SNAPSHOT: COVID-19 will accelerate a shift towards more localised supply chains

SNAPSHOT: COVID-19 will accelerate a shift towards more localised supply chains

Overview

  • As the total number of global coronavirus (COVID-19) cases surpassed 185,000 this week, governments have taken drastic measures, including wide-ranging travel restrictions and shutting borders, to contain the outbreak.
  • The global pandemic has unveiled fragilities in long-established supply chains, causing widespread commercial disruption since the start of the year.
  • With Europe becoming the epicenter of the global outbreak, EU-based companies previously exposed to supply risks linked to China are facing a double-edged threat.
  • A radical shift in how companies view and manage supply chains will likely take place once the outbreak subsides – either through the discovery of a vaccine or with a decline in the number of cases after the epidemic in Europe peaks. Businesses will be faced with a multitude of challenges ranging from a permanent shift in consumer spending patterns to a deteriorating global economic outlook before beginning to recover.

Analysis

  • A key feature of globalisation and the accompanying widespread movement of goods from the liberalisation of national economies has been the transnational nature of trade. Driven by cost considerations, multinational corporations across multiple sectors, including the car, pharmaceutical, and technology industries have relied on China as the main source of components in recent years.
  • Companies sourcing goods from China are racking up heavy financial costs by COVID-19-induced bans on mobility and staff quarantines. One likely outcome of such disruption will be that firms will seek to reduce their respective dependence on Chinese suppliers.
  • Indeed, businesses will aim to improve the resilience of their supply chains to cope with apolitical, indiscriminate and transnational macro-level risks such as pandemics and extreme climate-related events. Many will choose to reorient resources and diversify their supplier base to better absorb prolonged shocks.
  • Declining demand and the rising number of COVID-19 cases have forced some companies in Europe to abruptly and reluctantly halt production altogether. For instance, London-headquartered carmaker Fiat Chrysler Automobiles announced on 16 March that it was shutting its factories in Italy, Poland and Serbia until 27 March. Some car manufacturers had already been exposed to operational disruption due to a shortage of components from China.
  • Government actions in response to the pandemic will also inform how corporations act to soften the blow of future black swan events. In an unprecedented move, an increasing number of EU countries have implemented border controls to contain the outbreak.
  • Moreover, there have also been indications that European governments could nationalise struggling companies left exposed by supply chain disruptions and encourage them to shift production processes closer to domestic markets.​

 Forecast 

  • In this sense, existing relationships between governments and the private sector will likely undergo a vital shift. On 17 March, French finance minister Bruno Le Maire indicated that the government could nationalise important companies particularly affected by the virus. The statement echoed comments made by German economy minister Peter Altmaier a few days earlier and indicates that state intervention in markets will become the norm in the post-COVID-19 context. This could create longer-term asymmetries in some industries.
  • Among lessons learnt from the COVID-19 outbreak, businesses will almost certainly reassess the costs of relying on a narrow supply-chain, particularly with respect to vendors, for product manufacturing.
  • Businesses will strengthen internal mechanisms for mapping and regularly monitoring supply chains to identify potential vulnerabilities.
  • In the short-term, companies will likely initiate plans to localise their supply chains. Manufacturing processes could be integrated into existing output or transferred to partner companies located in-country or in the immediate region. This will enable companies to exert more quality control over their supply chain and decrease transport costs.
  • To some extent, a growing number of companies had already been exploring such plans against the backdrop of the US-China trade war and costly impact of associated imports tariffs. COVID-19 will accelerate this trend.
  • This process will be gradual, as contractual obligations and established infrastructure will prevent companies from suddenly severing supply chains. In tandem with those changes, companies will invest heavily in research and development. For companies seeking to improve resilience, increased automation will become an integral part of their strategy, leaving them better positioned to leverage technological innovations and manage risk.