In recent months, China has taken a strong blow to its supply chains, as the coronavirus pandemic has rearranged the way in which the country accesses key inputs and finished products. This has had major ramifications for China as well as for the rest of the world. On top of the already damaging US-China trade war, which forced China to turn away from the US and toward other markets, the coronavirus has resulted in the sudden stop of key transportation channels and logistics hubs while halting production entirely in some areas.
As the focal point of many global value chains, China plays a key role in processing and shipping goods to other nations. The nation is part of many complex webs of inputs from Asia and around the globe, which are directed to manufacturing hubs that assemble products for domestic or foreign consumption. Because China was the first country impacted by the coronavirus, global supply chains took a direct hit, as production stalled.
The coronavirus crisis impacted Wuhan in particular. As households were quarantined, economic activity ground to a near halt. The city is a transportation hub and home to many high-tech component suppliers, especially optical component manufacturers such as Fiberhome Telecommunication Technologies Co. This meant that high-tech supply chains that cater to global firms were greatly affected.
Multinational firms outside the high tech industry, such as Gap and Toyota, also temporarily halted production in China as well. Some companies with numerous suppliers in China, such as Procter and Gamble, with a total of 387 suppliers in China, were profoundly affected. International restaurant chains, such as Starbucks, shut down during the outbreak.
The impact of quarantine and control measures can be seen in China’s industrial production and GDP data for the first quarter of 2020. Industrial production fell by 8.4%, while GDP declined by 6.8% year-on-year. While exports had already been in the process of decline between the US and China due to the ongoing trade war, imports of key components of high tech products shrank and overall exports fell by 11.4%. According to Xinhua, at the beginning of March, over 36,000 parts and components, more than 9,000 factories, and over 1,500 different primary and secondary suppliers were adversely impacted by coronavirus disruptions to production.
What is more, supply chain disruptions resulted in rising food prices, exacerbated by the outbreak of swine fever. The potential for shortages rose to prevent this from happening, farmers and merchants in nine provinces supplied essential foods to Hubei province, where coronavirus was first identified. In order to assist those stricken by weakened food production, the central government of China issued $20 million in subsidies to the agricultural sector and invested in technology, such as unmanned vehicles, that would boost automated transportation of goods. Local governments also stepped in to unify purchases and improve the cold chain storage of county cooperatives while subsiding storage costs.
After the immediate threat of the coronavirus faded in China, business-as-usual was not restored immediately. Authorities were extremely cautious in returning to regular economic activities. As a result, there is an ongoing shortage of parts and workers— as many remain in their villages due to quarantine measures. In addition, many companies are attempting to catch up to new worker protection measures and lagging recovery of transportation channels due to closures remain barriers to restarting businesses. All in all, resulting in a slow path to recovery.
The spread of coronavirus to the rest of the world meant that China would sustain dampened growth, as many developed nations slowed air traffic, particularly to and from China, reducing transportation linkages between China and the rest of the world. Both final and intermediate goods that usually traveled on passenger airlines had to find other outlets, altering entire markets, and creating supply bottlenecks in many industries. Trucking capacity has declined, resulting in transportation bottlenecks even when shipments from China to those regions make it to port.
All of these factors have increased costs of production or shortages, as production or logistics are delayed, or as transportation routes are rerouted or shut down. Consumers and producers in China and the rest of the world have experienced frustration as they attempt to carry out market activities.
While the outbreak has shocked many economies, there is a silver lining: this sudden shock to global supply chains is altering the way that firms think about production and logistics. Firms are now much more likely to assess supply chain risks and understand more precisely where their products are sourced from, looking not only at suppliers, but at the suppliers of suppliers. Some multinational firms may choose to diversify their supply chains, especially in sensitive sectors, such as pharmaceuticals and medical devices. A few companies have already begun this process due to the US-China trade war. Going forward, we can expect to see major changes in supply chain practices, which may set new expectations and benefit international firms if they experience future economic shocks.