Is COVID-19 making governments and companies reconsider their supply chains?

Is COVID-19 making governments and companies reconsider their supply chains?

COVID-19 has touched all of our lives during the course of 2020. In the business world, it has particularly highlighted a number of issues with supply chains that either already existed before the outbreak or presented unique challenges that have never needed to be addressed before.

When hospitals and care homes became inundated, medical and care workers were desperate for personal protective equipment (PPE) and medicines. South-East Asia has the world’s biggest source of natural rubber and Malaysia alone accounts for about 60% of the globe’s entire supply of rubber gloves; India’s pharmaceutical industry gets 70% of its Active Pharmaceutical Ingredients (“API”) from China – incredible when you think that India has one of the world’s biggest generic drug businesses. Things got so desperate that the Trump administration tried to raise Kodak from the (almost) dead with a massive (and controversial) loan to make chemicals needed for drug manufacture!  Meanwhile, in Europe there were calls for more re-shoring of API production given the exposure to China, although pharmaceutical companies themselves said that the European Commission and EU member states would have to readjust their pricing policies to take into account higher resulting production costs.

Whilst many companies in the technology sector have done well during the lockdown, some parts of the sector have suffered and COVID-19 has highlighted significant imbalances. According to Thierry Breton, the European Internal Market Commissioner, Europe is 100% reliant on lithium imports.  Lithium is a key ingredient for batteries and 78% of it comes from China. He observed that industrial-use lithium demand will increase by 60x by 2050 and cobalt demand will increase by 15x. In addition to this, demand for rare earth metals used in electric vehicle, robot and wind generator batteries could be 10x their current levels.

Elsewhere, there were supplying bottlenecks caused by facilities that were either running on lower capacity due to employee absences and/or increased social distancing in the workplace. Apple announced quite early on that it would be delaying the official launch of its new 5G handset to allow production to catch-up. A report published by McKinsey Global Institute suggests that governments are likely to engage in major overhauls, which will dent profits and a Kearney report believes that they will also strive for more robust and localized supply chains as consumers continue to demand rapid delivery, requiring the finished product to be closer to the end user. All of these measures will cost money and take time to implement, against a backdrop where COVID-19 still hangs over us.

However, I think that John Spoehr, Director of the Australian Industrial Transformation Institute summed up the current situation best when he said, “This crisis has exposed deep vulnerabilities in global supply chains and how many western nations have allowed their manufacturing sectors to become hollowed out amid low cost competition, particularly from China”.

Everyone is taking a long hard look at their supply chains as many businesses have lost money and some have gone under as a result of the unprecedented disruption caused by COVID-19. Some companies have also made insurance claims under their existing business interruption policies for the impact of COVID-19 and these are subject to the well-publicized Financial Conduct Authority (FCA) test case, but very few companies had bespoke supply chain insurance in place prior to the pandemic.

Countries around the world have tightened takeover rules to ensure that key strategic assets do not end up on the shopping list of oil countries’ sovereign wealth funds or Chinese tech behemoths. They have all been shocked about how their respective supply chains have been so China-centric in many ways. Boris Johnson has had to be more wary than most about clunky supply chains given Brexit, but the pandemic took things to another level and there has been talk of reshoring generic drug manufacture and reducing the UK’s dependence on India and China. Australia is in a delicate position because it is making moves to be more independent whilst at the same time being cognizant that 25% of its trading is with China. Meanwhile, other countries in Asia are trying to make themselves more attractive alternatives to China. The Indian government, for instance, announced incentives packages early on in Lockdown to be allocated to API production and the establishment of manufacturing hubs.

Whilst we are still living in the shadow of the virus, it will be interesting to see in the coming months what steps governments and companies take to reduce the risk of their supply chains and reliance on certain countries and suppliers going forward. This will require the evaluation of new risks, including locations and suppliers, and I wonder if this will result in an increase in the uptake of bespoke supply chain insurance?  However, as we have seen many times in history, will the current steps that are being taken to address the imbalances and issues in the supply chain be long lasting, or in the years to come will there be an inevitable drift back to old habits and the temptation of lower prices? Time will tell …

For more information on this topic, or to learn how Baker Tilly’s Value Architects™ can help, contact our team.

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