The emergence of COVID 19 has interrupted the regular course of life in many countries. According to the latest estimates, over 20% of the global population is under lockdown, and this has had an impact on the functioning of the worldwide economy, presenting challenges for businesses, governments and households in the short run.
However, challenges can also produce opportunities for reassessment and innovation. The strain exacted by the virus has forced companies to adjust their plans, create contingencies and develop alternative ways, which can result in improved efficiencies. Likewise, innovation often gains traction during periods of stress creating new opportunities.
We examine some of these opportunities below, looking at how reforms to supply chain management could strengthen global trading practices and examples of innovation in the technological and medical spheres.
Supply Chain Reorganisation
The advent and spread of COVID-19 has adversely affected global trade with flows severely disrupted. However, even before countries entered enforced lockdowns problems were evident. In January, the total value of Chinese exports fell by 17% year-on-year. Likewise, freight traffic from China arriving at Europe’s biggest port experienced a similar year-year-year decline of 20%.
China’s preeminent role in global manufacturing is now under scrutiny. Over the last thirty years, multi-national companies established manufacturing bases in China to take advantage of lower labour costs and to produce consumer goods at lower prices.
China’s importance as a manufacturer extends beyond consumer products. It is the dominant supplier of global intermediate goods. In other words, parts that are required to construct final products such as industrial machinery, car components and precision instruments. According to the United Nations Committee for Trade and Development, as of 2019, the percentage of global trade in intermediate goods that originate in China is around 20%, a vast increase from 4% in 2002. This increase indicates the scale of China’s integration into global value chains.
This concentration was one of the most significant contributing causes to the reduction in industrial output observed in other economies as China began its enforced shutdown. Disruption within China led to interruptions to the production of finished goods in importing countries, which has disrupted exports of finished products such as European cars.
Despite these difficulties, we are not suggesting a retreat of globalised supply chains is optimal or even desirable. Since 1990, more than one billion people across the globe have emerged from poverty, as formerly closed economies embraced the virtues of free trade. International supply chains are not the issue; it is the degree of concentration in the supply of intermediate goods in China and a small number of hubs. This concentration poses significant risks when unpredictable events such as pandemics or earthquakes occur.
So, what is the solution? Well we can learn from previous experience and the changes made after the 2011 Fukushima Earthquake in Japan provide instruction. Before the earthquake and subsequent nuclear reactor failures, the area around Fukushima supplied around 60% of the world’s critical car intermediates. The resulting devastation exposed the fragility of many car manufacturers’ supply chains, and the disruption led to shortages of essential components, production suspensions and delays in the delivery of end products.
The supply issues faced by auto-manufacturers forced many to institute changes in how they procured the multitude of parts required to build their products. It is important to note that few companies decided to bring supply chains back home, highlighting the value placed on international trade. Instead, companies held higher levels of stock, and diversified their suppliers geographically.
It is likely we will see a similar response once economies begin to emerge from the present shutdown. Higher short-term costs for businesses may arise but taking this action will reap dividends in the long term as essential supplies lines are protected and disruption minimised.
Technological and Medical Innovation
Progress and innovation often develop during periods of stress. Likewise, it can also encourage the rapid adoption of existing technology as businesses upgrade their systems.
A small example has been the rapid increase in the usage of fintech apps in Europe, with reports indicating a rise of 72%. Likewise, with 25% of the globe’s population remaining in enforced lockdown has led to a substantial increase in homeworking, with one provider of cloud services reporting an eight-fold rise in demand in certain regions.
These anecdotes reflect the potential for businesses to reduce fixed costs by adopting technology that allows them to reach consumers without the need for costly physical fixtures.
The virus has cruelly exposed the lack of adequate reserves for certain types of medical equipment. However, efforts are underway to procure additional supplies with engineering firms, generally engaged in other activities, dedicating resources to alleviating pressure. By increasing the capacity of these necessary items, reserves will have increased, and the human cost that has been exacted will be reduced as time progresses. It could also increase competition and produce more efficient and accurate goods.
Efforts to produce a COVID-19 vaccine have begun in earnest, and the search is spearheaded by some unlikely entities utilising novel techniques. Tobacco isn’t normally described as an aid for health, but some of the most promising developments is emerging from research carried out by companies normally engaged in the business of selling cigarettes.
Conclusion
The common theme of all crises is disruption, but with disorder comes the potential for innovation and the opportunity to reassess established systems and practices of working. This is sometimes referred to as creative destruction. Lessons are learned and help shape effective responses to future problems.
For instance, in recent weeks, we have focussed on the measures central banks have taken in response to the economic challenge of confronting the Coronavirus. The rapidity and scale of their actions reflect the lessons policymakers learned during the 2008 financial crisis. Likewise, recent reports from China indicate authorities are beginning to recognise the necessity of adequate public health practices by banning the consumption of certain types of meat, recognising both the human and economic costs of allowing such practices to continue.
If there is some comfort to be taken from the events of the last few months, it is that the economic stresses created by the virus have exposed areas of weakness that will now be strengthened. Harsh lessons have been learned, but they will prove instructive, ensuring we are better prepared to go into another pandemic and mitigate any damage caused by future disruption.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.
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