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Too Many Eggs in Wuhan’s Basket Has Cracked the Global Supply Chain
It’s now safe to call COVID-19 a black swan event that few could have predicted just four months ago. Although it’s still early to state the full economic impact of COVID-19 on the global supply chain, the long-term ramifications across the value chain are indisputable – from raw materials all the way to finished products. To make matters worse, the virus was detected in Wuhan. Although the Chinese city has been a manufacturing hub for decades now, it has also ushered in an era of industrial transformation in its region. Industries present in Wuhan include pharmaceuticals, technology, biological engineering, and steel and iron manufacturing. Reports suggest that approximately 40% of Fortune Global 500 companies have a base of operations in Wuhan. Many companies also have Tier 1 and Tier 2 suppliers in the city. Furthermore, Wuhan has the distinction of being the largest inland port in China and is a crucial component in the intricate cog of Chinese manufacturing. Thus, the domino effect of a lockdown in Wuhan had devastating consequences for the country and thereby the world.
Holiday Stockpiling Gone Sour – Companies Counted Their Cash
Registers Before Inventory Hatched To add fuel to the fire, the COVID-19 outbreak corresponded with the Lunar New Year – China’s most important holiday, when factories shut down nationwide for anywhere between a fortnight to one month. Naturally, foreign companies doing business there are well aware of this and had made preparations beforehand by placing large orders well in advance to ensure sufficient inventory to last during the gift-giving period. The holiday usually begins by 24th January with factories resuming by 9th February. However, government-enforced lockdowns meant that only large enterprises had resumed operations by the end of the month, and at much less than optimal capacity. Small and medium scale enterprises were especially hard hit with less than half of their operations running.
What Doesn’t Kill You Makes You Stronger – Short-Term Economic Pain but Minimal Long-Term Impact?
Nonetheless, economists strongly believe that the medium and long-term economic impact on most industries will be relatively limited. The short term paints a different picture though. The consumer sector – contributing a lion’s share of economic growth in most nations – will be badly affected. In the first half of 2020, retail, travel & hospitality, aerospace, and catering, are anticipated to experience substantial cash flow pressure on account of plummeting sales and exorbitant fixed costs, and the shortfall in cyclical consumption cycles is unlikely to bounce back after the intensity of the virus subsides. This has already been witnessed in China with a number of high-profile companies downgrading their earnings forecast for the next few quarters. In stark contrast, the impact on manufacturing should be minimal as the obstructions are primarily short-term in nature, largely due to lack of employee mobility, and traffic and supply disruptions.
Asia’s Gain at China’s Expense – Are they Destined for Eternal Enmity?
That being said, companies have until now, only focused on the economic advantages of manufacturing in China. Recently, there has been a notable uptake in hostility towards the country unrestricted to the West alone. Some such as Japan have even begun creating stimulus packages to lure their corporations away from China. The primary reason is that companies ‘placed all their eggs in one basket’ and depend almost exclusively on China to provide manufactured goods. The second is that the COVID-19 outbreak has exposed in stark terms, how bottlenecks in a single manufacturing hub can bring the whole system down to its knees. Although the stimulus packages are intended for companies to return to their country of origin, that is exceedingly unlikely as manufacturing costs in developed nations are unimaginably higher. The more plausible scenario is factories moving further southward with India, Vietnam, Indonesia, and Thailand being potential beneficiaries.
Can India Reclaim Its Identity as the Exporting Powerhouse of Yore?
India, in particular, is attempting to strike while the iron is hot. The subcontinental giant is reportedly readying a plot of land twice the size of Luxembourg for companies seeking to move out of the world’s most populous nation and has even reached out to 1000 American MNCs. The US-India Business Council, a powerful lobby group working to enhance trade, has witnessed a sharp uptick in India’s interest to attract supply chain companies, both at state and central government levels. Companies already present in India may well try to ramp up production there. Unfortunately, investment decisions are rarely made in haste and these strategies are still in the exploratory phase. India’s decision to pull out of the Regional Comprehensive Economic Partnership (RCEP), seven years of negotiation notwithstanding, did not help its case either. Two steps in the right direction to assuage fears of investors could be greater regional integration as global trade follows the ‘sell where you make’ model where companies ‘near-source’ production to bring it close to demand. The second step would be less policy flip-flops with respect to FDI policies. Decades of protectionism have made foreigners somewhat hesitant to invest in India. The onus lies on the country to change that perception for the better and could well augur the shift towards Asian manufacturing where China may not be the byword anymore.
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