Due to the outbreak of COVID-19 and its rapid global spread, the global auto parts, semiconductor, and electronics industries have been exposed to highly uncertain risks. Global supply chain logistics is an issue that everyone has had to reexamine.
COVID-19 has disrupted entire supply chains around the world, and companies continue to grapple with new demands and obstacles to keep goods moving.
The China city of Wuhan, a manufacturing hub for the automotive and semiconductor industries, was the initial epicenter of the COVID-19 outbreak. The China's government shutting down much of the region put much of the world's supply chain under enormous pressure. As a major player in global value chains, China produces most of the components for consumer and industrial products, which are shipped to the rest of the world for assembly. This component production plays is an important role in the global economy, and any obstruction to the flow of these components will have a significant impact.
Supply Chains Face Global Challenges
The COVID-19 pandemic has affected all areas of the global economy. Highly developed transportation networks accelerated the spread of the pandemic. As a result, challenges to consumer transportation, labor and material shortages, rigorous monitoring of logistics processes, and closures of transportation hubs and borders have amplified the impact. Small and medium-sized business owners, are especially facing the risk of being unable to start construction, import materials, and ship goods, resulting in subsequent contract disputes, inability to pay salaries, and loan financing problems.
How COVID-19 is Affecting Global Supply Chains?
Although the outcome of the pandemic has been difficult to predict, areas of the global supply chain that have been impacted include:
- Raw materials: Raw materials and finished products come from or pass-through logistics centers in epidemic areas, resulting in supply shortages.
- Labor: White-collar and blue-collar workers may be unable to work due to quarantine measures or illness.
- Procurement: Due to limited traffic in some areas, business opportunities and new business plans are limited, thus hindering business development.
- Logistics: Existing distribution pipelines and supply networks may be restricted. Even if raw materials are safe, they will be blocked due to logistics problems. Therefore, alternative routes or methods of transportation must be found, but this can become arduous.
- Customers: Customers will become more cautious in their buying habits, especially in public places, with deep concerns about the threat of the virus. Many people will turn to online sales, which is the challenge faced by the logistics network.
Global and Regional Supply Chain Challenges
Global supply chains have been driven largely by lower labor costs and consumer demand for cheap goods. Commercial supply chains are heavily invested in the Asia Pacific, such as the APAC region, and less so in domestic manufacturing. From cellphones to electric cars, foreign-made goods have held back the growth of domestic manufacturing and distribution.
The pharmaceutical industry is one of the areas that has been significantly affected. About 80 percent of the ingredients in drugs made in the U.S. come from China. These include drugs manufactured in the United States by pharmaceutical companies, as well as those imported and sold to consumers and hospitals. Now, many of the largest U.S. pharmaceutical companies are looking to move their supply chains closer to better serve consumers and eliminate some of the risks associated with raw materials from different sources.
Environmental factors are also driving changes in supply chains. Global value chains distribute products around the world, leading to increased carbon emissions into the air, increasing water pollution, and overreliance on fossil fuels. As companies become more environmentally conscious, placing products nearby is good for the environment, even at a slightly higher price.
A strong regional trade partnership between Canada and Mexico has made many U.S. sectors less reliant on the Asia-Pacific region. While China remains the largest source of imports to the U.S., Canada and Mexico are major trading partners with huge potential. The three countries can benefit from establishing new and expanding existing regional supply chains. Some companies are also considering how to increase production and storage capacity within the United States.
Likewise, regional supply chains are primarily challenged by cost. High labor prices in North America are one reason many companies have moved overseas. Companies considering regional supply need to investigate the possible higher labor costs associated with more localized production, as well as other possible cost reductions to ensure consumers accept their prices.
Manufacturers need to weigh the risks and rewards of building more regional supply chains, and a stable and efficient supply chain is the key to success. Both commercial customers and individual consumers rely on supply chain reliability to get components and products when and where they are needed. Another challenge of regional supply is to ensure that, where possible, the required supplies are obtained from regional partners to reflect the efficiency of the supply chain. Tracking various shipments through different routes in an area can be complicated.
Distributors need to figure out how to reconfigure their logistics to pick up goods without face-to-face interaction with suppliers and then deliver goods directly to their customers via curbside delivery. Mobile technology provides a means of interaction between manufacturers and distributors. The other factor to consider is the flow of goods. As some companies move from global to regional supply chains, they need to consider how many supplies will be shipped within the time limit and how to deal with delays. Consumers demand products more urgently than ever. Consumer demand is why they turn to regional or localized supply chains. Global distribution is primarily by cargo ships and aircraft, but regionally, most transportation is by truck. Recalibrating the flow of goods will be a challenge without the expensive construction of national rail infrastructure.
The top priority for multinational companies across industries is to find ways to reduce supply chain risk. While predicting disruptive events can be difficult, companies can plan for uncertainty across industries and locations. In addition to events like the COVID-19 outbreak, there are many unpredictable scenarios in global and regional supply chains, including trade wars, regulatory or governance disruptions, labor strikes, and even natural disasters.
