The Global Supply-Chain Shock

By Michelle Soesanto

The world’s supply chains are facing root-to-branch shutdowns as lockdown measures to contain the coronavirus outbreak intensifies. The supply chain crisis that began earlier this year from the closure of Chinese factories has spread into major industries elsewhere. The shutdowns are contributing to the growing belief that the world has slipped into its first recession since the GFC.

Other than the impact on companies, the initial supply shock has also led to a demand crisis in Europe, the U.S. and other major economies as workers and consumers are housebound. In the U.S., Apple Inc., is currently combating the impact of component makers in Italy, Germany, Malaysia and South Korea after having endured the Q1 slowdown in Chinese factories responsible for the final assembly of products like iPhones and AirPods. Indonesia’s March trade surplus and resilient export figures may not be sustained as raw material supplies are disrupted, threatening the growth of local manufacturing businesses. Bank Central Asia (BCA) economist David Sumual commented that due to a lack of supply from China following its COVID-19 lockdown, Indonesia will experience a drop in future exports.

As the pandemic has disrupted logistics both within and between countries, causing shortages of medical equipment in some, the diversification of supply chains has become a much-debated topic. Many countries have persuaded manufacturers to domestically relocate manufacturing. Nevertheless, the head of the EU Chamber of Commerce in China Jorg Wuttke has recently stated that European manufacturers are hesitant in moving production back home, as it involves the difficult relocation of high-tech equipment. Furthermore, supply chain security is not their sole concern. Considering the size of China’s economy and its GDP Per Capita, European companies have no plans in giving up on the Chinese market even if they do choose to decentralise their future supply chains.

In a CNBC interview, White House adviser Peter Navarro revealed the preparation of an executive order that would assist in relocating medical supply chains from overseas to the U.S. Recently, Japan has also revealed a US$ 2.3 billion plan to transform supply chains, including subsidies for Japanese companies that bring manufacturing home. Japan’s Cabinet Office has declared that it will offer backings to firms that relocate production domestically. Moreover, financial support will be offered to companies that move the manufacture of key medical equipment – such as masks, ventilators, protective suits and extracorporeal membrane oxygenation machines.

China’s coronavirus outbreak and nationwide travel restrictions has had a major impact on the Japan’s manufacturing sector and global supply chains. One of the repercussions was a severe shortage of personal protective equipment, which imports about 80% of its PPE, mostly from China. Several Japanese carmakers, as well as electronics firms such as Panasonic Corp. and Canon Inc. also suffered supply chain disruptions. Japanese Prime Minister Shinzo Abe stated at a government meeting on the 5th of March that due to concerns about Japan’s supply chains, the government will attempt to move high-value added product manufacturing domestically. However, according to Ke Long, a researcher with the Tokyo Foundation for Policy Research, “there are no countries that can replace China in terms of manufacturing at present”. He states that China has gradually become a key market for companies across the globe, and no other country can match the country’s supply of skilled workers and transportation infrastructure.

The pandemic has reminded large multinationals that it is highly risky to rely on a single source for any item. In the future, some degree of supply diversification is required despite its costs. Sabine Weyand, a senior official of the EU Commission revealed that the best way to develop resilient supply chains is to allow many countries as possible to participate in production, instead of solely relocating companies domestically.

Sources: Caixin, Nikkei Asian Review, The Jakarta Post, Bloomberg, McKinsey & Company

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