How Coronavirus Could Impact the Global Supply Chain by Mid-March

COVID-19 is disrupting manufacturing outside of the United States, but the Harvard Business Review projected two weeks ago that things could get dicey in the U.S., as well.

Reports on how the Covid-19 outbreak is affecting supply chains and disrupting manufacturing operations around the world are increasing daily. But the worst is yet to come. We predict that the peak of the impact of Covid-19 on global supply chains will occur in mid-March, forcing thousands of companies to throttle down or temporarily shut assembly and manufacturing plants in the U.S. and Europe. The most vulnerable companies are those which rely heavily or solely on factories in China for parts and materials. The activity of Chinese manufacturing plants has fallen in the past month and is expected to remain depressed for months.

What happens in China, though, is having a big effect worldwide because over the past two decades, they’ve progressively become more and more important to the world economy …

Many analyses compare the current epidemic with the 2002-2003 SARS epidemic, which created just a blip in the global financial markets. This comparison is dangerous because the relative importance of China in the worldwide economic ecosystem has increased tremendously in the past 18 years: China has more than doubled its share of trade with the rest of the world between the SARS epidemic and today, and many more industries are now heavily dependent on China. The SARS epidemic started in the Guangdong province in 2002 and led to 8,000 cases in 2003. During that year, the GDP of China represented 4.31% of the world GDP. By contrast, the number of detected cases of Covid-19 has already passed 80,000 and China represents about 16% of the world GDP, an almost four-fold increase.

Equally important, mounting pressure to reduce supply chain costs motivated companies to pursue strategies such as lean manufacturing, offshoring, and outsourcing. Such cost-cutting measures mean that when there is a supply-chain disruption, manufacturing will stop quickly because of a lack of parts. The vast majority of global companies have no idea of what their risk exposure to what is going on in Asia actually is; that’s because few, if any, have complete knowledge of the locations of all the companies that provide parts to their direct suppliers.

Read the rest at Harvard Business Review...