Coronavirus and the Global Supply Chain
Covid 19 commonly known as the Corona virus has taken the world by storm over the last month with cases spreading outward globally from the Wuhan province of China. An estimated of 100,000+ people are infected globally with many more possibly undocumented cases, and the virus starting to spread in areas outside of the China and the middle east. SOURCE
The 24 hour news cycle has provided near constant coverage of the outbreak along with the subsequent 11% drop in the S&P 500 stock market index largely driven by uncertainty, lowered sales projects and consumer spending drops possible.
Let’s take a look at the impact the corona virus is having on the global supply chain.
Factory shutdowns in China
Many manufacturing facilities are still shutdown in China, following the standard 3-4 week break associated with Chinese New Year. Fearing increased spread of the virus, most factories in China have prolonged their break to limit exposure to the virus, this disruption in manufacturing has put pressure on inventory levels for many global companies that rely on components built in China either directly or indirectly. With no exact date at which manufacturing will commence again, companies such as apple are factoring in product shortages to the financial plans going throughout the first two quarters of 2020.
Shipping Cancellations and Travel Bans
As governments are limiting travel between hot spots around the world, commercial shipping both air and ocean have taken a hit as some are reducing routes by government request to slow spread of the virus and many others are reducing the shipping schedule due the lack of demand. Even if your products are sitting finished in a warehouse in China, there is a good chance there will not be any Chinese trucking companies to transport them to the ports or airports and that many ocean and air carriers will have cancelled the route that your product needs to make it to market.
A secondary effect of reduced sailings by ocean carriers is the lack of containers available for export products produced in the US. This complicates the situation and creates more pressure on the ocean carriers to resume normal operations.
Decreased consumer spending
While this is a less clear problem for supply chains, decreased consumer spending during the outbreak has created a financial issue for tourist, consumer goods and travel companies . For example consumer spending on goods dropped 80% in China over the last month. For many companies, this drop in revenue is resulting in closures as companies are not able to afford their fixed costs while experiencing such a drop in revenue. This is one of the key reasons the stock market has taken such a hit. The least likely, but worst case fear in the US is that many companies will shutdown for a period of time or make large layoffs resulting in an increase in unemployment and thus a even larger decrease in consumer spending in the US. While this worst case scenario is very unlikely, it is possible, and could be the push that drives the US economy into a full blown recession.
Coronavirus spurred Purchasing
On the other side of the spectrum is the increase in purchasing of items that could be used to prepare for the rise of the virus in the US. This includes soaps, bleach, face masks and non perishable food items. This spike in purchasing for these types of items has created a short term shortage particularly of face masks as supply chains and inventories were not expecting the rise in demand.
Overall, it is impossible to predict what the outcome of the coronavirus outbreak will be. It is very likely the virus will continue to spread in the US and around the world, but as this happens, it is also very likely that the mortality rate will drop as the total number of infected rise, but most will experience more traditional flu like symptoms. Consider that many who experience cold or light flu symptoms won’t even go the doctor, then many who go to the doctor won’t actually be tested for the virus. The global supply chain is incredibly interconnected and the less obvious secondary and tertiary effects will create unexpected and less clear issues for many members of the US economy.
Our recommendation is to take a measured response and not make any large changes at this time to your supply chain. Due to the volatility and unpredictable nature of the situation making any large supply chain changes will likely create more issues that it would fix. China is under immense pressure to resume manufacturing, freight carriers want operation to resume as standard, so if you have freight that is being routed from china, maintain communication to your supply chain and supplier partners and simply be patient over the next week or two. Domestically transportation providers up to this point have remained unaffected by the virus.
Watch this space for updates on the Coronavirus’s Supply Chain Impact.
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