Covid-19: as China reopens, tech firms find supply-chain disruptions continue elsewhere
Fancy Wang
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Fancy Wang 0525 2020
The following part comes from Jodi Xu Klein & Rebecca Liao & Ziyang Fan
When China announced the reopening of its factories at the end of March, it helped alleviate the pressure many of the world’s technology companies had come under since the coronavirus outbreak began. But the broken supply chain is far from back to normal.
In a survey by the Institute for Supply Management, a US trade association, 80% of 600 US responding companies believed they would be affected by supply-chain disruptions in early March. By the end of March, that number rose to 95%. Most respondents anticipated that the severity would increase in other parts of the world – especially in North America, Japan, Korea and Europe – after China reopened.
“China isn’t the biggest problem anymore. Unfortunately, we are in a worse position now because as the virus spread, the rest of the world got pneumonia,” said Kamala Raman, a senior director of supply chain at the research and advisory firm Gartner. “Now we need to address all the complications.”
While China ramped up manufacturing capacity, tech companies were hit by new waves of supply-chain headaches as the pandemic spread globally. The virus has ravaged countries from Italy and Mexico to the United States, infecting 45 times more people than China’s own official count of confirmed cases. National stay-at-home orders and the shutting of factories have led to an even bigger shortage of workers and transportation disruptions, further exacerbating the supply-chain disruptions.
For the first week of April, global air cargo capacity dropped 35% year-on-year, according to Seabury Consulting. The routes from Europe to North America were the most affected, with a drop-off of 60% of capacity; air cargo fell 15% from China to North America.
Air cargo rates also jumped more than 10 times, as shipping demand surged while the world rushed to obtain personal protective equipment to help shield health care workers. Air freight base rates generally start at US$1.50 (RM6.50) per kilogramme, or 68 cents per pound, according to the World Bank. Today, the lowest freight rate is at US$7.38 (RM32) per pound, according to the UPS website.
US tech companies are particularly vulnerable to supply chain disruptions, with a single product often requiring hundreds of parts from multiple countries. Many of those parts also involve numerous manufacturing steps, all completed in factories overseas.
“The computer and electronic products industry is at particular risk of disruption due to thin supply inventories,” Kaj Malden, a policy analyst at the US-China Economic and Security Review Commission, reported last month.
Take Apple’s iPhone. While assembled in China, the parts – cameras, chips, accelerators, batteries – are manufactured by dozens of companies around the world. Qualcomm, the US company that supplies chips and cameras for the iPhone, makes its parts in Australia, Brazil, China, India, Indonesia, Japan, South Korea and more than a dozen locations through Europe and Latin America.
“The cascading effect is if you need a hundred parts to build something, and you don’t have two or three of them, you still can’t build it,” Raman said.
Tech companies began feeling the disruption when Covid-19 first took hold in China, which locked down entire cities and shut manufacturing plants.
Qualcomm said in a statement that it had “complied with government restrictions in China since January, which have limited the employees' ability to work” in the country.
“Although such restrictions have since lessened, on March 12, 2020, we announced a global mandatory work from home policy for all of our other employees who are able to perform their jobs remotely,” Qualcomm said.
The mandate “is still in place”, and it expected the “supply and workforce issues to continue, and in some instances increase”, the company, which is based in San Diego, California, said.
Customers at an Apple store in Hangzhou, Zhejiang province, on April 24. Photo: China Daily via Reuters
The setback contributed to the product delay at Apple: the much-anticipated March release of the new iPhone was first postponed by the manufacturing pause in China, then later by delays in the supply chains beyond China.
“Our scenario now assumes the 5G iPhones do not get released this fall due to the global lockdown-like conditions with the supply chain in Asia still on a path to normalisation,” said Dan Ives, who follows Apple for Wedbush Securities. Ives said he did not expect the iPhone 12 launch to take place until after October.
Intel, the silicon-chip giant, has also pointed to the disruption caused by the shutdown outside China as well.
