The Global Economic Impact of COVID-19
When the novel coronavirus, now named COVID-19, first crept up in the city of Wuhan, China, in early 2020, no one could have predicted how this new virus would ultimately disrupt the global economy. Now, many around the world are contemplating how global supply chains may be affected and how things will play out in the next few months.
Effects Within China
Soon after a handful of incidents were reported, cases of COVID-19 spread in Wuhan quickly. On January 23, 2020, the Wuhan government declared a lockdown of the city to quarantine its residents from the other parts of China. Many cities quickly followed suit. By mid-February, close to 50 cities in four provinces of China, including Hangzhou, Shenzhen, Shanghai, and Beijing, were under official lockdowns to implement quarantine zones by limiting travel and transportation. This measure has affected hundreds of millions of residents and workers and has essentially shut down businesses and factories until further notice.
The first impact is the disruption in Chinese demand. The outbreak of COVID-19 happened during the Lunar New Year season when, historically, demands spike for businesses in retail, catering, movie, tourism and transportation. The city lockdown and the widespread fear of infection among the Chinese have resulted in few or no customers for many businesses. Already reports are indicating a major decline in the revenues for these industries during this Lunar New Year season. There are also Chinese news reports of the closing of many small restaurants and lodging facilities, with workers laid off as a result. At the same time, the city lockdowns have essentially extended the holiday break for hourly workers whose incomes are substantially reduced. Thus, it is likely that the slowdown in Chinese demand will continue into the second or even third quarter.
Effects Within Other Countries
The COVID-19 outbreak has been reported in many other countries including Korea, Italy, Canada, and the United States. This puts a lot of pressure on the global supply chains. In industries such as the electronics supply chain, where close cooperation, face-to-face communication, verification, and adjustment are necessary for new product development and production processes, reduced interaction will affect the eventual outputs. The recovery of high-level and close cooperation will depend on the containment of disease outbreaks and lifting travel restrictions across countries and within China.
The Technology Industry
The COVID-19 outbreak will disrupt the supply chain of the global technology industry. China is a critical component of the global supply chain. Many global electronics, telecommunications, and semiconductor companies rely on Chinese factories. For example, Wuhan is China's auto-production center, serving General Motors, Honda, Nissan, Peugeot Group, and Renault. Shanghai is home to Tesla’s new factory. Wuhan is also home to many high-tech component suppliers. These lockdown measures to close traffic and restrict logistics, coupled with the impact of extended shutdowns and labor shortages during the Chinese New Year holidays, will undoubtedly cause the global supply chain to face large-scale disruptions.
Even as some cities are coming out from lockdown and factories are returning to work, the risk of infection has caused the Chinese government to delay return to work for some factories. For example, Foxconn's plan to resume production at Shenzhen and Zhengzhou on February 10, 2020, was called off by the Chinese authorities due to worries surrounding the coronavirus outbreak. Foxconn is the biggest iPhone assembler for Apple, and a major supplier to Huawei, Amazon, HP, Dell, and most major electronics brands. We should expect similar supply chain disruption in many industries, including the electronics and automotive industries.
Compounded with the workforce shortage due to sickness and travel restrictions, many businesses and factories in China may continue to be understaffed in the upcoming months. Forbes has reported that more than 400 companies warned of the impact COVID-19 could have on first-quarter earnings.
The Retail Industry
These supply chain disruptions can also affect the global retail industry. Some experts say that to meet the deadline for summer delivery, Chinese factories need to start increasing production by March 15, 2020. If Chinese factories remain idle until May 1, 2020, it will likely affect retailers' critical back-to-school season and fall supplies.
Risk Planning and Management for Manufacturers
For the supply chain leader, the pervasive nature of this event brings an unprecedented level of uncertainty. As a result, challenges from transportation restrictions, labor and material shortages, strict monitoring of the logistics process, and the closure of transportation hubs and borders will exacerbate the scope of impact. Many manufacturers must develop some new procurement and manufacturing plans in different regions of the world outside of China.
To prepare for supply chain disruptions, leading supply chain operators should strengthen their risk management process, including the ability to continuously evaluate key risk indicators and to ensure mitigation plans are in place for uncertainty (such as compliance, labor, raw materials, production capacity, and finances) with controllable and foreseeable factors.
Companies need to first quickly develop transparency in their supply chains. This can be done by starting to map the location of first-, second-, and third-tier suppliers to know who is supplying what from where. Then companies can assess and monitor the impacts of the outbreak on their supply chains and customers. It may be important to contact the supplier and offer help. It may also be necessary to prepare plans for alternate sourcing. The next step is to ensure that all inventory is within the controllable range—excluding areas not affected by the outbreak—and control the logistics resources. Management should work with the legal and human resource departments to understand the risks of financial penalties if they are unable to provide products to customers on time and to provide corresponding help to employees affected by the outbreak. Where possible, shut down offices and ensure flex hours or telecommuting.
In the medium term, companies should focus on balancing supply and demand and establishing appropriate levels of buffer stocks. Evaluate opportunities for diversified supplier ecosystems, and review or establish their overall risk management methods. Work with company stakeholders and key suppliers to establish consistent risk management methods to monitor and identify potential shortage in raw materials and manufacturing capacity, and prepare contingency plans.
Once the impact of the crisis has eased, attention needs to be directed toward how to anticipate the next incident. For example, supply chain leaders and teams can conduct scenario-planning exercises and adjust SOP action plans. This is the time to tap or develop alternative sourcing and diversify the value chain. The shortage of people and materials is likely to be the biggest problem affecting the supply chain after work resumes. For example, Taiwanese businessmen in places such as Vietnam may also face shortages, because many factories have parts and materials from mainland China.
When dealing with high-risk events, the strategy is to first pay attention to the supply side, such as inventory, alternative energy, or shipping, and mitigate the impact of high-risk disruptions. If you are better prepared than your competitors, you can open up new business opportunities when the next disruption comes. Many will discover that they are competing against the other supply chains, not just their competitors.