COVID19 and the Future of Global Supply Chains

COVID19 will go down in history as a formidable disruptor in the league of world wars. Within a few months it has brought the world’s most populous nation to a halt, triggered an oil price war as demand/supply imbalances spread fear amongst producing countries and caused the fastest ever 20% drop in the Dow Jones Industrial Average (20 sessions compared to 36 sessions for the same drop in 1929).

When the world was fixated on a US-China trade rift last year, boards and leaders started thinking about supply chain disruptions, opportunities and risks. They should probably thank President Trump for at least having triggered the process of thinking about divesting away from China. Sadly, little was actually done to date and today we feel the ripples of dependency on China across the world and across industries.

From pharmaceuticals to shoes, all supply chains lead to China. I have summarized several stark stats that have surfaced over the last few weeks here and that illustrate the scale of the problem.

China accounted for 20% of US imports in 2018. Even the U.S. military has dependency. The Pentagon-led review ordered by President Donald Trump in 2019 identified specific concerns in relation to rare-earth metals that are critical to the production of various modern electronic devices, including communications systems and computers. China accounted for 81% of global mine production in 2017[1].

Moving from defense to health, India accounts for 20% of global supply of generic drugs. In turn, Indian companies procure a staggering 70% of the APIs (active pharmaceutical ingredients that make these drugs effective) from China[2]. Furthermore, more than 90% of APIs in antibiotics in the U.S. market are sourced in China. According to a transcript of Dr. Janet Woodcock congressional testimony on the FDA website from October, 2019 the United States “has become a world leader in drug discovery and development, but is no longer in the forefront of drug manufacturing.”.

FMCG, apparel and footwear are probably the most talked about categories when it comes to dependence on China. And of course Apple, which qualifies as a category in and of itself. P&G disclosed that China account for 387 of its suppliers and 9,000 materials which affect 17,600 of their products, not to mention that China is their 2nd largest market after the US. Forbes reported that c. two-thirds of global shoe exports and more than a third of clothing come from China according to a Coresight Research report. Apple, as now everyone knows, assembles most of its products in China (which is also its second-largest market). Apparently 50 Apple execs shuttle between CA and China on a daily basis, or did pre corona. In analyzing the Apple situation, the WSJ analysis highlighted that ‘the population in China has allowed suppliers to build factories with a capacity for more than 250,000 people’. This simply is not doable without the population that China has. India may have had a shot if its import-export and distribution infrastructure were better developed.

Because of the scale of this issue and assuming that the health crisis is contained and/or resolved, COVID19 will permanently morph the supply chain landscape of the globe.

Every responsible board member will be asking the management team about dependency on China and every surviving SME will recall the near bankruptcy it faced in 2020. More importantly, protectionist policies, government inventory requirements for critical products and anti-import policies will find fertile ground following this crisis. India, the world’s main supplier of generic drugs, has already restricted the export of 26 APIs and the medicines made from them. The scale of the pain will result in requirements by governments to shorten and localize supply chains across essential categories, creating an opportunity in production and manufacturing which I will discuss in a following article.

While all this is inevitable, the sheer scale of China’s share in the global supply chain means that a diversification will entail a long, painful transition. 

[1] https://www.reuters.com/article/us-usa-china-rareearth-explainer/explainer-chinas-rare-earth-supplies-could-be-vital-bargaining-chip-in-u-s-trade-war-idUSKCN1T00EK
[2] https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(20)30459-1/fulltext