The global supply chains are under huge pressure as Covid -19 has created ‘manufacturing deserts’ due to the lockdown conditions in various countries and manufacturing output will take at least 12 months to recover to 2019 levels, a report said.

According to a new report from Baker McKenzie and Oxford Economics, Beyond Covid 19: Supply Chain Resilience Holds Key to Recovery, the pandemic has produced an unprecedented global supply chain crisis, stemming from a lack of mapping and flexibility around the multiple layers of global supply chains and a lack of diversification in sourcing strategies.

On the upside the report forecasts that the hardest-hit manufacturing sectors across the world will be also the first to recover by H1 2021 as a release in pent-up demand is driven by a recovery in sentiment, and production ramps up to make-up for previously lost output.

The current global supply chain crisis is due primarily to the pandemic creating temporary ‘manufacturing deserts’, whereby a city, region or whole country’s output dries up so substantially due to lockdown conditions, they become a no-go zone to source anything apart from essential items such as foodstuffs and pharmaceuticals.

The report highlights that the immediate impacts of a failing global supply chain are already being felt, from auto plants in Korea shutting down because of a lack of parts from China to smart phone manufacturers running dangerously low of components. As a result, global trade is expected to have fallen by more than 4 per cent in Q1 2020, and decline even further in Q2.

As Mattias Hedwall, Global Chair, International Commercial & Trade at Baker McKenzie, explained this has serious implications for global supply chains: “It is clear that the extended shutdown of parts of the world’s economy is now feeding through to impact supply chains as existing stocks are depleted. Businesses need to focus on how to minimise supply chain disruption and to adjust rapidly to a changing landscape. This includes among others, infrastructure, tax and employment implications of changes and the option of quickly reversing changes if the situation stabilises quickly.”

Borys Dackiw, EMEA Co-Chair, Compliance & Investigations, and Gulf Head of Compliance at Baker McKenzie, added: “During this period of uncertainty, it is particularly important for companies to be alive to the risks arising from trade restrictions and supply chain issues, particularly when seeking out new sources of supply or dealing with new third party business partners. Sufficient compliance due diligence on new parties, jurisdictions, products and transaction structures will play an integral part in effective supply chain risk management.”

MANUFACTURING

While there remain a number of scenarios for the global economy over the next 24 months, Oxford Economics’ baseline forecast is that global manufacturing will take a 5 per cent hit in the first six months of this year compared to 2019, recover much of that drop in H2 2020 and finally exceed the 2019 position by early 2021.  The pace and extent of decline and then subsequent recovery varies by manufacturing sub sector. The automotive sector is set to see the biggest output falls in H1 2020 of 13 per cent, followed by textiles (8 per cent) and electronics (7 per cent) although the forecast also shows the auto and other transport equipment sector is likely to see the swiftest recovery, along with textiles.

IMPACT ON CHINA

Because of China’s unique role in the global supply chain, and its sensitivity to drops in global demand as a leading export nation, the forecast sees a significantly deeper drop in output this year than the global decline, with sectors such as automotive and electronics not actually climbing back to 2019 levels until 2022. China’s automotive sector will see a 19 per cent drop in output for H1 2020 while electronics will see a 17 per cent drop in output, all relative to Q4 2019 data. Textiles sees a 14 per cent drop in H1 2020 as well as headline manufacturing (11 per cent) and aerospace (6 per cent).

The Chinese economy being largely out of action for several weeks has also left many multinational companies with limited contingency plans to deal with supply chain disruptions. It has also rapidly exposed supply chain concentration issues for global companies that have relied heavily on China.

TRANSFORMATION

The report highlights that supply chain risk management has jumped to the top of many companies’ agendas because of the current supply chain crisis, and is likely to stay there well after the immediate threat of Covid-19 begins to recede. Longer term, digitalisation of supply chain will be the way companies begin to strategise and achieve business resilience against supply chain disruption.

THE WAY FORWARD

The report concludes that to take advantage of the policy boosts around the world, businesses need to be agile, nimble and ready to tackle operational, labour and demand/supply constraints, re-address strategic and tax planning and re-consider business models post-Covid-19. This means structuring their supply chains, ramping up on digital transformations, which could lead to an even stronger commitment to sustainability goals alongside building resilient businesses.