Globalization fostered interdependence. With the outbreak of Coronavirus, interdependence is a problem.
Supply chains today cut across borders. What is typically seen as an advantage now faces an about-turn, no thanks to the outbreak of Coronavirus. Beyond the devastating health risks, the virus is disrupting businesses, companies, and economies as a whole.
Entire supply chains — automotive, electronic, industrial — are starting to creak. Shipping companies are reporting a sharp drop in container volumes. China also has a huge domestic market for retail and food and beverages. One indicator that really hit the skids last week, partly as a result of the virus, was the price of coffee. Starbucks alone has 4,000 outlets in China. Half of them were closed by the outbreak. Oil prices came under pressure too, amid anticipation of a slowdown in global demand, as did other raw materials. China is the world’s largest crude importer and also a big consumer of metals such as copper and iron ore.
Many global companies rely on suppliers based in China. For example, 290 of Apple’s 800 suppliers are based in China and the country is responsible for 9% of global TV production. According to DHL’s Resilience 360 index, 50% of all manufacturing in Wuhan is related to the automotive industry and 25% to technology supplies from the region.
Automotive executives in Europe and the US are warning they are just weeks away from shortages. Hyundai has already shut down operations in South Korea because of a lack of parts from China.
US companies may find it difficult to access components for their manufactured goods, plunging a recovering manufacturing sector back into the long recession it suffered last year.
“They first paralyze the region of the virus outbreak…then they gradually spread domestically, undermining internal trade, consumption, production and the movement of people. If the virus is still not contained, the process spreads further, including regionally and internationally by disrupting trade, supply chains and travel.”
-Mohamed El-Erian,Chief Economic Adviser, Allianz
The Guardian reports that Qualcomm (QCOM), the world’s biggest maker of smartphone chips, has warned that the outbreak was causing “significant” uncertainty around demand for smartphones, and the supplies needed to produce them. Already, auto parts shortages have forced Hyundai (HYMTF) to close plants in South Korea and caused Fiat Chrysler (FCAU) to make contingency plans to avoid the same result at one of its plants in Europe.
According to CNN, the virus is not the driving factor behind [losses]. Instead, it’s the way consumers, businesses, and governments respond to an outbreak that matters most.
What can organizations do?
According to Richard Wilding, professor of supply chain strategy at Cranfield School of Management, “companies need to urgently review their supply chain to find out how exposed they are. They need to ask the question as to where their suppliers and suppliers’ suppliers are located and review other sourcing locations, which although often more expensive can protect from disruptive events such as this.”
Taking stock of where things stand for your business is the best way to assess potential damage and determine next steps. Software such as DataRails, an augmented intelligence platform that consolidates cross-organizational data, can help the executive team identify potential sources of risk and determine how to act accordingly.
Prevention is the way to go.
“There is a risk that an adverse feedback mechanism and limited space for policy response could push the global economy towards recession.”
-Christian Keller, Head of Economics Research, Barclays
According to Reuters, banks and asset forecast the virus could have an impact on the global economy, foreseeing that it could reduce global gross domestic product by 0.2 to 0.3 percentage points.
However, this forecast is a shot in the dark. If businesses do everything they can to mitigate risks, hopefully we won’t witness its realization.