To help mitigate some of these risks, many businesses are looking for ways to move away from over-reliance on the Asia-Pacific region by leveraging global and regional viability. It is hoped that India and Mexico will be major trading partners to meet global and regional demand. But the key is not to rely entirely on any single approach. In case of uncertainty affecting the global supply chain, companies can turn to regional distribution to compensate for the weak state of the global supply chain.
Technology plays an important role in improving supply chain management, especially as companies weigh their options. Managing the flow of data and information is a key area. In modern cloud-based solutions, there are advanced instant tracking tools that provide reliable data throughout the supply chain. If routes become more complex and dual supply chains become more common, technology can manage multiple streams of information at once. Technology can also help companies prepare for unexpected events, making them more resilient in the long run. Running a scenario plan, for example, can identify bottlenecks in the supply chain and reveal supply areas to improve efficiency before costly decisions are made.
Artificial intelligence (AI) is another area of innovation and is of particular interest, especially for packaging and warehousing. While working in a warehouse can keep employees safe while also trying to meet business needs, many artificial intelligence solutions have emerged. AI can help find better patterns and make recommendations. This includes more rapid replenishment of nearly out-of-stock items, shorter walking routes, and better inventory positioning.
Automated robotics and Internet of Things (IoT) solutions can not only track goods and arrange shipments, but potential benefits of autonomous robots include increased efficiency, reduced error and rework rates, and improved safety. These systems can learn everyday tasks, including how to pick, pack and fulfill orders, and work around the clock. Technological innovations can increase processing speed and allow people to work and collaborate on higher-level tasks.
SProgress in Technology and Shorter Supply Chains
With the rise of the industry 4.0 revolution, the manufacturing industry does not necessarily need to rely on cheap labor and land as the primary consideration for its implementation. In recent years, developed countries such as the United States, Germany, Japan, South Korea, and the United Kingdom have actively promoted the return of manufacturing industries. The rapid progress of technological innovations such as new materials, 3D printing, and smart manufacturing has deepened the division of labor in their domestic production chains.
More and more companies and countries are beginning to consider the possibility of replacing long supply chains with shorter ones, turning to more localization and regionalization, instead of relying on globalized production. They are reconsidering factors such as shortening delivery times, reducing total costs, shortening supply chains, improving quality, reducing freight, and wages, and improving customer experience. Many international companies have begun to initiate reflow strategies, transferring production lines back to their home countries.
The Rise of Protectionism as a Result of the Pandemic
The progress of manufacturing technology has kicked off the short-chain revolution. The friction caused by the US-China trade dispute continues to expand. Japan, South Korea, Taiwan, and other European countries are involved, which further affects the development of the global supply chain. The short-chain trend is more obvious. The epidemic struck suddenly and spread endlessly, and the shortening of the supply chain has been an unstoppable process.
In the past, countries may not have dared to promote protectionism too much, but now the epidemic has given governments a legitimate excuse to implement protectionism. To prevent the spread of infection, it is taken for granted to build international barriers. To contain the impact of the epidemic on the economy, governments around the world are bound to increase trade protectionism and the severity of the trade wars will worsen. With international barriers being erected, it is necessary to have the ability to produce the required products in one’s own country. From a national security standpoint, this further establishes the legitimacy and necessity of short-chain production.
Overcoming Challenges Through Decentralized Material Supply
The US-China trade war and the epidemic are undoubtedly accelerating the reorganization of the supply chain. However, short-chaining is not a one-size-fits-all approach. Since upstream industries such as raw materials are difficult to disperse, it is difficult to achieve localized or regionalized production. On the contrary, downstream manufacturing tends to shorten the chain, and the world factory model will be transformed into the development of regional manufacturing centers.
Aware of the crisis of material supply being controlled by others, relevant policies of enterprises and countries are more active than ever to incorporate upstream materials into the scope of domestic or regional production. For example, to decrease its dependence on Japanese materials, the South Korean government has expanded its efforts to support the localization of cutting-edge materials such as semiconductor materials.
Winning Over Economies with Similar Ideas
Business has always been inseparable from politics. In the process of changing from long supply chains to short ones, political intervening in the reorganization of supply chains is becoming more and more obvious. Since the U.S.-China trade war, the U.S. has regarded Taiwan as a trusted partner at many levels, helping to maintain Taiwan’s role in the supply chain and consolidating cooperative relationships between Taiwanese factories and multinational companies and brands.
Areas with similar concepts include India, ASEAN, and countries such as the Czech Republic, Hungary, Poland, and Slovakia. Supply chain resilience in these regions will strengthen Taiwan's New Southbound Policy and the United States' Indo-Pacific strategy. The triangular trade of the past, between Taiwan factories receiving orders, China's production, and exporting to the United States, is bound to see significant adjustments.