Covid-19 has laid bare the vulnerabilities of global supply chain, upending the long-established business models of corporations and governments across the globe that took decades to develop. As nations are grappling with containing an invisible pathogen, everything from lithium mines in Chile to semi-conductor makers of China's industrial capital came to a screeching halt. A supply chain shock that was originated in China became a global phenomenon with the blink of an eye. The domino effects are contributing to the growing conviction that the world has slipped into its first major recession since the global financial crisis more than a decade ago.
Corona spread has been leaving businesses around the globe to count colossal costs. This was preceded by the U.S-China trade war that has hurt companies around the world as they completely rely on China for sourcing business. A recent study (source: hbr.org/2020/03 ) shows the world's largest 1,000 companies or their suppliers own more than 12,000 facilities in the initial Covid-19 quarantine areas of China, Italy and South Korea.
China has been the biggest sourcing hub for companies in Asia, Africa, Europe and South America. Even prior to the trade war, companies begun to look for alternative sources to ensure their business continuity. It has become harder for companies around the world to go for other countries for alternative sourcing as China has robust infrastructure that is run by a skilled labour force and equipped with resources base. But it is needless to mention that in China, while the infrastructure is good, compliance with the law - including child labour, environmental and intellectual property laws - is a challenge. After this Covid-19 crisis, it is going to be logical to expect companies to ask suppliers for improvements in social support and health care attention to its people making compliance mandatory.
The dependence on a single country needs to be reduced in the light of the Covid-19 virus outbreak. The pandemic has taught the world a lesson on how much they depend on China. Ford and Toyota stopped some of their vast Chinese assembly plants for an extra week, Apple is preparing a plan to re-route their supply chains and Starbucks closed thousands of their stores. China has become so crucial to the American companies that some members of the Trump administration are citing this dependence as a justification for the trade war that forced American businesses to consider shifting their factories in China to countries with better relations with Washington.
The dominance of one country like China over the global market has grown astronomically in recent years, due in part to the availability of a large number of skilled human resources and also its large consumer base. Nevertheless, there are other emerging markets with better and even less expensive workers. Some of them are Brazil, Mexico, Indonesia, South-Korea, Turkey, Colombia, Indonesia, Vietnam, Egypt, Bangladesh and South Africa. This is the case for developing countries in South Asia, Africa and South America. Global companies need to change their strategies to include new emerging markets that can be alternative sources for their businesses. Global sugar buyers are feeling increasingly nervous as a much-touted surge of Indian sugar exports has failed to materialise, with some mills getting reluctant to sell even as global prices trade near 2-1/2-year highs. Taking into account three macroeconomic indicators GDP, Purchasing Power Parity (PPP) and export growth rate (%), we see that along with the BRIC nations, Mexico, Indonesia and South Korea are also considered favourably by the world markets for sourcing goods and services. Moreover, countries such as the U.S. have changed their trade agreements to make it more hospitable to multinational companies.
Companies also need to ensure that they have multiple sources of raw materials. The technological advancement of the world as a whole may also enable multinational companies to shift their sources from one country to another. For instance, the countries that rank highest for ease of doing business on a global scale are the United States, the United Kingdom, the Netherlands, Norway and Japan. These are countries where global companies can move to as they rethink their strategies for China and there are countries with a growing consumer markets. These are suitable alternatives that could allow global companies to enter into new markets with more commitment and greater potential.
The extreme dependence or overreliance on a single country for business sources is highly risky. This is due to a variety of reasons, among which are the break out of unexpected diseases, epidemics, natural calamities, disasters, and political instability. For instance, the outbreak of the Covid-19 virus in China has already cost many companies millions of dollars. This is because many of the Chinese workers have been quarantined that led to an abrupt scaling down of production.
Overreliance on one country also leads to rising costs of labour due to increased demand in due course of time. This is one of the reasons why China is slowly becoming an expensive source of labour for some categories of goods and services. The dependence on one country may eventually lower a company's profit. This is because the government's trade policy may change and become highly unfavourable. For instance, the trade war between China and the U.S has made the trade policy between the two countries less accommodating for global trade. Raw materials are also finite. Hence, it is important for companies to diversify business sources.
Acquiring new sources is not easy either. There are many challenges such as language and cultural barriers that make it harder for companies in developing countries to work with certain nations. The primary factors that companies need to explore before getting multiple sources are the resources that they need, the availability of skilled labour, the cost of doing business in the country, the availability of suitable partners, the customer base of the company in the country, the infrastructure availability in the country, the legal and political environment of the country and the economic growth projection of the country.
The country with a highly skilled labour force which is not very expensive is a great source. Getting a new source requires a lot of investment. Hence, a company should select countries in such a way as to ensure profitability. A company should also ensure that it has more than one source at all times. For instance, if a company is involved in agricultural production, it should get raw materials from two or more countries. This will ensure that there is continuous supply even when one source is not fully reliable. Why do we have to import tomato pulps to produce good quality sauce when we can produce similar quality tomatoes here in Bangladesh?
The economy of a supply hub may undergo various fluctuations during a year. The China dependency has left the globe in a very precarious situation. This has become quite evident due to the COVID-19 outbreak. The outbreak has led to the decrease in global production of various goods, especially those heavily reliant on technology. Developing a great sourcing is a great way to give companies a competitive edge in the global business.
Countries that have a great work ethics such as Japan make them good alternatives for sourcing. Moreover, countries without landlock and with great infrastructure make transportation of the raw materials from the producers to the company easier.
The use of technology in sourcing strategy is also important because it helps manage the supply chain. Integrating technology into the supply chain will also help companies reduce their dependence on one country.
Therefore, it is important for multinational companies to look for different suppliers in different countries. Emerging countries mentioned earlier have enormous potential. The world is changing and there are more opportunities coming in this shifting paradigm. Covid-19 was a wakeup call; and the world as we know has changed, and so should our business strategy to accommodate this new reality.
The key focus of our sourcing strategies so far was to reduce cost and to drive scale in our quest to build a robust supply chain model. It's time we should shift gears to recreate a new business model that is less disruptive and more resilient. Covid-19 has brought uncertainty to every market we could possibly imagine. It is time we should introduce new business procedures to combat the post-pandemic challenges.
The author is Managing Director of Paper Rhyme.