The new crown pneumonia epidemic has caused “desertification” in the manufacturing industry, and the global supply chain is under enormous pressure

Global – According to the latest report jointly released by Baker McKenzie International LLP (hereinafter referred to as “Baker McKenzie”) and Oxford Economics (Oxford Economics) – “Beat the new crown pneumonia: Supply chain resilience becomes Key to Recovery”, the pandemic has triggered an unprecedented global supply chain crisis due to a lack of communication and flexibility at multiple levels of the global supply chain and a lack of diversity in procurement strategies.

On the upside, the report expects the world’s hardest-hit manufacturing sector to recover first in the first half of 2021. This is as pent-up demand will be released, boosted by a recovery in market sentiment, while higher production will make up for previous output losses.

The current global supply chain crisis is largely due to temporary manufacturing “desertification” triggered by the pandemic, where output in a city, region or country is drastically reduced due to lockdown restrictions, making it impossible to do anything but necessities such as food and medicine. Production purchasing activities.

The report highlights that the immediate impact of a downturn in global supply chains is already starting to materialize, such as the closure of South Korean auto plants due to a shortage of parts in China; and the severe shortage of parts for smartphone makers. As a result, global trade is expected to decline by more than 4% in the first quarter of 2020, with even further declines in the second quarter.

As lawyer Mattias Hedwall, global chairman of Baker McKenzie’s international business and trade practice, said, the epidemic has had a serious impact on global supply chains. “It is clear that prolonged shutdowns in parts of the world’s economies are affecting supply chains as existing inventories dry up,” he said. Adapt to a changing environment, including the impact of changes in infrastructure, taxation and employment, and the ability for businesses to quickly make choices based on changes as the situation rapidly stabilizes.”

Impact on global manufacturing

While there are still many possibilities for the global economy in the next 24 months, Oxford Economics’ baseline forecast is that global manufacturing will fall by 5% in the first six months of this year compared with 2019, and will basically recover in the second half of 2020, Finally surpass 2019 supply chain levels in early 2021.

As the table below shows, the pace and extent of the recession and subsequent recovery varied across manufacturing sub-sectors. In the first half of 2020, the global automotive industry saw the largest decline in output at 13%, followed by textiles (8%) and electronics (7%). The report also shows that the automotive and other transportation equipment industries may lead the recovery along with the textile industry.

The new crown pneumonia epidemic has caused “desertification” in the manufacturing industry, and the global supply chain is under enormous pressure

The four main manufacturing industries analyzed in the report are expected to start recovering in the second half of 2020, with the strongest recovery in the automotive and textile industries, growing by 10% and 8% respectively (relative to the levels in the first half of 2020), and by 2021, all industries output will grow at least at 2019 levels.

Impact on China

Due to China’s unique position in the global supply chain and its sensitivity to falling global demand as a major exporter, the forecast shows that China’s production this year will decline significantly more than the global decline (as shown in the table below), automotive and electronics Wait until 2022 for the industry to truly recover to 2019 levels. In the first half of 2020, compared to the fourth quarter of 2019, production in China’s auto industry will fall by 19%, while that in the electronics industry will decline by 17%. In the first half of 2020, textile production will fall by 14%, while overall manufacturing and aviation will fall by 11% and 6%, respectively.

Jia Dian’an, chief representative of Baker McKenzie’s Beijing office, said: “In China, negative growth in industrial output of automobiles and Electronic products may pose challenges for supply chain companies. Restricted by travel restrictions and quarantine requirements, companies are There will be challenges in restoring production capacity. There will also continue to be disruptions to logistics and transportation networks that supply upstream components. Companies in China that source raw materials and components from overseas will face supply chain disruptions due to business restrictions and production shutdowns in countries around the world In addition, with some Chinese suppliers forced to close or unable to restore sufficient capacity, many downstream players in the global supply chain will be forced to look for alternative suppliers. And in terms of finding alternative suppliers that can meet specifications and quality requirements There may be difficulties. Downstream companies may be unable to meet their contractual commitments or resume sustainable operations.”

Jiayi Cao, a partner in Baker McKenzie’s M&A practice, said: “Given the current situation, investors tend to be more cautious in closing deals, so transaction values ​​are bound to decline. Asset values ​​may decline, and we expect transactions in and out of China. Activity will decrease. Whether it is a short-term investment sentiment issue or a ripple effect in other industries will depend on whether the outbreak can be brought under control in a relatively short period of time.”

Attorney Martin David, head of Baker McKenzie’s Large Projects Department in Asia Pacific, expects: “Chinese private companies will increasingly participate in China’s diversified supply chain operations and production, while private companies will have a greater role in China’s domestic production and exports. The impact will also grow.” David said, “While no industry is immune, we expect industrial manufacturing to be hit the hardest and, conversely, the greatest opportunity for investment and growth.”

China’s economy has largely stalled in recent weeks, leaving many multinationals with limited contingency plans to deal with the impact of supply chain disruptions. Global companies that rely heavily on China have also exposed supply chain concentration.

The problem is exacerbated for companies that rely on just-in-time production processes (especially important in industries such as automotive) and/or have low inventory levels.

Supplier goes bankrupt

As the focus of the outbreak shifts from east to west, the same issues above have become more acute for companies sourcing highly specialized goods and services in key markets such as Germany, northern Italy and the United States. In the coming months, there may even be challenges in securing supplies of certain categories of commodities if the focus of the outbreak shifts to emerging markets again.

The risk of global supplier bankruptcy is also growing, said attorney Debra A. Dandeneau, chair of Baker McKenzie’s Global Restructuring and Insolvency practice in New York.

Attorney Dandeneau commented that some companies may need to support their suppliers at least in the short term, and it is crucial to understand the root causes of the difficulties facing suppliers. Other suppliers may begin or prepare to begin some kind of formal reorganization or bankruptcy process, which could create additional business delays for the company. Knowing how the law works in the various jurisdictions that may be involved will help companies develop strategies to deal with the situation in advance.

long-term transformation

The report highlights that supply chain risk management has jumped to the top of many companies’ agendas due to the current supply chain crisis, and is likely to remain high even after the immediate threat of the novel coronavirus begins to recede.

While this risk management process can be costly, it can often be mitigated by related decisions affecting product pricing (shifting demand balancing to less affected production lines, inventory purchasing, and management and redeployment of production processes across locations). offset against the resulting savings. Clearly, supply chain risk management activities have increased as a matter of urgency to mitigate some of the immediate effects of the coronavirus, such as a sharp drop in output in some areas.

In the long term, the digitization of supply chains will gradually become the way companies develop strategies for supply chain disruptions and gain business resilience. In this context, big data analytics can assist companies in streamlining the supplier selection process, and cloud computing is increasingly being used to facilitate and manage supplier relationships.

Anne Petterd, Partner, Technology, Communications and Commercial Practice in Baker McKenzie’s Sydney office, said: “Strengthening supply chain management and digital adoption has never been more important. Companies with well thought-out supply chain risk management processes are more likely to identify issues The impact of the incident on their supply chain and product availability provides companies with an opportunity to assess how best to respond in a difficult environment.”

road ahead

The report concludes that if companies want to take advantage of the various stimulus policies being rolled out around the world, they will need to remain nimble, agile and ready to respond to operational, labor and supply and demand constraints, as well as revisit strategic and tax planning, and rethink the post-pandemic era. business Model. This could mean building supply chains and accelerating digital transformation to do more to meet SDGs while building resilient businesses.

When it comes to what the new normal means, it is clear that companies can facilitate the formation of the new normal through robust planning and a more comprehensive risk management approach.

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