 is difficult for a variety of reasons, not least because China is a very different country today than it was 17 years ago. But what is clear is that the impact of coronavirus will be more severe than SARS.
China’s share of global exports has more than doubled from just under 6% in 2003 to nearly 13% in 2018 according to OECD and World Bank data. As Chan Chun Sing, Singapore’s Minister for Trade and Industry told CNBC “Today, China is not just producing low-end, low-value products, they are also in the supply chains of many of the high-end products. And that means that the impact on the supply chains will be significant across the entire globe.”
SARS curtailed China’s economic growth by 0.5 – 1% in 2003, yet the country still experienced overall GDP growth of 9.1% for that year. Meanwhile for Q1 2020, economists are forecasting more significant reductions: JP Morgan slashed quarterly growth forecasts to 4.9% whilst Bloomberg Economics are forecasting just 4.5% growth. These compare to a previous World Bank forecast of 5.9% growth, much lower than the near double digit rates of the early 2000s.
Why does this matter? Because a slowdown in China will affect the global economy. The country accounted for just over 4% of global GDP in 2003. By 2018, it accounted for nearly 16%. The global supply chain is not just vulnerable to China’s position as the world’s largest producer of goods and parts, but also as the world’s second largest consumer. Weaker demand from China will further complicate the impact on global supply chains.
A faster response
China is eager to show it has learned lessons from SARS. The response this time has been much quicker and there are reasons to believe a more extreme containment strategy could work.
An article by ‘The Conversation’ explains how China’s reliance on public transport makes it easier to patrol entry points to major cities. The size and density of Chinese cities makes it difficult to leave an urban area without taking public transport. The rapid construction of two new hospitals in the city of Wuhan points to the extraordinary capability and determination of China to contain coronavirus.
Containment is important for disrupted supply chains as they can only return to normal once the virus stops spreading. China’s response therefore could result in a shorter period of supply chain interruption, albeit with a negative social and economic impact to consider in the short term.
Lessons for the future
Coronavirus is not the first public health emergency to impact global networks, but its severity highlights a need for greater supply chain diversification and visibility. Chan Chun Sing points to coronavirus as “a very good lesson for everyone to really look at the supply chain resilience.” Natural disasters similarly prove this point: the 2011 Tōhoku earthquake in Japan exposed the dependence of global motor vehicle companies on auto parts manufacturing in the country.
Diversification can succeed with the right strategy. Greater visibility into complex supply chain activity will equip organisations with the knowledge to reduce supplier exposure and risk. New technologies are emerging that allow conglomerates to manage partnerships with a wider range of suppliers, from global corporations to smaller start-ups. Data even suggests that supplier diversity can help reduce costs through fewer out-of-contract purchases.
A growing number of organisations are now incorporating diversity and visibility into their wider supplier collaboration and innovation programmes. But as the situation with coronavirus develops, the question is whether many more organisations will learn the lessons of the past and present.