World Economic Forum.
- This outbreak shows the need for companies to focus on preparedness and response to risk.
- Businesses should increase the visibility of value chains, shorten supply chains to be nearer to customers, leverage technologies and evaluate different scenarios.
It is clear that the COVID-19 (coronavirus) outbreak is disrupting manufacturing and global value chains, with consequences for businesses, consumers and the global economy. Many CEOs are scrambling to respond to urgent questions about how to protect their employees, ensure supply security, mitigate the financial impact, address reputational risks, and navigate market uncertainty, which is driving down demand.
Global value chains, which are essential engines of economic development and GDP growth, have traditionally been designed to optimize for cost competitiveness. The coronavirus underlines the need for companies to focus on risk competitiveness as well.
A new kind of disruption
COVID-19 is already having significant effects on global markets. Fear of the virus is affecting the global oil price, as Chinese refiners slash output in anticipation of shrinking demand at home. Slowing Chinese demand is further darkening the outlook for suppliers. According to conservative estimates from Reuters, China’s economic growth is expected to slow to 4.5 percent in the first quarter of 2020—the slowest pace since the 2008 financial crisis and could cost the global economy $1.1 trillion in lost income.
The final economic toll of this crisis is yet unknown, but it’s likely this crisis will be far more disruptive than anything we have experienced in the past.
From a value-chain perspective, the disruptions associated with past crises such as the 2003 outbreak of SARS or the 2011 Fukushima nuclear disaster may not be instructive for action today. China is now much more developed and integrated with the global economy—growing from 9 percent of global manufacturing output in 2003 to more than 28 percent today—and the country has significantly improved its transportation networks in recent years.
In addition, today’s value chains are global and more complex than they were in 2003 or 2011. According to “Business Impact of the Coronavirus,” a Dun & Bradstreet report published earlier this month, 938 of the Fortune 1000 companies have a tier 1 or tier 2 supplier that has been affected by the virus.
The automotive industry with its just-in-time supply chain and global supplier network felt the shock early on. In fact, China’s automotive industry is at less than 50 percent of its pre-virus production rates, and while some Chinese parts suppliers have partially resumed operations, it will be a long time before factories return to full capacity. For example, Volkswagen AG’s joint venture with China FAW Group Co. resumed at four plants last week but won’t be at full steam until May.
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These delays have created a ripple effect on domestic and overseas OEMs, which are postponing or interrupting production. This is a heavy blow to an already falling market, causing an additional 2 to 5 percent volume decline this year.
Electronic component manufacturers are also being directly hit. For example, Apple, which lost more than 12 percent of its market value in the past week, works with suppliers in 43 countries, all of which receive components from contract manufacturers in China.
Across industries, the availability of white- and blue-collar labor is severely limited, and strict quarantines in key manufacturing hubs continue to take a toll. Many employees are staying home, and according to Jefferies Financial Group, only 60 to 80 percent of China’s 300 million migrant workers are expected to get back by the second quarter of the year.
Responding to risk
How should companies respond and prepare for the long-term disruption to supply?
Our recent paper “Reshaping Global Value,” produced by the World Economic Forum in collaboration with Kearney, offers a framework to help understand the impact of forces that are disrupting global value chains and the strategies that business leaders and governments need to deploy to respond.
In the context of the coronavirus crisis, leaders urgently need to deploy short-term strategies to become more resilient and make longer-term considerations that will reconfigure supply chains to protect against risks. These include:
- Develop visibility to the entire value chain across primary, secondary, and even tertiary players. Who makes critical parts? Are there alternate sources? What is the supplier’s inventory status? Dual-source critical parts of the value chain, or increase inventory buffers to insulate against vulnerabilities.
- Aggressively evaluate near-shore options to shorten supply chains and increase proximity to customers.
- Leverage advanced manufacturing technologies to become more resilient by improving sensing and pivoting capabilities.
- Deploy scenario-planning techniques to systematically evaluate the end-to-end value chain, establish action plans and be able to deploy rapidly.
Mitigating the impact of COVID-19 on a global scale is too big and too urgent for any single entity to address by themselves. We need to work together—as business and government leaders—to harness the leading practices and catalyze a joint response.
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By working together, stakeholders can take the actions needed to bring about the best possible solution for navigating new global risks.
Thierry Heinzmann, Manager at Kearney and seconded to the World Economic Forum, contributed to this article.
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