Global trade is affected by myriad factors. The latest event to affect the international supply chain is the recent coronavirus that causes COVID-19. This novel virus has infected more than 80,000 people and killed more than 2,700.1 More cases are expected as the virus moves beyond its point of origin in China’s Hubei province to the rest of the world.
Resulting labor deficits and quarantine procedures could have major effects on production and shipping worldwide. Events like this one reinforce the need for companies to have detailed logistical plans in place to compensate for the shortages and delays that are likely to result.
Serious impacts expected
Worldwide health crises and other disasters have had significant effects on the global supply chain in the past. The comparatively minor outbreak of sudden acute respiratory syndrome (SARS) identified in 2003, also originating in China, cost the global economy about $40 billion dollars.2
In the wake of such catastrophes as SARS; the attacks of Sept. 11, 2001; Hurricane Katrina in 2005; and the meltdown at the Fukushima Dai-ichi nuclear power plant in 2011, it is reasonable to expect that the coronavirus could have similarly long-reaching effects. Several factors are likely to exacerbate its impacts on global supply chain economics.
First, the outbreak occurred during the Chinese Lunar New Year holiday, which took place between Jan. 25 and Feb. 4. Annually, this holiday precipitates what is considered the largest human migration on Earth over a period of about 40 days.3 Between early January and mid-February each year, hundreds of millions of Chinese people travel to visit relatives, much as Americans do during the Christmas holiday.
In an effort to slow the spread of the virus, many Lunar New Year celebrations were canceled, and the government issued travel bans4 and instituted a quarantine of millions of people, which prevents laborers from returning to work.5 The quarantine has had major effects on the labor force responsible for producing goods as well as loading and piloting the ships and planes used to transport goods all over the world.
The effects of the coronavirus outbreak might also affect the detente in the trade war between the United States and China signified by the signing of the “phase one” trade deal on Jan. 15. The new deal orchestrated by the administration of President Donald Trump promises $200 billion in sales to China.6 The coronavirus outbreak has the potential to impede these sales by creating a drag on the supply chain.
Identifying alternatives
Companies increasingly have attempted to anticipate the consequences of unexpected events on their suppliers and shippers. Disaster recovery plans have become an essential defense against the ramifications of these events.
While the production of these plans has become an industry in and of itself, all plans are not created equal. Some do not factor in delays in production and transport. A comprehensive disaster recovery plan needs to account for both. Merely hoping that problems will not rear their heads is no longer an adequate strategy.
In the case of the coronavirus outbreak, if a vendor relies on goods produced in China, it needs to have an alternative source of production. With a labor supply held up by quarantine procedures, it might be a while before production capabilities reach normal levels. The trade war has opened competitive production markets in Mexico, India, Malaysia, and Indonesia, among other places. Thus, there is little if any excuse not to have identified other production centers that can make up the shortfall in the event of a disaster.
Furthermore, it is imperative to assess whether transport services will have the capacity to ship existing inventory in the case of a crisis. If there is a backlog and a resulting lack of transport space, shipping costs might increase substantially. Delays in the wake of the Chinese Lunar New Year take place every year regardless, and in a time of crisis, delays will be even more marked. Establishing a plan with shipping partners for such events might not totally offset the cost increase. However, it can create space in the budget for it. Additionally, locating alternative routes and carriers ahead of time can allow companies to circumvent delays entirely.
While certainly expensive and complicated at the outset, disaster planning can pay dividends in the inevitable case of a major global crisis. Even if anticipated delays never manifest, planning for them might open new routes of production and shipping that ultimately can be used to increase efficiency during times of normal business operation.
Thinking ahead
Ample precedent exists for the alternative of no plan, which leads to an inability to meet demand and the financial consequences that result. Investors take note of such deficiencies and allocate funds accordingly. Developing an agile approach to anticipated problems will increase in importance as the global economy becomes more complex.
While the coronavirus outbreak continues, another disaster is already looming. The implementation of Brexit over the next year will have massive consequences in terms of customs and duty, taxation, and supply chain strategy. Getting ahead of this incipient crisis by anticipating its effects on the production and movement of goods can increase your company’s resilience.
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Pete Mento, Managing Director at Crowe LLP
+1 202 779 9907 or pete.mento@crowe.com
Endnotes
1. Helen Regan, Adam Renton, Meg Wagner, Mike Hayes, and Veronica Rocha, “February 25 Coronavirus News,” CNN, Feb. 25, 2020, https://www.cnn.com/asia/live-news/coronavirus-outbreak-02-25-20-hnk-intl/index.html
2. World Health Organization, “SARS (Severe Acute Respiratory Syndrome),” https://www.who.int/ith/diseases/sars/en/; William Feuer, “Coronavirus: The Hit to the Global Economy Will Be Worse Than SARS,” cnbc.com, Feb. 6, 2020, https://www.cnbc.com/2020/02/06/coronavirus-the-hit-to-the-global-economy-will-be-worse-than-sars.html
3. Karla Cripps and Serenitie Wang, “World’s Largest Annual Human Migration Now Underway in China,” CNN, Jan. 23, 2019 https://www.cnn.com/travel/article/lunar-new-year-travel-rush-2019/index.html
4. “China Coronavirus Spread Is Accelerating, Xi Jinping Warns,” Jan. 26, 2020, BBC https://www.bbc.com/news/world-asia-china-51249208
5. Emily Feng, “45 Million Chinese Now Under Quarantine as Officials Try to Halt Coronavirus Spread,” NPR, Jan. 27, 2020, https://www.npr.org/2020/01/27/800158025/45-million-chinese-now-under-quarantine-as-officials-try-to-halt-coronavirus-spr
6. James Palmer, “The ‘Phase One’ Trade Deal Is Still Hypothetical,” Foreign Policy, Jan. 15, 2020, https://foreignpolicy.com/2020/01/15/phase-one-us-china-trade-deal-hypothetical-trump-liu-he/