Based in Santa Clara, California, Intel said its manufacturing operations in the US, Ireland, Israel, Malaysia and Vietnam have all been seriously affected by the outbreak.
Intel’s production has been sharply disrupted by pandemic-related shutdowns in countries outside China. Photo: AP
At an investor call late last month, Intel joined many tech companies in withdrawing full-year guidance about its prospects because of uncertainty caused by the pandemic. Coronavirus-related shutdowns in some countries where Intel operates have stalled construction projects, George Davis, its chief financial officer, said.
Employees have tested positive for coronavirus at Intel’s California, Arizona and Oregon locations.
“Current and future restrictions or disruptions of transportation, such as reduced availability of air transport, port closures, and increased border controls or closures, can also impact our ability to meet demand,” Intel said.
The prolonged disruptions have prompted tech companies to consider whether relying on other countries for parts and manufacturing remains a good idea.
“Global supply chains have brought amazing benefits for people in all economies. It’s precisely the reason why we have luxury in our daily lives like computers that cost only a couple of hundred dollars,” Shannon O’Neil, a senior fellow at the Council on Foreign Relations, said at an event sponsored by Foreign Policy last week.
“It will be everyone’s loss if there is a pullback,” she warned. “It will make us poorer and less prosperous.”
Even so, the pandemic reminds businesses, particularly tech companies, of the vulnerability that comes with that reliance.
Now the US and much of Europe, even in regions where confirmed cases continue to increase, are moving to reopen. As of Friday, a majority of US states have either loosened restrictions to various degrees or plan to – though leading health experts have suggested that Covid-19 could return in the fall and even become a seasonal disease like the flu.
“If for the foreseeable future, this is going to be part of our daily life, these [supply chain] issues will continue and companies will have a lot of disruption,” said John Scannapieco, chair of the global business practice at the Baker Donelson law firm. – South China Morning Post
Supply chains have been upended. Here’s how to make them more resilient
Supply chain visibility is crucial to understanding the impact of disruption.
Digitizing records will make supply chains more resilient to future shocks.
Blockchain will help ensure data privacy for suppliers.
In the wake of supply chain disruptions due to coronavirus, several experts have reiterated the need to obtain more visibility across the chain. Companies who sell finished goods generally know production and shipment schedules for their Tier 1 suppliers, but they usually have little to no knowledge of suppliers further up the chain.
Obtaining this visibility is considered key to optimizing supply chain efficiency and agility during normal production. When critical supply chain disruptions hit, this visibility becomes crucial to understanding the impact of the disruption on the rest of the chain so that others in the ecosystem can plan and take action, such as developing routes to alternative suppliers.
Because COVID-19 has led to lockdowns, suppliers in the chain are temporarily ceasing production, and logistics providers can no longer transport goods as seamlessly, particularly across borders.
Fiat Chrysler Automobiles announced in mid-February that it was temporarily halting production at a car factory in Serbia because it could not get parts from China. Hyundai has made a similar announcement for factories in Korea. International air travel transported a significant amount of trade cargo prior to COVID-19 but has seen its flights decrease by 55% since the beginning of the pandemic. China plays a central role in global supply chains.
How coronavirus can infect global supply chains.
This is not a new problem: companies have been trying to uncover this data for decades, but suppliers are not forthcoming with the information. Here is how we can actually achieve visibility across the entire value chain:
1. Move away from paper to digitization
Trade is notoriously reliant on paper-based processes: the “Bill of Lading” – a detailed list of a ship's cargo; notices filled out by hand; paper copies of packing lists from each logistics carrier. In some cases, such as with the Bill of Lading, physical paper copies are required by law. For the most part, however, companies have yet to digitize their supply chain processes because they have determined the cost of doing so does not bring enough efficiency or security to justify the endeavour.
