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How will coronavirus affect global supply chains in the long run?

04.02.2020 | By Chris Pickett | 4 min. read

The Coronavirus pandemic has rattled public health, had a huge economic impact, and changed everyday life around the world. Globalization has exacerbated its effect on supply chains.

The state of interdependence created by globalization has made supply chains fragile; if any part of the process breaks down, there’s little slack to help the system recover. And multiple pieces have fallen apart so far.

Some context on globalization

Let’s take a closer look at how globalization works. In the context of business, globalization is defined as the practice of operating internationally. Companies have found it beneficial to open facilities in other countries to streamline manufacturing, source raw materials, produce new product varieties, tap into global markets, and more.

When we examine the benefits of globalization, it’s easy to see why it’s become so common among businesses everywhere. The major advantages of globalization include:

  • Lower production and labor costs.
  • Ease of scaling operations.
  • Optimizing resource utilization.

Globalization applies an economic principle known as comparative advantage, which allows countries to create goods that they’re the best at making with as few resources as possible. This method of specialization results in logistics efficiencies, which generate cost savings that companies can pass onto customers in the form of lower prices. All of these factors together amount to growth.

Globalization is one of the reasons just-in-time production is possible, optimizing manufacturing procedures and accelerating shipping times. The prevalence of globalization has made the world more connected than ever before and has built a flourishing international marketplace.

How did it come to this?

Globalization has empowered producers to form adaptable supply chains in which they can swap suppliers and components as needed. A large percentage of suppliers are based in China, which is one reason the pandemic has posed so many challenges for supply chains.

Both international companies with ties to China and the domestic companies they serve have felt the effects of working with production plants that are oceans away. This difficulty, along with sanctioned travel bans and mandated business closures, has crippled industries that rely on imports. At this point, their futures depend on the government regulations and economic resilience of multiple countries.

Before the coronavirus crisis, United States Secretary of Commerce Wilbur Ross unknowingly foreshadowed current supply chain issues when he said, “Globalization [has] gotten out of control. It takes 200 suppliers in 43 countries on six continents to make an iPhone.” Never before has this way of commerce caused such problems as the ones we now face. The good news is supply chains are active, with logistics workers putting in long hours to produce and deliver orders.

Today’s trucking landscape

Trucking volumes in the U.S. have fluctuated during the pandemic. Before non-essential businesses closed, panic-buying overloaded supply chains and led to a range of unfavorable outcomes, such as excessive load times, increased load tender rejections, and tight capacity. Carriers started charging detention fees and raising prices to cushion themselves for lost hours.

At present, only essential businesses are open. Warehouses and distribution centers are fighting to free up bottlenecks, but have, for the most part, had success prioritizing critical goods. Additionally, we’re seeing small carriers who haul spot freight lower their rates to keep trucks running, which may indicate loosening capacity.

The instability of the U.S. market is causing uncharacteristic behavior by shippers and carriers, especially as production picks up in China. Shippers are opting to cancel, postpone, and reduce orders because there’s no guarantee warehouses are accessible; others are accepting detention charges because there’s no way to deliver goods to customers. What’s more, carriers are finding ways to prolong transit. All of these complications exacerbate the dilemma.

China and other Asia-Pacific countries have (for the most part) resumed business operations, but the U.S. has been on lockdown, and this trade barrier hasn’t helped mend supply chains. Until our nation is able to return to work in full capacity, our economy and supply chains will remain fragmented. The same goes for the rest of the world.

The economic implications of cracked global supply chains

Though industry experts predicted the U.S. trucking industry was headed for a downturn closer to 2021, no one believed responses to a worldwide illness would slow the economy in the first quarter of the year. This slump marks the end of a 10-year economic expansion, says IHS Markit chief economist Nariman Behravesh. The circumstances for freight will “get uglier before [they get] better,” he adds.

Not since the September 11th terrorist attacks in 2001 has the U.S. economy changed this quickly. Companies in every sector are taking drastic measures to stay afloat, like improving the bottom line and cutting expenses. As a result, a great number of Americans have found themselves out of work. The U.S. Chamber of Commerce forecasts “a severe contraction” and notes the possibility of a gross domestic product (GDP) drop of up to 40% in the second quarter of 2020.

The rest of the globe is facing similar conditions. Hapag-Llloyd CEO Rolf Habben Jansen anticipates substantial repercussions for financial markets around the planet. Italy was in a recession before COVID-19, but has since sunk deeper with a GDP decrease of 3.5%. Other European nations have fared better than Italy, but Behravesh points out that no one is safe from recession.

That said, “the global economy is still expected to grow 0.7% in 2020, a rate that may be revised downward, and then bounce back to 2.4% in 2021,” according to the Journal of Commerce. For comparison, global trade capacity dropped 15% during the Great Recession.

So what are leaders saying about economic recovery? The short answer is it will take time for the market to rebound. Once businesses can resume normal operations, many will need to rebuild financial capital before hiring personnel. Behravesh believes the steps we’re taking to social-distance and continue necessary labor are a good start.

The vulnerability of global supply chains

Coronavirus has revealed how interlaced the elements of the global supply chain are. Companies that work in or source supplies from other countries have experienced firsthand how easily supply chains crumble when one segment can’t execute. On the contrary, businesses with redundant processes in different locations have had an easier time keeping supply chains intact.

The same logic follows for nations. Those with abundant resources have been able to endure this time of hardship more easily than those that count on international trade. But, because no country possesses everything its economy needs, most of us are in this together.

How will COVID-19 affect globalization?

Nick Vyas, Executive Director of the Center for Supply Chain Management at the USC Marshall School of Business, predicts “…we’ll start to see a decoupling from some long-term supply chain dependencies from the China-centric supply chain network.” Shifting production activities from Asia to North America would shorten American supply chains and make them more resilient.

If its government can stabilize and address drug violence and corruption issues, Mexico — with its low labor costs and proximity to the United States — would have a lot to gain from these regional shifts, Vyas adds.

“We will also see a lot more focus on supply chain resiliency and risk management and global supply chain management in international settings,” according to Vyas. He foresees companies focusing on diversification. With “…more diversification of supply chain nodes across the globe, we would not see the impact of supply chain disruption we see now,” he suggests.

In an effort to build redundancy into their supply chains, businesses may choose to offshore to Vietnam, Indonesia, or Eastern Europe, Turkey in particular. They might even opt to invest in robots and 3D printing to produce closer to home. It would take a few years to complete these actions, Vyas reveals.

Lessons learned

Vyas put it best: “The takeaway here is that cost should not be the only consideration when establishing … supply [chains]. There have to be some mitigation strategies as well, where essential commodities have several pathways to markets … You have to think through certain what-if scenarios, so you’re not caught off guard. Companies need to be proactive instead of reactive.”

By establishing business processes with multiple ways to operate, companies will leverage international economic growth while mitigating supply chain risk.

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