Coronavirus’ spread causes ‘ripple effects’ to global supply chains

3/11/2020

DHL’s supply chain risk management platform Resilience360 yesterday highlighted the “ripple effects” on global supply chains as the new coronavirus epidemic continues to spread quickly beyond China. It highlighted that large companies may take several more weeks to regain pre-outbreak production levels in China, or longer if outbreaks in other countries delay sourcing of intermediate goods, as air, rail and ocean freight schedules and rates seem likely to remain disrupted into April and May and ocean carriers warn of global equipment shortages.

During the initial stages of the COVID-19 outbreak in China, overseas manufacturing operations experienced partial disruptions due to a lack of components typically sourced from China, the report noted. For example, production lines at car makers in Japan (Nissan), South Korea (Hyundai) and Europe (Fiat Chrysler) were temporarily suspended for a few days. 

But the rapid propagation of the coronavirus outside of China to more than 80 countries and territories has led to more significant impacts on overseas manufacturing and logistics operations, with many businesses having to adapt to government-mandated quarantine zones as well as voluntary disinfection and quarantine efforts. 

Four main clusters, namely in South Korea, Italy, France and Germany, have emerged over the past week that have resulted in business disruptions that range from home-office requirements to complete or partial closures of headquarters or production sites. The situation has prompted fears that temporary border closures could be enforced, which would severely impact cross-border road transport routes and rail operations.

In South Korea, Resilience360 data shows that more than 80% of manufacturing, supplier, and logistics locations within Daegu – the epicentre of the virus in the country – are related to the automotive industry. Other affected industries in the country include high-end electronics and semi-conductor manufacturers. 

“Any prolonged shutdown can therefore have a major impact on the production and assembly of electronic goods in China, which sources mainly from South Korea and Japan,” the report warned.

In addition, due to falling demand and international travel restrictions, a number of major airlines have reduced or cancelled flights to and from South Korea until at least April 2020. Rates have reportedly increased from South Korea to markets across Asia Pacific due to reduced belly capacity in passenger flights. 

In Europe, Italy, is to date the country the hardest-hit by the virus, with state authorities sealing off several towns in the northern regions of Lombardy and Veneto, in the north of the country, after multiple cases of COVID-19 were confirmed. 

The report said that economic activity has largely been suspended since 21 February in the affected areas, where numerous manufacturing facilities active in the automotive, life sciences and health care and chemicals sectors operate. Several companies have reported disruption to their operational activities. 

China challenges continue

Turning to China, while the Hubei province and its capital, Wuhan, remain in lockdown, factories across the country are gradually ramping up production as travel restrictions continue to ease. 

However, Resilience360 underlines that electronics contract manufacturer Foxconn, a major supplier to Apple, recently announced that it only expected to resume normal production by the end of March, an indication that it might take even large companies almost four weeks to regain pre-outbreak production levels. 

It said air, rail and ocean freight schedules and rates are likely to remain disrupted into April and May, with ocean carriers warning of global equipment shortages.

Chinese factories could also face the prospect of not being able to resume normal production at full capacity if the COVID-19 outbreak in other countries creates difficulties in sourcing intermediate goods.

Other ‘ripple effects’ may also emerge as a result of export bans for drugs and medical equipment – in particular in countries producing a majority of such material, such as India and China – causing global supply shortages and hampering the effectiveness of measures put in place by public authorities to combat the virus, further delaying its containment, the report added.

Meanwhile, land transport has started to experience disruption due to border closures. In the Middle East, both Pakistan and Turkey have closed land borders with Iran, while in Europe, Austrian authorities temporarily halted rail traffic on the critical Brenner Pass with Italy after several passengers were feared to have contracted COVID-19.