CHINA’S contribution to global manufacturing has grown steadily over the past decade. Various estimates indicate that it accounts for anywhere between 27 and 50 per cent of global manufacturing output. The world’s reliance on China, though, has never been more evident than in the past few months.
Until recently, China has been the epicentre of the global Covid-19 pandemic. The authorities have left no stone unturned in their bid to contain the outbreak, including putting entire cities and provinces on lockdown. The measures are widely credited to have helped bring down the number of new cases of late. It is no doubt a positive sign.
However, as the country has battled to control the situation, the shutdown has affected businesses across the world. The impact has been felt mostly in manufacturing, transportation, and distribution of goods.
WIDESPREAD IMPACT
While the impact differs from industry to industry, it is influenced by two key factors.
First, which Chinese province the global supply chain of a sector relies on. Hubei, which was at the centre of the outbreak, is an automotive industry cluster. It also has concentrated production of electronics goods, along with Zhejiang and Guangdong provinces. Henan has a high concentration of food and agricultural activities. Zhejiang is home to a cluster of apparel producers and Guangdong hosts several machinery producers.
Second, the more labour-intensive the industry, the greater the impact of a quarantine policy, and the lower the level of work resumption. Consequently, declining output has hit the automotive components, electronics, and apparel industries the hardest.
The automotive industry, for example, is still under 50 per cent of its pre-virus production rates. While some Chinese parts suppliers have partially resumed operations, all major automotive suppliers, especially in Wuhan, have postponed resumption, creating a ripple effect on domestic and overseas original equipment manufacturers who are delaying or interrupting production.
Other labour-intensive sectors are facing significant hurdles as well. Consumer goods producers in China are operating at 10 to 20 per cent of their pre-outbreak levels. The apparel supply chain has been critically hurt, which will ultimately affect retailers’ stocks. Currently, global retailers purchase about 20 per cent of their goods from China, with that percentage rising substantially in seasonal categories. Electronics companies are operating at 40 to 60 per cent of pre-outbreak levels.
The logistics industry has also been impacted, making the delivery of goods (where they are ready) more challenging. For example, 90 per cent of passenger flight capacity to and from Greater China has been withdrawn, resulting in slashed air transport capacity and mild surges in airfreight costs. Belly cargo capacity, accounting for some 50 per cent of total air cargo capacity, has also been reduced.
The outbreak has spread across the world and multiple countries have announced lockdowns of various proportions. Travel in and out of major economies and business hubs has all but come to a standstill. This means that even with the situation in China starting to show signs of stabilising and improving, and factories hoping to come back online, they will struggle to deliver the goods across the globe.
THE WAY FORWARD
Companies do plan for unexpected disruptions to their business. However, when an event of pandemic scale happens, and lasts for as long, we can be certain that it will force companies to rethink how they manage their supply chains.
Some industry practices will surely be reconsidered. Top among those will be just-in-time inventory, on-demand production, and eliminating warehousing. All these are interconnected.
Over the years, companies across the world have adopted just-in-time inventory policies. Simply put, it is a system under which companies receive goods only as and when they are needed for their production process, or as the name goes ‘just in time’.
The receipt of the goods, in turn, is influenced by when the company gets an order for its own goods from consumers – on-demand production. The concept is designed to bring down inventory costs and reduce the need for warehousing.
While these concepts have helped companies achieve those objectives, many have found out the hard way that these models don’t indemnify them enough against a major disruption. It is what happened in the aftermath of the Japan tsunami and earthquake in 2011, and what is happening now amid the pandemic.
Companies will realise that while maintaining higher inventory levels may cost more, it does pay dividends in terms of customer satisfaction and competitive positioning during a crisis. It is better to have enough buffer stock and not need it, than to need it and not have it.
They may not change their strategies overnight but expect them to become more flexible and start making changes across at least 20 per cent of their supply chain footprint.
The same is true of single sourcing. You can save some money and maximise economies of scale and control buying in quantity when you engage just one supplier, but what do you when that supplier is located at the epicentre of a major global crisis?
Ultimately, single sourcing is always a higher risk.
FROM CHINA TO ASIA AND BEYOND?
Businesses across the globe have already been rethinking their supply chain strategies, driven in part by the ongoing trade dispute between China and the United States. It has seen the world’s two largest economies impose tariffs on hundreds of billions of dollars’ worth of goods.
While the two sides signed a preliminary deal in January, some of the most challenging issues are still being debated. Uncertainty over how, and when, this might get resolved has had an impact on businesses worldwide.
The current outbreak is likely to push companies, especially those sitting on the fence, to act on diversifying their supply chain network. While companies are unlikely to leave China completely, we can expect them to reduce their reliance and expand their footprint in other countries in the region.
Thailand, for example, is already an automotive hub, Vietnam and Bangladesh are known for apparel production and Malaysia has established itself as a credible player in electronics manufacturer.
In addition, the evolution of the Fourth Industrial Revolution could play a key role in reshaping global supply chains. It is underpinned by technologies like Internet of Things (IoT), artificial intelligence (AI) and advanced robotics.
The technologies help to negate the low labour cost advantage that countries like China have enjoyed for decades.
The impending rollout of 5G services, which is expected to accelerate the adoption of these technologies, will add further impetus to this.
There is little doubt in anyone’s mind that China, which has borne the brunt of the outbreak, will conquer this challenge. However, when things return to normal, it is unlikely to be business as usual for its manufacturing sector.
- The writer is chairman, Asia-Pacific, at Kearney
