How China can rebuild global supply chain resilience after COVID-19
By Francisco Betti, Head of Shaping the Future of Advanced Manufacturing and Production, World Economic Forum, and Jun Ni Shien-Ming Wu, Collegiate Professor of Manufacturing Science; Honorary Dean, UM-SJTU Joint Institute, University of Michigan
As the number of COVID-19 cases in China falls, it is also recovering from the effects on industry.
Companies have been exploring creative ways to restart global supply chains.
More work is needed to ensure long-term resilience.
China seems to be seeing the light at the end of the tunnel of fighting the COVID-19 outbreak domestically. Last week the country reported no new cases of coronavirus for the first time since the outbreak began, and people are returning to work and their daily lives.
Yet there is much more work to be done for companies to resume their normal productions and respond to the economic effects of the crisis.
How COVID-19 affected global supply chains
The COVID-19 pandemic has hit the business world in an unprecedented scale and speed. It has caused the closures of business, the stoppage of factory outputs, and the disruption to global manufacturing industries and their supply networks.
Major industries including automotive, electronics, pharmaceuticals, medical equipment and supplies, consumer goods and more have been significantly affected. This is a result of China having become a world production centre over the past two to three decades.
China provides the bulk of the components, raw or processed materials, as well as major subsystems to manufacturers globally. Not only have China’s original equipment manufacturers (OEMs) faced the challenges of resuming their production capacity but also global manufacturers have felt the impact of part shortages in their supply networks.
Companies inside China are slow to resume their normal productions due to various factors. These include the shortage of parts from lower-tier suppliers; the shortage of labour workers who might still be trapped due to the shutdown of their villages and other infected regions; the stringent requirements for companies to establish adequate protective measures and provide an adequate supply of protective gears for employees; and the slow recovery of transportation network capacity due to road closures and other emergency regulations and priorities.
How companies are fighting back
Many global manufacturing OEMs have been scrambling to find alternative solutions, including quickly shifting orders to secondary or tertiary suppliers to make up the missed delivery from their primary suppliers and moving some core business priorities back to their own factories.
Some OEMs have even ventured to re-tool their production systems to make totally different products. For instance, when automotive business was down by more than 90% in China in February, automobile manufacturer Shanghai-GM-Wuling (SGMW) quickly retooled its production system to produce medical face masks, which positively contributed to mitigating the COVID-19 spread and at the same time generated rewarding revenues and positive reputation for the company.
To meet the production needs, Chinese firms have also become creative and resourceful to recruit workforce. Some firms negotiated with local governments for permission to send in charted buses and even airplanes to bring back workforce from remote regions. Others have started to adopt automations to make up for labour shortages. Some are also applying technologies to do crash training for newly recruited manual labour workforce. In some firms, salaried workers are temporarily taking on the work of hourly labour workforce in certain critical production areas.
As the COVID-19 crisis has intensified the competition for valuable supply sources, in certain industrial sectors, including electric vehicle (EV) production, the bargaining power has shifted from OEMs to suppliers. For instance, Tesla and CATL recently announced their strategic partnership for CATL to supply EV batteries to Tesla’s Model-3 production in China, shifting away from the sole supply by Panasonic alone. Toyota and Panasonic also announced their agreement to launch a joint venture to produce EV batteries. And BMW signed a major agreement to purchase EV batteries from CATL worth of 7.3 billion euros.
Managing disruption in the long-term
Traditionally, corporate executives consider the cost, quality and delivery as their key metrics when developing supply value chains strategies. But as the recent crisis has shown, major global events caused by pandemics like COVID-19, as well as natural disasters, climate change and geopolitical tensions, can create significant disruption to the reliable supply of parts or products.
Supply value chains cannot be established overnight. It takes time and effort to qualify potential suppliers in areas of manufacturing quality, capacity, delivery, cost and their ability to respond to engineering or demand changes. Thus, supply value chains are designed for longer-term needs. Once they are established, it can be difficult to change them quickly to adapt to unpredictable disruptions.
The COVID-19 pandemic has reminded corporate decision-makers that there is a need to develop new business strategies in their future supply chain designs. The KPIs to be considered for future supply value chain designs will likely contain both traditional metrics such as cost, quality and delivery, and new performance measures including resilience, responsiveness, and reconfigurability (otherwise known as the 3Rs).
Moving forward, there will be an increased need for infrastructures and technical means to create the transparency within global supply chains. There must also be a call for the development of predictive models for proactive scheduling and dynamic planning of supply demands with the consideration of uncertainties and risk factors. These predictive models will help corporate decision-makers do what-if analysis of various scenarios.
Finally, in this emergency period, there exist opportunities for government collaboration. For example, the US and Chinese governments could eliminate artificial tariffs so that increased supplies and goods can be flown between the boarders to fight and mitigate the global COVID-19 pandemic.
The World Economic Forum’s Platform for Advanced Manufacturing and Production is bringing together senior operations, supply chain executives and top leaders from government, academia, and civil society to analyse the economic impact of COVID-19 on value chains and help companies address existential and short-term challenges while keeping sight of longer-term goals aimed at driving systemic change.
Jun Ni is a member of the Global Future Council on the Future of Advanced Manufacturing and Production.