How the COVID-19 pandemic has affected the US supply chain
A summary on how globalization affects the US supply chain
Globalization. Since its introduction, that concept has only become much more scrutinized and despised. But it is globalization of supply chains that has built the foundation for the success of American companies and entire industries since the 1970s. Take Apple, for example. Tim Cook states that much of Apple’s manufacturing, sourcing take place in China not only because of competitive advantages in cost, but also quality, to the point where final assembly takes place overseas. This fundamentally means many profits of global companies stem from their China subsidiaries, which do not show up on the trade deficit as imports nor exports but rather shows up on the income statements. Without the level of quality and costs specialized producers, Apple would have to switch to the next best alternative in terms of costs- which evidence now shows is Vietnam or Mexico.
What is the situation with the trade war?
In the upcoming months, both governments are preparing for Phase 2 of the agreement. Phase 1 took place in January, in which both sides agreed to raise imports, China increasing purchases of American products by $200 billion over a 24-month period. China would also ramp up legal protection for counterfeiting and make it easier for companies to pursue legal action over trade secret theft.
Together with its Chinese partners, General Motors sold 3.6 million vehicles in China last year, more than in the United States. GM brands like Cadillac or more importantly Boeing were very popular in China- that is very likely to change given decline in the airline industry, as well as with grounding of 737 Maxes.
Despite this, some US brands are actually doubling down on China- with Popeyes opening stores, Tim Hortons declaring opening of over 1500 coffee shops, Walmart, Tesla and Exxon Mobil all believe in the country’s long term growth potential despite high geopolitical tensions. Companies are still optimistic, with Starbucks CEO Kevin Johnson telling Bloomberg, "The market in China — I am so bullish on it for the long term…. we're going to be able to accelerate and build new stores for a long, long time in China".
Companies that built their supply chains in China now face the danger of being cut off by regulation, which the government has full power to do, but does not because it still views many American firms as “business partners”. The US has further restricted exports to Chinese telecom equipment manufacturer Huawei, which has beforehand had zero revenues from the US, out of national security concerns. Huawei’s strong brand would give China perfect reason to stop encouraging new brands to enter and ban the many big US brands that operate in its own countries.
What implications does COVID-19 add to the situation?
COVID-19 has severely slowed most major economies- US is the 2nd on the list of trade impact, preceded by the European Union. US trade and supply chain partners are affected as well- countries like Vietnam, Mexico, Germany, and Japan are among the top 10 most heavily impacted. China’s biggest export destinations (excluding the US) are also affected: Hong Kong (255B), Japan ($157B), Germany ($109B) and South Korea ($98.1B).
Because all these economies are still recovering from the pandemic, the agreements put forth during Phase 1 of the trade deal, specifically the import boost China has agreed to is too high and unrealistic. The timing of this agreement, being in January during Chinese New Year, coupled with the outbreak of COVID-19, meant that the economy took a massive hit. China’s economy shrunk by 6.8% from January to March, ending nearly a half-century of growth. China’s economy will simply fail to match the agreed upon amount. Worse of all, China is unlikely to purchase any products from industries severely affected by COVID-19. In the coming months, it makes sense for the US government to renegotiate more realistic goals and ease the burden on Chinese consumers. This would be mutually beneficial to its own companies, and US based exporters who would benefit from the easing of the deal.
On a micro level, big multinational corporations do not have full control over their supply chain: Once they decide to outsource the production of goods and services, they tend to deal only with the first layer of suppliers. But those suppliers also buy intermediate goods and services from other suppliers, who buy from other suppliers, and so on. A single bottleneck can disrupt the entire supply chain, which has become probably the “largest disruption to supply chains we’ve seen since World War 2”. This is something the manufacturing bases are not set up to adapt to such rapid changes in demand. At the very minimum, many domestic businesses are having shortages, with many retailers having to adjust short-term by rationing items, or prioritizing deliveries of essential goods- most are reducing the number of SKU (stock-keeping units) that they offer. Many factories are looking to pivot their production- for example, some automotive suppliers stopped making cars and switched to building ventilators. Richard Sandall, chief supply chain evangelist at Innovapptive, said companies are taking measures in plants and warehouses to avoid further spread of the virus, including running production lines at slower speeds, assigning workers to designated work areas, and sanitizing equipment between shifts.
What will happen in the long term?
To adjust, this pandemic will have long-term effects on the way supply chains are geared to handle recessions and shortages like this- companies will undoubtedly be focused on building resilience, contingency plans, response mechanisms and risk assessments of their supply chains to be more prepared. On a geopolitical level, COVID has only sped up the phenomenon of “de-Chinafication” of US and other supply chains, where anti-globalization sentiment has driven companies to gradually reduce outsourcing and more on reshoring production, which will only raise costs for producers and consumers. According to Dean Garrett of Wharton, this means that Mexico and Vietnam are likely beneficiaries of this process, Mexico being near the US and Vietnam having similar capabilities as China as a manufacturing nation.
Sources
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Coronavirus Outbreak Has Cost Global Value Chains $50 Billion in Exports, www.unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=2297.
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Lichtenwalter, Jim. “How COVID-19 Is Affecting Every Aspect of Supply Chains”. Asug Insights, Asug, 25 Apr. 2020, www.asug.com/insights/how-covid-19-is-affecting-every-aspect-of-supply-chains
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