Coronavirus impact on global supply chain – The worst is yet to come
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Reports on how the Covid-19 outbreak is affecting supply chains and disrupting manufacturing operations around the world are increasing daily. But the worst is yet to come.
Pierre Haren and David Simchi-Levi predict that the peak of the impact of Covid-19 on global supply chains will occur in mid-March, forcing thousands of companies to throttle down or temporarily shut assembly and manufacturing plants in the U.S. and Europe.
In an article on the Harvard Business Review, they argue that the most vulnerable companies are those which rely heavily or solely on factories in China for parts and materials. The activity of Chinese manufacturing plants has fallen in the past month and is expected to remain depressed for months.
The argue that the comparison of the the current epidemic with the 2002-2003 SARS epidemic is dangerous because the relative importance of China in the worldwide economic ecosystem has increased tremendously in the past 18 years.
“China has more than doubled its share of trade with the rest of the world between the SARS epidemic and today, and many more industries are now heavily dependent on Chin”, they argue.
The SARS epidemic started in the Guangdong province in 2002 and led to 8,000 cases in 2003. During that year, the GDP of China represented 4.31% of the world GDP. By contrast, the number of detected cases of Covid-19 has already passed 80,000 and China represents about 16% of the world GDP, an almost four-fold increase.
Equally important, mounting pressure to reduce supply chain costs motivated companies to pursue strategies such as lean manufacturing, offshoring, and outsourcing. Such cost-cutting measures mean that when there is a supply-chain disruption, manufacturing will stop quickly because of a lack of parts. The vast majority of global companies have no idea of what their risk exposure to what is going on in Asia actually is; that’s because few, if any, have complete knowledge of the locations of all the companies that provide parts to their direct suppliers.
The widening coronavirus epidemic is already affecting ports. Allard Castelein, the CEO of Rotterdam harbor said, “The effect of the coronavirus is already visible. The number of departures from Chinese ports has decreased by 20% these days.” Activity at the French port of Le Havre is also slowing and could drop by 30% within two months. And the anticipated impact on U.S. ports is starting to be factored into financial analyses.
In summary, we believe we should brace for a major effect on manufacturing worldwide. It will begin to hit full force in two to three weeks and could last for months.
