The spread of the Coronavirus – officially known as COVID-19 – has been a major concern worldwide this year. Clinical tests have been launched to find a treatment, but so far there is no specific antiviral treatment for COVID-19. While scientists and doctors are making any possible effort to stop the spread of the virus and find a cure, and while every day new personal tragedies take place as more and more lives are lost, the world is also starting to feel another consequence of the Coronavirus: supply chain disruptions. For those who have been wondering what will be the economic impact of the Coronavirus on global trade, an impact estimate predicts that the Coronavirus will “knock off $26 billion a week in lost exports” worldwide.
Major Disruptions In Supply Chains That Rely On Chinese Suppliers
In its report about the impact of the Coronavirus, the leading B2B data firm Dun & Bradstreet shows that five major sectors account for over 80% of the businesses within the impacted provinces in China:
- services (personal and business);
- wholesale trade;
- retail; and
- financial services.
According to the report, at least 51,000 companies around the world have one or more direct or Tier 1 suppliers and at least five million companies around the world have one or more Tier 2 suppliers in the impacted region. A “Tier 1” supplier is your direct supplier; a “Tier 2” supplier is a supplier of your supplier. If the suppliers of your suppliers cannot deliver (e.g. raw materials), your suppliers won’t be able to produce (e.g. components that you use in your production process), and therefore you won’t receive your supplies, and you won’t be able to produce either. Thus, Tier-N analysis is a Supply Chain Risk Analysis method.
Five Million Companies Impacted
In other words, the ability of five million companies to deliver their products to their clients is currently under pressure. In fact, as I tried to order a well-advertised electronics product of a very well-known brand a few days ago, I was faced with the unexpected answer that the product isn’t available anywhere in the country. Also when I checked for options to buy the product in two other countries, the answer remained the same: unavailable. Eventually, one seller told me that the product was not available because no shipments are arriving from China.
I heard another story from someone working for a very small consulting company in the export business. As the phone rang this week, the person on the other side asked whether they can receive shipments from Wuhan. He had a list of what he thought were logistics companies, and he was calling all of them to ask who could receive a shipment from Wuhan, China. In other words, cargo from China does not arrive, to be sold in shops around the world.
A report from the U.S. predicts that “major U.S. ports could see a nearly 13% drop in containerized retail imports in February (2020)… due to extended production shutdowns caused by the coronavirus outbreak in China”.
To Change Suppliers Or Not To Change Suppliers?
Further, the report of Dun & Bradstreet discusses two scenarios for the containment of the Coronavirus (by mid-2020; and by the end of 2020), and highlights the potential supply chain risks of companies whose supply chains (i.e. Tier-1, Tier-2, Tier-3 etc suppliers) are impacted. Yet, will companies now replace their Chinese suppliers with other suppliers? It’s easier said than done.
Certainly, when you start working with a new supplier, you normally expect it to be a long term relationship. The cost of searching and onboarding a new supplier is high; it’s sometimes referred to as “switching cost”. For sure, if the supplier does not meet your quality criteria, you will search for another supplier. But otherwise, companies may be hesitant to switch suppliers. As a client, you are likely to be understanding when a supplier experiences disruptions of a “force majeure” nature, for example as earthquakes or a virus outbreak. Yet if the disruption cannot be mitigated fast enough, it is likely that you will look for other suppliers, to mitigate your immediate problem: empty warehouses and shops. In the long run, you may return to your original supplier, however… maybe this disruption is the straw that broke the camel’s back?
Nobody Likes Uncertainty In Their Supply Chains
In an earlier blog I wrote: ”Predictability is key to successful supply chain management, especially in ‘just in time’ supply chains”. The current disruptions in global supply chains (companies that rely on products from China run out of stock) is a short-term problem for companies worldwide. But these 5 million companies currently experience something that may impact their long-term behavior too: uncertainty. They do not know when the current disruption may end.
The uncertainty due to the Coronavirus is the second major uncertainty around supply chains in China in a short time. It was preceded by the Trade War between the U.S. and China (still ongoing). During this trade war, trade barriers (import duties) have been introduced which make import of Chinese products more expensive in the United States (and vice versa). In the same earlier blog, I wrote: “Even the fear of import duties could be enough for U.S. companies to decide to seek for new suppliers because the threat of import duties creates uncertainty, and uncertainty is the enemy of predictability, which is so important in today’s global supply chains”.
Now that one uncertainty has been added on top of the earlier one, the likelihood is growing that companies will decide to diversify their supplier portfolio, and replace some Chinese suppliers with other suppliers. In business, this is called Risk Mitigation.
Brazil: Potential Alternative Supplier Country
The report of Dun & Bradstreet identifies which countries may replace China as suppliers of top eight (by value of trade) product categories. Notably, Brazil is identified as a potential supplier for 5 of the 8 product categories. In other words, Brazilian suppliers are candidates to win business if and when they replace Chinese suppliers.
|Product category||Harmonized System Code||Possible Alternative Supply Countries|
|Electrical machinery, equipment, and parts||Chapter 85||Brazil|
|Nuclear reactors, boilers, and parts||Chapter 84||Chile, Singapore|
|Furniture and parts||Chapter 94||Mexico|
|Toys, games, and sports requisites||Chapter 95||Mexico, Brazil|
|Plastics and article made of plastics||Chapter 39||Mexico, Brazil|
|Motor vehicles and parts||Chapter 87||Chile, Colombia, India|
|Apparel and clothing accessories||Chapters 62 and 63||Brazil, Canada|
|Optical, medical, and surgical instruments||Chapter 90||Colombia, Brazil, India|
Note: The Harmonized System (HS) of tariff nomenclature is an internationally standardized system of names and numbers to classify traded products.
While the top priority remains to contain the outbreak, finding a treatment and supporting those who have been impacted on a personal level, the direct and indirect economic impact of the Coronavirus will be felt worldwide.
First, a major drop in global trade will cost jobs in the logistics sector (later also in other sectors). Second, it will reduce the amount of import duties collected by Governments (i.e. the money that Governments can spend on healthcare, education and citizen wellbeing). Third, the shortage of products worldwide (due to supply chain disruptions) will result in fewer sales by companies worldwide. Fourth, the need to find new suppliers to fill the gap of Chinese suppliers that are unable to deliver will entail higher costs to companies worldwide. Either these costs will be shifted to the consumer (i.e. consumers will pay higher prices for products), or companies will face decreasing profit margins. This is just the tip of the iceberg. The domino effect of the Coronavirus’s economic impact may be much more extensive. Or it may not; if the virus is contained quickly enough.
It is important to remember at all times that while a discussion such as presented in today’s blog has its merits for executives in charge of a business, we’re talking here about people losing their lives, and people losing their beloved ones. The Coronavirus is a reminder of how fragile life can be. Hopefully, when you read about supply chain disruptions, you also feel compassion and empathy for the situation of strangers in another country, facing such imminent threat that came “out of nowhere”.
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