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The Confusing Post-Virus Future of Global Supply Chains

The world depends on China for protective masks, like so much else. That dependency may soon change.

What happens when a pandemic disrupts the global supply chain?

We’re finding out.

In February, manufacturing in China’s Hubei region was shut down when the novel coronavirus COVID-19 broke out. At the time, it looked like the virus was going to be contained to China, but now it is a pandemic. Globally, there are about 170,000 confirmed cases in more than 114 countries, as of mid-March.

Researchers and governments have little idea how far the virus will spread, except that it will continue to expand widely. Any prediction of its final reach is impossible. That makes projecting its ultimate effect on global supply chains impossible.

But one thing is sure: they will look radically different.

First and most obvious: companies will pull out of China. Apple, Microsoft and Google already have begun.

Silicon Valley Software Group, where I work, is a consortium of chief technology officers based in San Francisco, and one of our specialties is the internet of things (IoT). We’ve found that moving clients away from total dependence on China reduces their costs and allows them to scale easier. Vietnam and Mexico are favored destinations for manufacturing relocation.

The world is learning what happens when disaster strikes a region that accounts for one-fifth of all global manufacturing.

“Suddenly, all supply chains seem vulnerable because so many Chinese supply chains within supply chains within supply chains rely on each other for parts and raw materials,” Logistics Management’s Rosemary Coates writes. “That tiny valve that is inside a motor that you are sourcing for your US-made product is made in China. So are the rare earth elements you require to manufacture magnets and electronics…and on and on.”

For an example of how reliant we are on Chinese supply lines, consider this: If the coronavirus were to take widespread hold in the U.S., we could lack key drugs and medical equipment to fight it, as many are made in Hubei. (Hubei also supplies 80% of key ingredients to the world’s largest producer of generic drugs, India.) While some manufacturing has resumed in China, movement and business activity in that country remains significantly lower than normal levels.

Projecting the next few months is impossible, as the virus breaks out in new countries every day. Global health has taken a huge hit. The global economy, too, has taken a huge hit, affecting everything from sick employees to under-employment in the numerous transport nodes where Chinese goods have stopped flowing.

When March began, it would have been difficult to predict that the Dow would have its worst day in over 30 years, or that all major sports in the U.S. would be shut down. Even predicting tomorrow is problematic. We are in a time of massive uncertainty.

Mid- to long-term predictions are a little clearer, as they will continue trends that began before COVID-19. China and the US will continue to decouple. China will continue its push to shift to exporting its own products, as US companies shift more manufacturing out of China and into Latin America and Southeast Asia, accelerating a movement that was already underway. When you add this trend to tariffs, increasing costs in China, plus the increased difficulties faced by foreign companies in China, it is a good time to look at diversifying a supply chain.

But that doesn’t mean it will be easy.

Moving supply chain operations away from China will be costly and require a significant commitment in workforce and time. In some cases, it will take years to build an infrastructure and workforce comparable to what China offers.

Since China has a mature manufacturing infrastructure that many growing economies lack, companies that leave may have to build that kind of infrastructure — factories, housing, and shipping, for example — before they can begin producing. And even if all that were to be a piece of cake, getting out of China might prove difficult, as some manufacturing contracts there are notoriously difficult to terminate – sometimes in the past having resulted in the theft of intellectual property and even kidnapping in extreme cases. 

“The coronavirus exposed the weakness of China’s interdependent supply chains and the global chains they feed,” says Chris Maresca, managing director of Silicon Valley Software Group.

“Adding to the pre-existing trade war exodus, many companies will move out of China altogether, and many others will consider leaving,” Maresca says. “There is no way to forecast the ultimate impact of the coronavirus. What is certain is that COVID-19 will change future supply line strategy in ways we can’t even predict. All we can do is prepare for the next time something at this scale happens.”

We’re living the danger of putting all eggs in one basket, and we know that distributing supply chains across several regions can have its advantages. COVID-19 could test that theory as well, as cases of the coronavirus have shown up in numerous other low-cost manufacturing counties, including Mexico, Vietnam, Indonesia, and Malaysia.

Human beings and networks are inexorably intertwined. Supply chains and transport modes are networks the virus spreads along — two of the most heavily hit countries, Iran and Italy, are nodes on the New Silk Road that links transport infrastructure to China, for example.

The virus then affects the supply line by shutting it down.

In a viral pandemic, that physical infrastructure remains intact. The networks are fine: it’s simply missing people. We fear that in fact this could be the long-term takeaway for companies focused on the bottom line. The massive hit to the global economy and global supply chains boils down to the large numbers of people who cannot go to work during a viral outbreak . This could cause companies to see the human component of supply chains as the weakest part. This could lead to an acceleration of fully-automated factories filled with robots instead of people.

That is a doom-and-gloom scenario, but as the price of automated factories drops, some companies might look at 2020’s coronavirus as an example of a human workforce being a hazard, not a strength.

But again, we’re still too early into this thing to predict.

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