This article explores the global supply chain ramifications of Covid-19. The pandemic is demonstrating to be a super-accelerator of several megatrends which have been formed before Covid-19, including globalization shifts, digital disruption, and the e-commerce frenzy.
The Covid-19 crisis has strongly displayed the profound inter-dependencies in global supply chain ecosystems nowadays, and vividly proved the intrinsic risks in our complicated connected world.
1. SUPPLY CHAIN SHOCK – SUPPLY GRIDLOCK FOLLOWED BY DEMAND COLLAPSE
Covid-19 has initially impacted the global supply chain with supply-side gridlock when mainland China went into hibernation induced by coronavirus just after the extended Lunar New Year holidays. This resulted in component & product shortages globally since it became strongly apparent how global supply chains have become inextricably dependent on China.
The pandemic Covid-19 then embarked on its own globalization journey, expanding rapidly to Europe and then North America, and all around the globe, bringing fear and uncertainty because healthcare systems become overwhelmed. Widespread lockdowns established: shops and businesses being closed, leading to the most dramatic collapse in demand, from consumers and industry alike.
Medical supplies stand as an exception, personal protection equipment, and related healthcare products experienced an outstanding exponential surge in demand all around the world. Except for basic household necessities including groceries, toiletries, and medicine, retail shopping dramatically came to an abrupt interruption.
Just as China was starting to re-open its economy and factories in this country were getting back to their work, production orders were canceled because the market lacked demand, and international supply chains ground to a halt. Then, because consumers became unable or unwilling to get out of their homes, shopping moved online en masse, massively turbocharging the e-commerce frenzy and generating unparalleled volume growth in small packages for home delivery.
When these incredible supply chain shocks reverberated globally, subsequently urgent re-evaluation of sourcing strategies, business models, and distribution channels followed. Uncertainty portrays the Next Normal, but no doubt coronavirus will have significant implications both in the short term (from12 to 18 months) and the medium term (the following 2 to 3 years). Thus Supply Chain 2025 will be very different on multiple dimensions, which we will explore in this article and subsequent blogs.
2. COVID-19 TRANSFORMS NEAR-SHORING TALK INTO ACTION
Near-shoring is not a new field in the industrial market. Other big supply chain shocks such as the Fukushima earthquake, the Iceland volcano, and the Thailand floods, have all sparked animated near-shoring discussions, fighting for the need to relocate production closer to the final consumption markets.
- Near-Shoring is the relocation of production activities closer to where the products are consumed. For example, from China to Mexico to serve USA demand, or to Poland to serve the UK.
- Re-Shoring is also known as On-shoring – is one step further, whereby production is moved back into the country where the goods are consumed, for example, back into the USA.
But the enthusiasm for change tends to dissipate because things soon get back to normal and then companies realize the enormity of truly re-configuring their own supply chain. This is a tough time. This time, near-shoring will become much more than just discussion because of numerous reasons.
Firstly, Covid-19 is much more serious in impact and global in reach than previous shocks. The supply chain results are much deeper, wider, and longer, the ramifications will be more drawn out and long-lasting.
Secondly, the Covid-19 predicament is intertwined with geopolitical tensions between the globe’s superpowers, which had companies exploring or implementing the relocation of their the United States destined production already, with a view to avoiding the United States tariffs on China-sourced imports.
Thirdly, a number of companies and countries have become impatient about the pace of reform since China’s 2001 accession to the World Trade Organization (WTO). Business frustrations embrace a range of issues, which include market access, government subsidies, intellectual property, and a level playing field. It is not only the United States that is dissatisfied but Canada broke off talks on a Free Trade Agreement saying, “The China of 2020 is not the China of 2016”. The EU has labeled China a ‘systemic rival’ and the EU Chamber of Commerce coined the phrase “promise fatigue”.
Thus, Covid-19 becomes the catalyst that stimulates businesses into actually taking real action on near-shoring initiatives reducing dependency and diversifying risk, inevitably resulting in shorter supply chains.
3. NEAR-SHORING IN ACTION
Nevertheless, relocating the supply chain is much easier said than done.
- Not for the Faint-Hearted. Supply chains have been built and fine-tuned over several years, they can not easily be untangled, unpacked, and moved elsewhere. Whether near-shoring or re-shoring, this is a principle undertaking, and obviously, you can not stop your business while you are reconfiguring your supply chain. As Covid-19 is the catalyst, its related restrictions on travel and in-person exchanges will restrict progress and prolong the process; most businesses will be planning to build and implement the changes of their supply chain over a two to three-year horizon.
