Coronavirus exposes global supply chain vulnerability

Coronavirus has unleashed a domino effect of global supply chain disruptions that exposes the trading vulnerability and questions the trend towards a geographic concentration of suppliers.

David Abbott | 24 February 2020

Coronavirus has unleashed a domino effect of global supply chain disruptions that exposes the trading vulnerability and questions the trend towards a geographic concentration of suppliers. From Apple iPhones, Fiat Chrysler cars, Nike shoes to Pepsi cola, manufacturing inside China and onward freight-forwarding around the world is under rising strain following the outbreak of the potentially lethal respiratory infection.

The outbreak started in Wuhan, the capital city of the Hubei province of China – a hub for high-tech and automobile industries with factories building semiconductors for smartphone and global auto parts. Coronavirus has since spread rapidly to 25 countries with almost 52,000 laboratory-confirmed cases (1.3% outside China) and more than 1,660 fatalities (3 outside China). The nature of human-to-human transmission, via droplets in personal contact, together with unique role China occupies in manufacturing supply chains – including electronics, apparel, automobiles, life sciences, consumer durables and fast-moving consumer goods – makes the coronavirus a simultaneous humanitarian crisis and a significant economic disruption.

Early estimates put the cost to the world economy at more than $280 billion in the first quarter of this year, according to Capital Economics, which would end more than a decade of unbroken quarterly global GPD expansion. If containment is delayed beyond the summer of 2020, the cascade effect might cause a drag of around 1 percentage point on global GDP growth, according to a separate estimate by Dunn & Bradstreet. By comparison, China and Hong Kong are estimated to have suffered a 1.1% and 2.6% GDP drop and economic losses in the region of $30 to 100 billion due to the SARS epidemic in 2002–3.

Whether the coronavirus emerges as full-blown ‘black swan’ event is probably still too early to say, although Alibaba, the Chinese online retailer, has. The impact of containment measures will be felt unevenly throughout the world, and between sectors. The global logistics industry, including air, ship, truck and rail freight-forwarding companies, will be among the hardest hit sectors. Chinese government-enforced closures of business within highly affected provinces – combined with cancelled and reduced orders, as well as severe delays to existing orders – has greatly slowed the breakneck manufacturing output of the world’s largest manufacturer. The degree to which logistics and freight-forwarding companies come under strain this year will be linked to multiple interrelated variables. These include: (i) how long containment takes, (ii) the extent and duration of factory shutdowns, (iii) ability of workforce to return to work upon approval by local authorities, (iv) production capacity of re-opened factories, (v) the degree of bounce back in pent-up international demand, or not, post-containment.

How this critical pre-containment disruption period unfolds from here – in terms of the scale of the epidemic and humanitarian crisis, may influence the post-containment industry reaction. Logistics companies with a high revenue concentration of client orders via China’s manufacturing hubs in affected provinces, including Guangdong, Jiangsu, Zhejiang, Beijing and Shandong will be most sensitive. To complicate the picture further, as more cases of coronavirus are recorded outside China, the greater the impact on the wider global supply chain. So far, this remains minimal. Taken together, probable outcomes remain difficult to assess. This fact, in turn, may prompt affected businesses to draw up scenario planning for these unforeseen risks to annual revenues, profitability and even debt service coverage.

In the interim, replacing China for inputs will be challenging and carry time-lags. Whether low or high value, missing components or parts in globally assembled products creates supply-line bottlenecks that drag on output, rippling to lower sales, profits, investor returns to and, eventually, sector contribution to local GDP. In the UK, JCB, one of the world’s top three manufacturers of construction equipment, has cut the working hours and overtime of 4,000 UK-based employees due to a shortage of parts from China. More than 25% of JCB’s suppliers in China are closed for business due to coronavirus. Hyundai Motor has suspended production in all seven of its plants in South Korea because of a lack of parts from suppliers in China. Elsewhere, Boeing said the outbreak will affect its first-quarter airliner deliveries while analysts have estimated Apple to ship up to 10% fewer iPhones in the quarter. Many other companies are bracing for supply-line bottlenecks.

The coronavirus can inform important lessons about the interdependency of global supply chains. Reducing the number of suppliers is standard practice for many businesses across many sectors. Few suppliers can create a platform for broader bidirectional relationships including mutual investment in advanced technologies which digitalise supply chain management processes. However, the coronavirus virus is a reminder of the necessity for strategic cost-benefit analysis and contingency planning which examines cost versus risk alternative suppliers located in different geographies.

Expert help and advice when you need it most

BTG Advisory can work with your business to assist you through this challenging time. We can conduct an initial review and recommend the most appropriate action, from restructuring current debt or sourcing emergency finance in order to give your business short-term financial cushioning or looking at possible restructuring methods if the problems in China have severely disrupted operations.

Our services include, but are not limited to, the following:

If your business is facing any issues and you require advice, please contact David Abbott on dabbott@btgadvisory.com or telephone 0843 320 9194.

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