The COVID-19 crisis has exposed the fragile state of contemporary global supply chains. Due to regulatory restrictions and lockdowns, global supply networks were greatly crippled by a shortage of raw materials and labor supply as well as by changing structures of demand. The devastating impact of the pandemic on the global economy and trade is an urgent warning for companies to transform their existing global supply chain networks in order to make them more resilient, robust, and sustainable. Diversification of the supplier base, re-shoring, and digitalization will play significant roles in re-modeling modern-day global supply chains.
The COVID-19 pandemic has posed unprecedented challenges to economic systems all over the globe. While economic repercussions due to lockdowns and travel bans were felt by most industries throughout the world, automobile, electronics, and tourism were some of the hardest hit sectors. COVID-19 inflicted regulatory protocols led to a shortage of raw materials, human resources and finished goods worldwide and adversely affected the functioning of logistical systems. Global supply chains all over the world witnessed delays and shortages, and international trade was down by 18.5 percent in the second half of 2020.1 As a result, a re-modeling of global supply chains to enhance their sustainability and resilience has become the need of the hour.
HOW HAS COVID-19 IMPACTED GLOBAL SUPPLY CHAINS?
Global competition has led companies to shift their production networks to diverse locations in order to take advantage of relaxed labour policies, increase cost-effectiveness as well as manufacturing efficiency. As a result, global supply chains today are more expansive, complex and interconnected than ever. The COVID-19 crisis has exposed the inherent vulnerability of global supply chains, forcing companies to re-think and re-model their existing supply chain networks and prepare contingency plans to deal with situations of crisis. Since the beginning of the pandemic, global supply chains have continued to experience disruptions right from supply of raw materials to delivery of finished goods.
This is not the first time that global supply chains have been exposed to sudden shocks. For instance, when Japan was hit by tsunamis and earthquakes back in 2011, Japanese corporations in the United States had to cease production as they were unable to procure materials from suppliers back in Japan.2 However, this was only a temporary and localized disruption. The COVID-19 pandemic in turn, is a far more globalized calamity. The sheer scope and magnitude of the COVID-19 crisis not only threatens a timely restoration of supply networks, but also raises serious concerns regarding the role of supply chains in propagating economic shocks through different countries.3
What makes these COVID-19 inflicted supply chain disruptions more devastating that anything ever witnessed before? For starters, the origin of the COVID-19 virus in China, “the World’s factory”, led to a sudden and unprecedented shortage of raw material supply to countries all over the world due to lockdowns and travel and transport restrictions. The supply shock that began in China with the closing of factories and production units hit the global economy in no time, with innumerable industries all over the world experiencing a partial or complete halt of production altogether. This raises serious concerns regarding excessive reliance on China for raw materials. Consider this: “a quarter of immediate inputs in high-tech exports in the US, Japan, Korea, and Mexico” are procured from China. China accounts for 60 percent of antibiotic components imported by Japan and 40 percent imported by Germany and France.4 Around 70 percent of India’s bulk drug production is dependent on Chinese imports. Today, China contributes around 17-18 percent of the world’s GDP.5 Thus, it was only a matter of time before international production, heavily dependent on China, crumbled as national lockdowns were imposed in the country.
As infection rates increased in most countries, domestic production sites were also adversely affected, resulting in either the delaying of or a complete stoppage of national production processes. Additionally, restrictions on cross border movements as well as national lockdowns imposed to curb infection surge halted international trade and transportation channels, as well as led to shortage of labour supply. Around 75 per cent companies experienced supply chain disruptions in March 2020 itself, as reported by a survey done by the Institute For Supply Chain Management.6 During April 2020, Honda had to stop automobile production in Japan due to stoppage of supply of components and parts from its manufacturing plant in Wuhan, China, after the latter went into lockdown due to infection surge. Samsung had to suspend production in its factories located in India and South Korea due to national lockdowns and safety regulations.7 Furthermore, fresh regulatory protocols created logistical issues in trade and transportation and companies struggled to come up with alternative arrangements to facilitate their supply chain networks. Additionally, erratic demand shifts coupled with decreased production led to acute shortages everywhere, further crippling supply networks. This has been especially the case for medical equipment and supplies and various consumer goods. Such extraordinary rise in demand accentuated the supply-side shortages faced by companies globally.8 With the infection rate still on the rise in various countries and the threat of future infection waves, it is unlikely that normalcy will be restored in supply chain networks anytime soon.
GLOBAL SUPPLY CHAINS AND INTERNATIONAL TRADE: WHAT LIES AHEAD?
While this complex and expansive network of production was adopted by companies to minimize costs and maximize profits, the COVID-19 pandemic has exposed how such global interconnectedness is extremely vulnerable to reverberating economic shocks that can crumble entire economic systems. Furthermore, experts predict even more severe outbreaks of infectious diseases in the future due to extreme weather conditions as the climate crisis continues to worsen. Additionally, the ongoing US-China trade war and the subsequent rise of protectionist and nationalist economic tendencies in international trade warrants an urgent need for action vis-à-vis developing far more resilient global supply chains.9 Thus, there is an urgent need to transform and re-model our supply chain networks to increase their robustness and make them less susceptible to crisis situations. A survey done by McKinsey Global Institute (2020) revealed that about 93% of supply chain executives, from around the world, planned to build more resilient supply chain networks as we venture into what is being called the “new normal”. This will be done through diversifying the supplier base, nearshoring, focusing on redundancy across suppliers, and prioritizing end-to-end digital transformation.10
One of the direct implications of the current crisis on global supply chain networks in the future will be active reshoring opportunities sought by companies and diversifying of suppliers to mitigate potential risks related to specific geographic locations and specific suppliers. We have already witnessed numerous companies shift operations to countries like Vietnam and Mexico from China in the past year itself.11 This has the potential to create opportunities for more countries to open their shores to attract potential foreign investment through investor-friendly economic and labour market policies and through the creation of financial incentives.
Additionally, countries may prioritize and accelerate domestic production to build resilience against global economic shocks. The World Economic Forum (2020) has advocated for countries to “aggressively evaluate near-shore options to shorten supply chains and increase proximity to customers” to build robustness in times of crisis situations.12 Companies shall also experience greater political pressure to accelerate domestic production. Countries like United States and France have already asked their companies to “re-evaluate their supply chains” to reduce dependency on China and other Asian countries.13 Inevitably, a rise in economic nationalism and protectionism is in order.
The COVID-19 pandemic has also opened endless possibilities into building digital infrastructure to support logistical work and operations, and this trend is likely to be permanently adapted by companies in the future. Largescale supply chain innovation using Artificial Intelligence and blockchain will aid in facilitating end-to-end digital transformation to build sustainable and resilient supply chains.14 Companies will be looking to integrate existing as well as forthcoming technologies into their business models to promote sustainability and build robustness. Mechanization and technological automation will help reduce labour costs without geographic re-location, and will reduce dependence on physical labour. This way, production can be carried out in a cost-effective manner without having to re-locate to low-income countries. Investment in technology to boost production without incurring additional labour costs is bound to accelerate, as companies become wary of potential disruptions.
The current COVID-19 crisis is forcing countries to re-evaluate their production strategies in a globalized world. However, it is far too soon to confidently remark on how of global supply chains will evolve in the future. It is also imperative to acknowledge that international production networks will indeed play a significant and inevitable role in the mass production of vaccines and life-saving drugs during this health crisis.15 COVID-19’s long-term impacts on global supply chains are yet to be fully discerned. Nonetheless, the need to develop a more resilient, flexible and sustainable system of operations is definitely set to be a priority for companies worldwide.