Covid-19 is spreading like wildfire, affecting almost every sector of the global economy. Transportation has been hit hard by this global pandemic, manufacturing in China is almost coming to a halt, and the net effect of all these disruptions is the deteriorating state of supply chains. But have we seen the worst of coronavirus or are there more far-reaching negative consequences to come?
Economic experts predict that if the pandemic isn’t contained within the next month, thousands of manufacturers and retailers who depend on Chinese raw materials and finished products might be forced to shut down temporarily. We are already seeing activities slowing down in most Chinese manufacturing plants, and the same could be happening soon to assembly and manufacturing plants in the U.S. and Europe. After all, most of these companies import most of their parts and materials from China.
With that in mind, which other predictions can we make in regard to the effect of coronavirus on supply chains?
1. Impact on Online Shopping
Everyone is shaking at the mention of coronavirus, with Wuhan and other cities in China already put under total lockdown. European nations such as Italy are also in high alert following the rising number of affected people in the country. People are even scared of shaking hands or even interacting with other humans. What that means is that most shoppers will be avoiding physical shops, opting instead for online shopping. However, not all online sellers will be in luck. Consumers will most likely be avoiding goods from international sellers, especially those that ship packages directly from China.
2. Supply Chain Vulnerability
Most US-based companies have been operating under the assumption that supply chains are self-sustaining; that there will always be free flow of materials across the world. Of course, we haven’t witnessed many serious threats to companies’ ability to source raw materials or even produce and distribute their products. But this fundamental assumption has been greatly challenged within the last 12 months, first by the China-US tariffs, then by Brexit, and now by Coronavirus. Supply chains have never been more vulnerable.
Hot on the heels of this exposed vulnerability, companies are working towards redesigning their supply chains in order to make them more diverse, reliable, and lesser vulnerable to trade fluctuations. Companies that will fail to invest in multiple supply chains, both for their raw materials and final products, will lack the much-needed operational flexibility to meet the demanding needs of the modern consumer; shoppers who are extremely intolerant of tardy responses.
Coronavirus will force companies to redesign their supply chains. Instead of relying fully on raw materials from one source and producing all their products from a central location, companies should invest in production facilities in different parts of the world. Each of these facilities should then source raw materials from local suppliers. By so doing, companies will be spreading risk so that in case one source is compromised, like by Coronavirus in this case, other major markets will not be greatly affected.
3. Possible Closure of Manufacturing Firms
Chinese companies are closing down temporarily for the fear of coronavirus spreading to their employees. This hasn’t had a huge impact as of now, but that is because most of the Chinese manufactured goods and raw materials that the rest of the world is using now were shipped months ago. Shipping by sea takes months, after all. Most US manufacturers are using Chinese shipments that arrived by the end of February or earlier. If no ship leaves China for the US before mid-March, then we are looking at a possible spike in temporary closures of American-based assembly and manufacturing facilities before April.
4. Most Hit Industries
As anyone would expect, the global high-tech industry has been immensely hit by the Coronavirus. Big multinational companies such as Apple are already feeling the effects of the constrained global supply of its products. There is, for example, a significant decrease in demand for iPhones in China. That means that Apple will not be registering the high earnings it is used to in the Far East.
Another industry that will be hit by the Coronavirus is the food industry. Many city dwellers in Europe and the Far East are already starting to stockpile food as a precautionary measure in case there is Corona outbreak in their city. Packaged goods manufacturers and food retailers could benefit from the sudden increase in food demand, but that demand will be short-lived if the virus keeps spreading. Factoring in the lack of enough flexibility on the part of most retailers, chances are that most of them will not be able to switch suppliers as fast as the Coronavirus pandemic is demanding of them.
What Is the Way Forward?
Apple CEO Tim Cook has already announced a possible reopening of Apple’s manufacturing plants in China. That would mean only one thing: That the tech giant has realized that there is a bigger financial implication in closing down China-linked supply chains than in keeping them open, Coronavirus scare notwithstanding. Apple has discovered that COVID-19 isn’t a China problem anymore; it has spilled over to Europe, the US, and some parts of Asia, Africa, and Latin America. Besides, Covid-19 is just one of the many risks that threaten the survival of multinational supply chains. Closing down Chinese firms might not be the remedy to this problem. Redesigning supply chains is the solution.