Global supply chains are set for a major reshuffle as the coronavirus pandemic exposes the vulnerability of countries and companies that rely heavily on a limited number of trading partners.
The new coronavirus disease, formally known as COVID-19, was first reported in the central Chinese city of Wuhan. Since late-January, a wave of city-wide closures and quarantines in China have shut down factories in the world’s second-largest economy, disrupting supply chains globally.
“One of the things that really became apparent with COVID-19 is the rapid change that has occurred in terms of the critical mass of value chains that have built up in China from 2003 when we had SARS to 2019,” said Alex Capri, a visiting senior fellow at the National University of Singapore’s business school.
SARS, or severe acute respiratory syndrome, was another kind of coronavirus that broke out in 2002 and 2003 that wrought damage to China’s economy.
Then, China’s contributed 4% to the world’s GDP. Now, the country contributes almost 20% to world GDP, with much of the growth coming from foreign investment.
Much of that investment have gone into the manufacturing sector, but a lot of that is now in “sharp reversal” as companies look at ring-fencing risks and localizing their supply chains, particularly those in strategic areas like technology and pharmaceuticals, Capri told CNBC.
Due to retaliatory tariffs imposed on each other in the U.S.-China trade war, companies had already started diversifying their supply chains out of China. The speed at which they do this will now accelerate, Capri told CNBC.
“We are going to see massive restructuring of supply chains,” said Capri, who has over two decades of experience in various trade roles including leading the Asia trade and customs practice at accounting giant KPMG.
While China is gradually returning to work, it could take months, “probably quarters” to ramp up operations and catch up on lost output, supply chain risk management software company riskmethods said in a report last updated Thursday.
Citing a February survey by German supply chain consultant Kloepfel Consulting, riskmethods noted that every third company has major Chinese customers and 81% of companies it surveyed rely on Chinese suppliers.
Supply chain risks multiply as outbreak spreads
Now that the epicenter of the pandemic is shifting west to Europe and America, the knock-on effects are multiplying.
According to riskmethods, a large portion of manufacturers are experiencing problems with their supply due to the coronavirus outbreak, with a 44% increase in companies declaring “force majeure” from December to February. A force majeure event occurs when unforeseeable circumstances, such as natural catastrophes, prevent one party from fulfilling its contractual duties, absolving them from penalties.
After the first wave of disruptions from China, the second wave of supply chain disruptions came from neighboring South Korea and Japan, where there are also high numbers of infections, noted Bruce Pang, head of macro and strategy research at China Renaissance Securities.
Surging COVID-19 cases in Europe and the U.S. may bring another shockwave, putting global manufacturing and supply chains under a stress test, Pang told CNBC.
“Therefore, as the COVID-19 global outbreak has widened, even if the Chinese manufacturing companies were to resume their work at full scale…countries and regions might receive a second hit from the drop in a trading partner’s supply, and vice versa,” said Pang and his team wrote in a recent report.
Even though supply chains will reshuffle, China will remain an important market for sales and for supply chains, so companies do see an urgency to diversify and achieve a “China + 1, 2, (or) 3 supply chain strategy” when it comes to sourcing, said Capri.
“I don’t think things will return to normal as we’ve known them over the last couple of decades,” said Capri. “We are in a completely different new era now and globalization as we’ve known it in the past is over.”