The impacts of COVID-19 on the diversification of supply-chains

1st May 2020

The ongoing COVID-19 pandemic has swept the world, suggesting to begin in Wuhan, China, before expanding to a further 210 countries and territories.1 Most would agree that this health crisis has been made possible due to the effect of globalisation and how interconnected we have become. This interconnectedness has also meant that, alongside the health crisis, we also find ourselves in an economic crisis.


Globalisation is a key aspect of why most nations have a strong economy, through healthy competition and free trade amongst others. However, in situations such as a pandemic, this level of integration also leaves the global economy in a fragile state where supply chains may become inoperable due to the restrictions imposed to eliminate the virus. A great example of the fragility created by global integration is used by McKnee and Stuckler (9 April 2020) who point out that ventilator manufacturers in cities such as Sheffield, Detroit or Dusseldorf may depend on specialised parts from Shanghai, Manila and Kuala Lumpur.2  Afterall it is common practice for many businesses to outsource product manufacturing to others across the globe. This global outsourcing inevitably has a knock-on effect when the supply chain is interrupted, and businesses are unable to manufacture their products or have to seek supplies elsewhere.


In a PwC survey conducted in America and Mexico, it was found that 31% of finance leaders had supply chain issues as one of their top three concerns directly related to this coronavirus outbreak.3 Furthermore, an Institute for Supply Management survey found that 75% of companies in late February and early March 2020 had reported COVID-19 related disruptions to their supply-chain, 44% of which had no plan in place to deal with the disruption.4


Despite numerous events over the years that have led to supply-chain disruptions, such as volcanic eruptions, earthquakes, tsunamis and hurricanes, many reports suggest that numerous businesses have failed to diversify and so were found to be ill-prepared to deal with this pandemic. Some companies have been reported to be unsure where their suppliers are based with the Harvard Business Review finding that 70% of 300 respondents to a survey conducted by Resilinic were still trying to identify in early February 2020 which of their suppliers were situated in locked-down regions of China.5 Whilst this lack of diversification has led to some of the larger globally recognised clothing and sports brands fearing profit losses as a result of supply-chain disruption, media has also widely published the shortfall in medical supplies at a time when they are most needed.6


As well as being a major hub for retail manufacturing, Asia has also become a considerable producer of medicines, in particular India who has become the world’s largest manufacturer of generic drugs and who also receive 70% of their raw material from China. In the UK it is thought that the National Health Service procure an estimated 25% of their generic drugs from India, with the USA procuring just under half.7 8 From these transactions alone we can see how delicate the supply-chain is, and already the impacts created through lack of diversification. Already the world is beginning to experience the knock-on effects generated through the temporary closures of key manufacturing facilities in Asia, often resulting in a global shortfall of products.


Whilst previous events that have disrupted supply-chains may not have motivated companies to diversify, possibly as a result of regional and short-term impacts, the scale and perceived longevity of the COVID-19 pandemic is likely to convince companies to review their supply chain tolerance in far more depth in order to establish greater resilience to disruptions, and this is especially true of those with a heavy reliance on Chinese manufacturing that has been significantly impacted by this pandemic. Acknowledging that some companies may be reluctant to move their infrastructure out of China where low productions costs attract many global brands, ISM CEO Tom Derry pointed to the fact that ‘you can still emphasise labour costs by moving to Vietnam, Malaysia, and Cambodia’.9 Mirroring this advice the accounting firm Deloitte has also suggested global businesses re-evaluate their supply chains in order to mitigate risk during global crises. The company goes on to suggest that, as a result of this pandemic, it is expected that we will see more investment in Mexico by the USA, more European investment in Africa and the Middle East, and Japan looking towards Asia.10


In reflection of this prediction by Deloitte it could be that the much-needed diversification of supply chains, highlighted by the COVID-19 pandemic, could kick start the long touted future power economies of the BRICS (Brazil, Russia, India, China and South Africa) and MINTs (Mexico, Indonesia, Nigeria, Turkey), thereby creating a stronger, integrated and more diverse global economy.