The coronavirus disrupts supply chains, ratcheting up the pressure on global businesses as the US-China trade tension cools
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Covid-19, or the so-called novel coronavirus, is starting to bite global supply chains, with hopes of a short-term resolution diminishing. With each passing day, the death toll and number of infections in the epicentre Hubei province and across China increases. Many global businesses are still reeling from the drawn-out impact of the trade war and Brexit, facing a new and perhaps even greater threat to global trade and economic growth.
In China the economy would normally be getting back to business as usual after the Chinese New Year but instead, production has ground to a halt. The workforce remains homebound awaiting authorisation from the government to return. Retail and hospitality vendors have temporarily closed their doors, factories have slowed or ceased production, cargo sits unshipped, and Chinese tourists have been banned from international group travel.
Australia is particularly exposed to the impact of this outbreak - even more so in the wake of the recent bushfires and drought. PwC’s economic analysis highlights that the impact on the Australian tourism and education sectors alone could result in a fall of services exports of up to $2.3b this year. Moreover, retailers are indicating the constrained supply of Chinese-manufactured finished goods - including electrical machinery, electronic and other precision goods, clothing, footwear and apparel - will lead to revenue losses of 10% this year.
In recent times, the trade war has highlighted the exposure global supply chains face when over-relying on a single-source supplier or country. However, this situation has further exposed the inherent vulnerabilities arising from just-in-time delivery, low supplier diversity and low input country of origin visibility. This is starkly observed in the automotive industry which is heavily dependent on Chinese manufactured components. Automotive manufacturers in South Korea, Japan and Europe have been forced to make the decision to idle their plants, while US manufacturers watch their stocks of critical components rapidly dwindle.
Chinese manufacturers, suppliers, exporters and the shipping lines, airlines, non-vessel operated cargo-carriers, freight forwarders and other intermediaries are struggling to deliver goods. More Chinese buyers are threatening use of force majeure clauses to get out of planned purchases of goods - an outcome that would be particularly damaging to Australian commodities exporters who are highly leveraged in the middle kingdom.
Further delays are being experienced at Australian ports due to goods arriving without the required documentation, subsequently increasing supply chain costs. For example, refrigerated containers arriving in China are having to be shuffled around due to the shortage of available electrified spaces, increasing the risk of spoilage and attracting a hefty congestion surcharge of USD 1,000. There are also goods backing up along China’s Yangtze river and elsewhere which will need to be pushed through when exports resume, aggravated by reduced vessel and flight frequency due to route cancellations and decreased workforce availability. When authorisation to resume manufacturing production is ultimately given, this is expected to increase slowly due to the anticipated caution which employees, companies and their clients are expected to exercise, at least initially given the scale and danger Covid-19 has caused.
All of this paints a particularly grim picture of the outlook for global markets and the Australian economy.
However, there are steps that Australian traders can take to manage their exposure, particularly those who are dependent on Chinese buyers and sellers. Australian businesses should already be asking themselves:
How adequate are the contractual clauses and insurance arrangements in place to limit the exposure of global events such as virus outbreaks to the business?
What diversified sources of supply or alternative export markets may be available?
To what extent can we stockpile goods and wait out the impact of the outbreak?
If alternative sources of supply are available, which factors should be considered before making purchasing decisions? Is there a risk Covid-19 could also impact this alternative source of supply?
If this situation has given rise to an overdue review of the purchasing function in the business, what other issues and opportunities addressed to improve business sustainability moving forward?
The first step is ultimately to know your global supply chain with the key being access to timely, accurate data to interrogate and derive insight on the true costs to your business.
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