The COVID-19 pandemic has strained global supply chains for products ranging from automobiles and industrial equipment to medical supplies and clothing.

The story has unfolded in a series of shocks, each highlighting different aspects of a network of interdependencies that span the globe, and the brittleness of the overall global trading regime.

In late January, when the government quarantined Wuhan – central China’s industrial and transport hub – it shut down almost all manufacturing and transit in and out to contain the coronavirus. While the initial scramble among companies focused on critical suppliers located in the city, it quickly became evident that the broader impact was the inability of migrant labour from inland provinces to get back to their work in coastal manufacturing centres.

Most of China then extended the Lunar New Year break to try to corral the COVID-19 infection. But as the broader lockdowns started easing, and the Chinese Communist Party ordered provinces to get back to work, nervousness among cities and factories about receiving back workers who might still be a contagion risk dramatically slowed the restart.

This led to a delayed but massive supply shock as the last ocean-borne shipments departing from China reached their destinations around the world. The shutdown of almost all air travel into and out of China simultaneously shrank air cargo capacity, as 60% of this type of freight is carried in passenger aircraft.

There was a period in late February and early March during which many firms placed emergency orders, but there was no lift capacity to be had. Meanwhile, as China restarted, manufacturers pushed a backlog of container cargo outbound in catch-up mode.

When a supply shock meets demand shock

Just as China showed early signs of recovering, Italy, Spain, the US and other nations started shutting down to try to slow the spreading contagion. That triggered a major demand shock, as consumers stopped buying all but essentials.

Widespread efforts at social distancing and the shutdown of virtually all non-essential retail and hospitality businesses cratered cash flow for many firms. The US Census Bureau advance monthly trade report showed clothing and accessories sales plunging more than 50% in the month of March, even though shutdowns only became widespread later in the month.

The closure of retail distribution centres for non-essential merchandise caused a pile-up of inbound inventory at ports, and order cancellations rippled up the supply chain causing existential threats to manufacturers in emerging markets in Bangladesh and South-East Asia, as well as in China.

A network of interdependencies

March and April exposed the brittleness of global supply chains. There are multiple steps in the production of most products, and many times key ingredients come from China. Even the many over-the-counter and generic pharmaceuticals manufactured in India use active pharmaceutical ingredients made in China.

While most companies had anticipated the normal Lunar New Year shutdown and had stockpiled some extra inventory, the extended disruption caught many short in the middle of a logistics crunch, which hobbled their ability to respond.

Many firms, especially automakers across Europe and the US, shut down their operations as much because of parts shortages as slowing the spread of COVID-19. Modern lean production systems are predicated on reliable supply and logistics, and the scale of the breakdown has been dramatic.

“Modern lean production systems are predicated on reliable supply and logistics, and the scale of the breakdown has been dramatic.”

What might seem surprising is that many firms still didn’t know who all of their upstream suppliers were. Because so many modern products are quite complex, a modular division of labour has evolved in which specialist suppliers focus on narrow slices of the value chain.

Tier one suppliers are fed by a network of tier twos who in turn are fed by tier threes and so on down the line, so it becomes difficult to identify everybody in this network, especially at tiers three or beyond. The COVID-19 disruption helped many firms discover who some of those distant tier suppliers were. Inevitably, this has exposed the dependence on China for links in so many of those supply chains.

Many firms are beginning to plan for an extended post-pandemic recovery phase. They will be looking at the resiliency of their supply chains, and what lessons they can learn from the massive disruptions they have faced.

This will likely include more diversification of sourcing, and probably more regionalisation as well – a trend that recent trade tensions has already encouraged. But it may take years for global trade to recover to pre-pandemic levels.

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