- Government Incentives. With big fanfare, the United States government is actively encouraging American companies to undertake-shoring initiatives, offering incentives, grants, and much kudos for companies relocating their production back into the US and helping create local jobs. In Japan, the government has allocated grants of USD 2.2 billion for Japanese companies that relocate manufacturing back to this country, and a further USD 535 million to support them move production from China to other locations in Asia.
- Automation potential. Re-shoring production back into developed countries such as the United States, United Kingdom, Germany or Japan will lead to greater deployment of automation, which is now very economical and will mitigate the high cost and limited availability of manufacturing labor.
- Key Beneficiaries. Near-shoring candidates need to be both (a) relatively low-cost; and (b) in closer proximity to the final consumption market. Leading competitors include Mexico for the United States, and some countries like Poland, Turkey, or Hungary to serve Western Europe demand. North Africa is now also on the agenda as a low-cost production ground from which to serve EU markets. Near-shoring then will cut down on reliance on Asia in general, and China in specific. It will contribute to supply chains that are typically much shorter and locally focused, configured as ‘Made in North America for America’, or ‘Made in Eastern Europe for Europe’.
- Next-Generation Supply Chain. As these changes come to fruition, we can predict the ongoing implementation of the next-generation supply chains through to 2025, by when a considerable proportion of United States consumer goods will be produced much closer to America, likewise for products produced to serve the EU market.
4. NO MASS EXODUS, BUT DIVERSIFICATION WITHIN ASIA
Yet this will certainly not result in a mass exodus of manufacturing from Asia, or from China indeed.
- Made in Asia. Many well-established and highly efficient global supply chain ecosystems which service the Asia-EU and Asia-USA trades have been deftly tuned over decades and may have no real viable alternatives or would be too risky or prohibitively expensive to relocate. Also, the huge potential of the domestic consumer markets in Asia’s emerging economies will lead to much manufacturing remaining within Asia. We are undoubtedly in The Asian Century, whereby Asia now contributes one-third of global GDP. This continent has 1.8 billion people in the consuming class and will be home to two-thirds of the world’s middle class by 2030. Even in the midst of the Covid-19 crisis, the Asian Development Bank forecast the growth of Asia’s GDP to rebound in 2021 to 6.8%, enviable by any measure. We can thus expect to witness further diversification of supply chain activities around the Asia countries, continuing to build on established centers of expertise that have emerged in recent years.
- China Plus. In the short term and medium term, there has been an increasing number of companies that will be diligently exploring China-plus options for the sourcing of their products and components; with the ‘plus’ being supplementary or substitute places beyond China, which offer lower cost and tariff-free.
- Furniture, garment, sports goods, footwear supply chains are likely to be nearly more moveable compared to those for high-tech electronics, household white goods, and automobiles, which have higher levels of complication. The leading alternative choices change by industry sector, however, some countries in Asia namely Vietnam, Cambodia, Indonesia, India, and Bangladesh are all competitors for post-pandemic diversification of production activities that leverage their low-cost labor markets. But none of these alternatives can match the enormous extent of China’s resources! This country remains the obvious leader in both scale and scope, leveraging its massive investments in domestic highways, container port and airport capacity, storage and handling facilities, and international connectivity.
- In China for China. And for that very reason, many supply chains will continue in China, or at least, remain China-centric. That includes all the multinational terms that are selling into China’s huge domestic market regardless of consumer or industrial segments. Eventually, let us not forget the cliché, “Twenty years ago, multinational companies came to China for the Workers, now they stay in China for the Shoppers”. Such companies will retain within China all their manufacturing, sourcing, and assembly activities for commodities they sell domestically in China, now known as the “In China for China” approach. Also, many firms that sell their goods around the Asia locations will retain their China-centric supply chains, with a view to combining volumes and leverage economies of scale in another efficient configuration of the ‘Made in Asia for Asia’ strategy.
5. SUPPLY CHAIN 2025
The results of the Covid-19 will result in a step-change for global trade as we know it, marking the end of thirty years of globalization. Post-pandemic, the Next Normal will see some radical reconfiguration of global supply chains, adopting a much more regional and localized approach. Evolving through to the year 2025 we can foresee widespread deployment of shorter supply chains which increase control, responsiveness, and resilience, while lowering lead times, transportation costs, emissions, and risk. In times of such uncertainty, best to plan for the worst, hope for the best, and expect the unexpected!
Source: Mark Millar (NEPTUNE)