Protective measures for COVID-19 have made clear that operations dependent on physical assets, such as paper, can face serious disruption when physical presence is not a possibility. Wet signatures and paper printouts are usually handled by operations personnel who must come to the office, or another place of work, and coordinate with others. In addition, value chains that rely on information in these paper documents lose access to that visibility very quickly and cannot react to changing conditions.
Digitizing, then, is not simply a matter of cost, but primarily of visibility and managing supply chain risk. To limit the impact of points of failure in the value chain, it is important to make data available through digital means. In the current COVID-19 pandemic, governments and businesses with strong digital infrastructure and enabling regulations such e-signature and e-transactions laws, are dealing with the supply chain disruptions much better than those without.
2. Ensure data privacy for suppliers
The reason why upstream suppliers will not reveal information to end customers, even if it's easy for them to do so, is that they fear losing commercial advantage if their customers know even more about their operations, pricing and sourcing. Suppliers have to be able to control exactly who receives what data from them, and independently verify such controls.
Most digital communication in the supply chain happens via Electronic Data Interchange (EDI) and Excel spreadsheets. When passed back and forth only between two parties in the supply chain ecosystem, data privacy is easily controllable and not a concern. When the data in these communications needs to be distributed to more parties, however, traditional supply chain systems, which are centralized, cannot grant independent and auditable access controls to each individual party. A decentralized system that is nevertheless owned by a large buyer is the best way to give suppliers the privacy they need and buyers the visibility they want.
A blockchain with either private or public permissions meets this criteria. When created properly, suppliers can audit their data-sharing permissions directly on their own blockchain node. At the same time, their data can be securely distributed to others in the blockchain network without requiring the point-to-point integration that centralized systems do. We’ve therefore solved a key technology problem in getting suppliers to participate in supply chain visibility initiatives.
3. Give suppliers an incentive to share their data
For buyers who value data highly, they may consider paying their suppliers for the data itself, in addition to the physical goods they’re sourcing. A more cost-efficient and profitable method is to institute supply chain finance programmes that offer the buyer's own competitive interest rates.
Many buyers already offer such programmes to their Tier 1 suppliers. However, the lack of visibility is a problem that stems from other suppliers who are Tier 2 or even further up the supply chain. The financing needs to reach these suppliers as well. Blockchain is the ideal technology to ensure that data on performance and risk, which underpin all supply chain finance transactions, can be shared in an authenticated manner with financiers and other parties to a transaction, even when there is no direct relationship between them.
Using blockchain, buyers can, for example, use payment commitments on the blockchain as alternatives to a Letter of Credit, pay suppliers later, reduce cost of goods sold, and insulate themselves from supplier bankruptcy. Suppliers, in turn, recognize revenue sooner and replace their current supply chain finance arrangements with much lower financing terms. These benefits multiply as the network grows. The result is a financing ecosystem that makes data sharing pay for itself.
4. Start early – don’t assume the current disruptions will never happen again
Supply chain initiatives take time to roll out. The most effective move to take now is implement supply chain finance programmes to support suppliers in financial straits and make the value chain more capital efficient. If companies begin to institute data sharing in their supply chains at the same time, they will be in a much better position to deal with a future shock.
What is the World Economic Forum doing about the coronavirus outbreak?
Global trade and supply chains are going through an unusual and massive shock, which strikes from both ends – the supply and the demand side. Companies, whether buyers or suppliers, are facing tremendous challenges in keeping the goods and services flow at a time of global lockdowns. Countries, especially developing countries, are carrying the direct consequences of supply chain breakdowns aggravated by trade restrictions. As the COVID-19 situation changes daily, it’s crucial for all parties to have visibility into the supply chain, to share data, and communicate effectively. Technologies accompanied by enabling policies can play a significant role in rebuilding the trade and supply chain system, and making the supply chain more shock-proof in the decades to come.
The World Economic Forum’s Platform for the Future of Trade and Global Economic Interdependence works closely with public and private stakeholders to address acute shocks and continuing tensions, and lead the effort to rebuild a resilient and responsive global system.