Although B.C. manufacturers are not yet seeing a major impact from supply chain disruptions caused by the coronavirus, experts say it is only a matter of time – especially in electronics and pharmaceuticals.
That is because the supply chains in these sectors have been optimized through years or even decades of relationship-building, negotiations and assessments, and that means that changes to any link in the chain can’t be made without significant risk or cost, said Werner Antweiler, director of the Sauder School of Business Prediction Markets at the University of British Columbia.
“With tourism, once you lift travel restrictions, you usually see tourists return to travelling very quickly,” Antweiler said. “You may have some cancellations and loss, but typically, when people can find alternatives like travelling later, they will take those alternatives.
“In complex manufacturing, companies don’t have options, because the supply chain is highly optimized. Many of these components are highly customized in a way that you can’t stop on a drop of a coin and switch to another supplier, because you’ve made a long-term investment with the existing supplier to get the level of customization in your product.”
That is the case with Vancouver-based startup Casca Designs Inc., which makes premium all-day footwear and is the city’s first shoe store fuelled by 3D printing. Casca’s shoes are manufactured in China, but because the company just received an order about two months ago, it is currently not running into supply chain problems caused by the outbreak.
However, Casca co-founder Kevin Reid agreed with Antweiler that the specialized nature of the company’s products and the materials used means that Casca cannot extricate itself from supply chain tie-ups if the outbreak causes further delays. “We’re exploring the switch, but it’s not a simple process. For other products like apparel, this shift might be easier, but there are so many technical components in shoes, it’s difficult to co-ordinate shifting all those suppliers to another country while maintaining quality.”
Antweiler pointed to consumer electronics, automotive and pharmaceuticals as the most likely to experience a manufacturing disruption, because many companies in those sectors depend on the highly customized components that could hold up production elsewhere in the chain while being difficult to replace. It also means that even if a B.C. business does not have a direct manufacturing relationship with a Chinese supplier, operations could be disrupted if any step of the chain involves a Chinese component.
“China is such an important supplier and manufacturing hub, and many goods depend critically on the supplies from those regions that have been affected.”
China is the world’s largest maker of mobile phones, computers and televisions. Companies like Apple Inc. (Nasdaq:AAPL) and Facebook (Nasdaq:FB) have supply chains deeply ingrained in the Chinese market, and disruptions to production for items such as computer screens and virtual-reality headsets have already been reported.
In a February economic report, consultancy Oxford Economics said the coronavirus outbreak has likely already dashed the “tentative optimism” in analysts’ circles that the worst of the global economic uncertainty brought on by the U.S.-China trade war was over.
The report further projected the outbreak to cause China’s GDP growth to plunge to 3.8% in 2020’s first quarter and fall to 5.4% overall for the year.
“Weaker Chinese imports and tourism and disruption to global supply chains will take a toll on the rest of the world, particularly in the Asia-Pacific region,” the report said. “And the shock will exacerbate the ongoing slowdown in the U.S. and may result in the eurozone barely expanding for a second quarter running in Q1.”
The report now projects global GDP growth at just 1.9% for 2020’s first quarter and 2.3% for the year.
Andreas Schotter, associate professor of international business at the University of Western Ontario’s Ivey Business School and a former business executive in China, said a visit this month to Hong Kong was “eerie” compared with a trip to the city a month before.
“Masks everywhere, few people in the street, hotels empty,” Schotter said. “Taxi drivers are really suffering, telling me they are waiting during normal rush hour for 60 to 90 minutes for just a short trip.” Since 2011, when the Tohoku earthquake and tsunami devastated Japan and threw its energy production and manufacturing sector into disarray, Schotter has urged multinational corporations to develop contingency plans for their supply chains.
“Unfortunately, few have taken this up,” he said. “Many firms seemed to just keep going. By the time they really need to transform, their capabilities and capacity to act have taken a severe blow. I do not think we have seen the peak of the supply chain disruption effects yet.” Antweiler agreed. He said that, given the specialized nature of complex manufacturing supply chains, companies would have few options to switch now, even if they wanted to.