The Economic Ramification Of COVID-19 On Global Supply Chain
On December 31, 2019, the World Health Organisation (WHO) came to know of a new strain of the virus – COVID-19 in China. What followed was a pandemic outbreak, disrupting the global supply chain and impacting the global macroeconomic outlook. Since then, the world has undergone a dramatic transformation, making quarantine and social distancing a societal norm while slowing down the velocity of global activity.
Since early 2020, a wave of extensive quarantine and lockdown compelled companies to shut down factories, leading to massive supply chain disruption. Today, global supply chains are experiencing a root-to-branch shutdown unlike any seen in modern days, as efforts to contain the outbreak hit every sector – from imminent food shortage in the U.S to the copper mines in Peru, and the ball-bearing makers in Germany’s industrial heartland.
However, this isn’t the first time we encountered a natural catastrophe, but none has upended the global supply chain like the coronavirus outbreak. A survey conducted by PwC – COVID-19 CFO Pulse Survey provides insight on the potential for the pandemic to turn to a global economic fallout is the top concern for finance leaders. Out of the participants, 80% indicated that a potential global recession was among the top-three concerns with respect to COVID-19, 54% of respondents feel the pandemic will significantly impact business operations, whereas 30 % expects a considerable impact on the supply chain. However, 90% of finance leaders say their business would return to normal in less than 3 months if COVID-19 were to end immediately.
With the advent of globalisation, the hyper-connected markets lead to a complex supply chain across nations and industries which are currently being savaged by the lingering impacts of the virus. And as the markets are demonstrating, the economic consequences are just beginning to kick in.
The pandemic outbreak has further revealed that supply chain disruptions could wreak far greater havoc on the global economy and national security than most people realise.
Supply Chain – A Key Component Of A Robust Economy
Supply chain frames a crucial component of global trade, ensuring the smooth functioning of the economy. If any connection in a supply chain falters, the final product gets affected, and the entire ecosystem stops functioning. The outbreak of COVID-19 in China – one of the world’s largest manufacturers created a ripple of supply chain disruption that spanned across the world. In today’s integrated world, companies are dealing with the fallout from containment measures such as extended factory holidays and travel restrictions.
Anurag Jain, Co-Founder & Executive Director of KredX, says that the supply chain is a crucial component of the overall economic perspective of a nation which translates smooth running of any vibrant economy. “It infuses the much-needed liquidity into the supply chain, which permeates through multiple layers and reaches the last mile supporting small and needy businesses. In times of crisis, any disruption to this chain leads to a discontinuity in the value creation at each level and subsequently affects the profitability of vulnerable small businesses,” he adds.
Geopolitical events like global trade and competitive tariffs had already compelled companies to involve sharp reversal and look out for localising their supply chains, especially those involved in sectors like technology and pharmaceuticals. India, for instance, imports 70% of its Active pharmaceutical ingredients (API) from China, causing significant disruption in supply chain and increase in demand.
In this pandemic, businesses that have labour-intensive processes have been disrupted because of social distancing and quarantine requirements. For instance, a farmer who produces wheat – a crop that gets harvested during summer, might encounter challenges in the upcoming days due to labour shortages. For some businesses, the challenge may not be about labour supply or raw materials, but the capability to deliver their products.
Impact of COVID-19 On Supply Chain
The pandemic outbreak and the consequential factory shutdown, followed by worldwide quarantine, and supply chain disruption is being felt globally across operations in ways that are difficult to perceive and assess.
The supply chain crisis that started in early 2020 is contributing to the growing speculation that the world has entered into its first recession since the financial crisis more than a decade ago. Industry experts are attributing the black swan event as a “rolling natural disaster” that will make a significant impact on the global output – creating a more profound and sprawling effect than the past trade wars, geopolitical events, or natural calamity.
The International Monetary Fund (IMF) revealed the grave outcome of the coronavirus-infected global economy and the multifaceted economic challenges for low-income nations. IMF Chief Economist Gita Gopinath wrote in the foreword for the fund’s World Economic Outlook, “It is very likely that this year, the global economy will experience its worst recession since the Great Depression, surpassing that seen during the financial crisis a decade ago.”
The IMF’s latest report The Great Lockdown described the black swan event as a crisis “like no other” and revealed that the global economic yield will reduce by 3% this year, before encountering a rebound next year.
The increasing worldwide tally of confirmed COVID-19 cases has created immense pressure on the healthcare system of nations, leading to an acute shortage of medical equipment and supplies worldwide – which are not only produced using global supply chains but have increasingly become dependent on China.
Intensifying the impact, the initial supply shock has become interwoven with a demand crisis, as workers and consumers are ordered to stay home. For instance, tech giant Apple is facing the impact on component makers in Italy, Germany, Malaysia, and South Korea after having weathered the February slowdown in Chinese factories that do the final assembly of products.
What Will the Post-Coronavirus Supply Chain Look Like?
Currently, China accounts for almost 20% of the world GDP and any stoppage to its output could translate into massive economic shock, worldwide. Considering the current situation, the post-pandemic supply chain outlook in the near future paints a grim picture.
On the home ground, digital lenders and platforms will become more conservative in their disbursals which will affect the economy negatively and will further widen the working capital gap being faced by the MSMEs in India. Although India Inc is making efforts to curb down the economic blow that the COVID-19 outbreak has caused by announcing moratorium to ease the situation, however, the question is more about the ability to pay rather than getting an EMI holiday. The worst part about the coronavirus pandemic is the uncertainty about its end and the potential impact it will have not only on the domestic market but also the global economy.
Considering the ongoing lockdown, businesses and factories shut down across industries; there’s no doubt that a global resilient supply chain has become crucial. The economic effect of COVID-19 will be far-reaching and unpredictable at this moment. “The current lockdown has already brought the economy to a grinding halt giving a severe blow on GDP. With the reverse migration of labour and employees, it will be months before we see the activity returning to normal levels,” adds Jain.
As per a study, most of the small businesses in India do not have a backup cash reserve of more than 27 days on average, and any extension of the current lockdown will severely challenge the sustainability of these businesses. “Unprecedented” would be the right word to sum it up.
As coronavirus continues to spread rapidly the macroeconomic outlook seems to be colossal. However, the pandemic provides some valuable insights on the vulnerability of supply chains. Once the pandemic reaches a controllable level, a lean supply chain strategy that would nullify or reduce the supply chain vulnerabilities will become intrinsic, a metaphorical shift from international to domestic supply chain and diversification of manufacturing entities is expected to be the new norm of the business ecosystem – a de-globalisation may have been set in motion.
The views expressed in this article are solely the author’s