Over the first half of 2020, there was barely any facet of business that was not affected by the pandemic. Global supply chains, in particular, are set for a major reshuffle after the COVID‑19 crisis has exposed the vulnerability of countries and companies that rely too heavily on a limited number of suppliers.
Reassessing Dependence on One Sourcing Centres
Businesses all over the world have awoken to the risks of overdependence on one production base as they experienced shortages of urgently needed items such as face masks and ventilators caused by the disruption to supply chains. These have spurred the promotion of local manufacturing in countries such as the US, the UK, Japan, and others. In short, there will be a shake‑up of global sourcing and a move away from some of the current mass production centres in Asia.
With factories across China being closed or operating well below full capacity, and much of the country’s domestic and international transport halted, the pandemic has had a large impact on many overseas brands. Like other international carmakers, Nissan and Toyota have had to halt production at factories in Japan because of the interruption to the supply of parts from China. Indian pharmaceutical companies have warned that their output is at risk from disrupted shipments of Chinese ingredients. Western manufacturers of industrial electronics complain that they cannot get the Chinese circuit boards their machines require.
More importantly, many medical products such as personal protection equipment (PPE) are largely produced in China. With the COVID‑19 outbreak, countries were scrambling to find PPE medical equipment to protect their front‑line medical workers fighting the virus in hospitals and retirement homes. Most of their frantic appeals for PPE supplies ended up with the original manufacturers and suppliers back in China. A huge shortage of products ensued as buyers from all over the world started competing for the same supplies. What made matters worse was the shortage of air‑cargo capacity around the world as many airlines were grounded. This also significantly increased the prices for air freight to transport the PPE goods from China to destinations around the world.
According to a February survey by German supply chain consultants Kloepfel Consulting, every third company in Europe and the US has major Chinese customers, and 81% of the companies it surveyed rely on Chinese suppliers.
Even before the coronavirus pandemic, the retaliatory tariffs imposed on each other by the US and China had encouraged many companies, large and small, to diversify their supply chains. It is expected that the speed of diversification will now accelerate.
The US Government and supporters of reducing reliance on China have used the epidemic to highlight what they believe is a longstanding vulnerability. Americans could be left dangerously short of medicines in the event of trade conflict or disruptions like the COVID‑19 outbreak.
The post COVID‑19 world will be very different. Countries as well as companies will be reviewing their manufacturing base from a risk management perspective. They will be looking to reduce reliance on one major production source. The global trend of single sourcing over the past 10 years will move towards a global market with dual or multiple sources for any single product. Some Hong Kong companies go along with this view.
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