Coronavirus Highlights Fragility of Global Supply Networks
As public health epidemiologists warn that the coronavirus epidemic is far worse than earlier envisaged and that other countries should consider tough containment measures similar to those imposed in China, the likely human cost of the outbreak is enormous. The ease with which the virus can be spread, even by people who have never been to China, let alone Wuhan, was highlighted by a case in the United Kingdom. A businessman, who caught the virus at a conference in Singapore, was linked to several other cases. Eight people tested positive for coronavirus in the UK, while five British nationals tested positive in France following the businessman’s trip to a French ski resort, and an NHS clinic he attended had to be temporarily closed.
Meanwhile the WHO has suggested that the incubation period for the virus may be as much as 24 days, which means the 14-day quarantine periods imposed to date may not be sufficient to contain the disease. That’s quite an ordeal for a lot of people, not least passengers who are locked in their cabins on cruise liners whose supplies are running short.
The consequences on supply networks?
But even if containment has the desired effect, what are the wider consequences of shutting down schools, shopping centers, factories, transportation and supply networks?
‘…as CNN business bluntly put it, ‘You can’t make a car with 99% of the parts. Coronavirus could wreck the global auto industry.’
Procurement professionals around the world are sitting up and paying attention, especially in sectors with globally integrated supply chains. In such a crisis, virtually all supply categories appear “strategic”: as CNN business bluntly put it, “You can’t make a car with 99% of the parts. Coronavirus could wreck the global auto industry.”
Since the outbreak of SARS in 2003, the last major epidemic to hit China, the country has become even more important as a source of key components and materials as well as finished consumer goods. China’s economy has grown in leaps and bounds from roughly 4% of world GDP in 2003 to 16% today. Since 2004 the city of Wuhan, at the center of the outbreak and in lockdown since January 23, has been a focal point of the Rise of Central China Plan, making it one of the country’s key inland hubs for advanced manufacturing. It has at least five major industrial zones with various specializations including automobile production and assembly, biotechnology and pharmaceuticals, heavy industry, telecommunications equipment, laser and fiber optics technology and much more. Plus, Wuhan has a dedicated export park.
“You can’t make a car with 99% of the parts. Coronavirus could wreck the global auto industry.”
Other manufacturing hubs in China, particularly in Hubei province, have also been badly hit by the coronavirus outbreak.
Supply chains around the world that have been most heavily impacted include high-tech, pharmaceutical and automotive industries. Technology companies in North America and Europe are especially dependent on contract manufacturing in China and just-in-time shipments. Forbes reported that Dell Technologies, HP, Qualcomm, Huawei, Samsung, Qorvo, Skyworks Solutions, MagnaChip Semiconductor, and Amkor Technologies are all looking at disruptions to their supply chains: most of the contract manufacturing capacity is located in regions that are under similar restrictions as the province of Hubei.
The most heavily impacted industries
Coronavirus and the auto industry
In the auto industry, China is the world’s major supplier of parts. It shipped parts with a value approaching $35 billion in 2018, according to UN data, including $20 billion in parts to the United States alone in 2018, most of them going to assembly lines. CNN Business quoted Kristin Dziczek, vice president of a Michigan automotive think tank as saying, “It’s difficult to say when it will start to bite here […] All automakers have a supply chain war room going on right now to determine what they can be doing. But China is so huge, there is no way they cannot be impacted.”
The situation is perhaps even more serious in Germany, whose auto industry has a deep and multidirectional relationship with China. The CAR Center Automotive Research at the University of Duisburg-Essen calculates that in 2019 a third of all vehicles manufactured by German companies worldwide were sold in China, a total of around 5.2 million units. Most of these – around 4.8 million units – are manufactured in China itself, either directly by German companies or with Chinese partners.
The world’s largest automotive supplier, Bosch, also produces in China, including Wuhan. Presenting the company’s preliminary financial results for 2019, its CEO Volkmar Denner stated, “If this takes longer and the supply chains are affected, there could be disruptions.” That was in the early stages of the outbreak. Similar warnings have been issued by leading German auto manufacturers such as BMW.
FIAT was the first global auto company to raise the specter of a shutdown of a European plant, highlighting the risk to global supply chains from the coronavirus emergency. On February 6 Fiat Chrysler has warned that one of its European plants will be forced to shut down production in a matter of weeks.
As for Japan, Nissan said in a widely reported statement on February 10 that it will temporarily stop production at its factory in Kyushu. In fact, the effects of the increasingly widespread blocking of goods traffic into and out of China are beginning to be felt in the supply chains of raw materials and vehicle parts throughout the country. Toyota is also affected.
But what about other sectors?
At the time of writing disruption has been limited to individual cases rather than becoming widespread. Even so, it can reach companies and places you would not expect. Take, for example, procurement of equipment and supplies in healthcare. Die Welt reported that the fan manufacturer ebm-papst is a family-run business in Mulfingen, a small town near Heilbronn in southern Germany. It has three plants in China and all were closed at the behest of the government in Beijing. This means the disruption to the supply of its fans, which are widely used in hospital ventilation systems.
There is great uncertainty on how long this particular crisis will run, but sooner or later there are bound to be similar scenarios in the future. Flexible and holistic supply management will be key.
Beyond a certain point – and we cannot yet be certain when that point will be reached – such individual cases may become generalized. Another consideration is that buying companies will have pulled their representatives, including engineers, out of China in response to the virus, meaning that when the virus is finally brought under control, it will still be some time before things can get back to anything like normal.
In this context procurement organizations must rapidly develop risk mitigation strategies. There is great uncertainty on how long this particular crisis will run, but sooner or later there are bound to be similar scenarios in the future. Flexible and holistic supply management will be key.
Jim Bureau, JAGGAER CEO, comments: “It is vital to have robust supplier management and risk mitigation strategies in place. Intelligent and structured supplier management strategies, based on digital solutions, can proactively provide insight to activate emergency plans to face these types of real–world circumstances.
“In practice this means having insight into your supplier network as well as alternative means of fulfilling both direct and indirect sourcing needs with suppliers, already classified and approved. Such measures enable organizations like cruise lines to deal with emergency supplier management requirements that need to be acted upon. Insight into suppliers on a global basis allows them to mitigate risks and save lives. It eliminates the need for a long process of scouting, selection and on-boarding at short notice.”
As we transition through this unfortunate situation many companies will alter how they manage their supply chains today. “It is critically important that risk and resilience is built into supply chain strategies, especially in direct procurement,” said Bureau. “Most companies have contingency and business continuity plans for disruptions of various sorts but coronavirus, which is putting whole regions of the world out of action, at least temporarily, is a whole new ball game.”