Coronavirus: the long-term impact on supply chains - Capital Economics
Emerging Asia Economics

Coronavirus: the long-term impact on supply chains

Emerging Asia Economics Update
Written by Shilan Shah
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The coronavirus itself may not trigger a wholesale reorganisation of supply chains, but it strengthens the argument for companies to reduce associated risks. One response might be to introduce more redundancy into supply chains to lessen reliance on single suppliers. Within Asia, that could benefit the likes of Vietnam, Korea and Taiwan, whose firms have demonstrated over the past couple of years that they are viable competitors to suppliers in China. Another response would be to simplify and shorten supply chains, which could harm suppliers across much of the region but potentially benefit many in China.

  • The coronavirus itself may not trigger a wholesale reorganisation of supply chains, but it strengthens the argument for companies to reduce associated risks. One response might be to introduce more redundancy into supply chains to lessen reliance on single suppliers. Within Asia, that could benefit the likes of Vietnam, Korea and Taiwan, whose firms have demonstrated over the past couple of years that they are viable competitors to suppliers in China. Another response would be to simplify and shorten supply chains, which could harm suppliers across much of the region but potentially benefit many in China.
  • The outbreak of the coronavirus and subsequent shutdowns of factories in China have highlighted the vulnerability that comes from being dependent on suppliers in one place for key parts of a supply chain. Many companies (such as Apple) have warned about an impending shortage of components. Some (such as Hyundai) have already announced production suspensions as a result.
  • The latest trade data give an early indication of supply chain disruption. Exports and imports of Vietnam – one of the economies most tightly integrated with manufacturing in China – both contracted in y/y terms in January. And Korea’s imports from China in February dropped by 16% y/y.
  • On its own, the coronavirus seems unlikely to prompt firms to redesign their entire supply chains. This isn’t the first shock to supplies of key intermediate goods that has led to factory shutdowns elsewhere in the world. But neither Japan’s 2011 tsunami nor Thailand’s floods the same year stopped the further fragmentation of supply chains. It could be that the efficiencies of just-in-time production continue to make it worth taking the risk of an occasional shutdown – particularly one that is likely to hit competitors too.
  • But firms have additional reasons now to rethink how they organise their logistics, including environmental concerns, new technologies and pressure from the US to decouple from China.
  • Any such rethink could play out in two ways. The first would be for multi-national firms to introduce more redundancy into their supply chains, so that there is less reliance on a single firm for any link. Over time, this would almost certainly reduce the rest of the world’s dependence on Chinese producers – and so make decoupling easier. And it would provide opportunities for alternative suppliers.
  • One way to identify who might benefit in this scenario is to look at who did well when the US-China trade war set off a search for alternative suppliers. Vietnam, Taiwan and Korea stand out in this regard. (See our Focus, “Winners and losers from the trade war”, 26th June 2019.)
  • The second option for firms wanting to reduce supply chain vulnerabilities would be to simplify their supply chains so that there are fewer links. Somewhat ironically in current circumstances, this would probably benefit China. After all, in many sectors, it is one of the few places that is large enough to sustain a full production chain.
  • By contrast, this kind of response would probably harm smaller economies in Asia, including Malaysia, Thailand, Singapore and Hong Kong, that currently have niches in global production but can’t compete with China in the breadth of their capabilities. Taiwan and Korea occupy a middle ground: their investment in technologies that support the shortening of supply chains, including robotics, could pay off.
  • In addition, if supply chains were to shorten that would slow inward investment into some parts of the region, and more generally slow the diffusion of technologies, techniques and knowledge. This would make it much harder for poorer Asian economies such as Vietnam, Cambodia and most of South Asia to emulate the previous success of some of the region’s richest economies in leveraging their role in global supply chains to develop globally-competitive manufacturing sectors.

Shilan Shah, Senior Economist, +65 6595 1511, shilan.shah@capitaleconomics.com
Mark Williams, Chief Asia Economist, +44 20 7811 3903, mark.williams@capitaleconomics.com