Impact of Coronavirus on the Global Supply Chain

Sometime in December 2019, Chinese authorities had communicated to the World Health Organization (WHO) about the spread of contagious pneumonia by an unknown virus in the port city (inland) of Wuhan. As of 8th February 2020, this virus has killed more than 700 people and is now considered a global threat. Many cities have shut down borders, people are being quarantined and even Chinese New Year (CNY) celebrations were put on hold in the country.

Under normal circumstances, Chinese exports would have restarted by 7th February post the CNY holidays. However, in the current condition, there is no assurance when the situation will return to normalcy. Shipping lines were expected to start operations from 10th February but according to recent circulars, the date has been revised from 10th February to 1st March. This means that even if China opens up, the required capacity to ship necessary goods would not be available and global demand would not be met in a timely fashion.

Wuhan is the capital and biggest city of Hubei province in China. It is a major transportation hub with excellent connections of railways, roads, and expressways with other major cities. Because of its key role in domestic transportation, if Wuhan is closed, there would be an impact on the domestic network as well. While Wuhan has been a traditional manufacturing hub for decades, it is also one of the centers for industrial changes in China.

Some of the key industries in Wuhan are Auto-mobile Production/Assembly, Biotechnology/Pharmaceuticals, Chemicals Production and Processing, Food/Beverage Processing, Heavy Industry, Telecommunications Equipment, and Optical-electronics. Additionally, Wuhan Bio-lake is an industrial base established to accommodate research activities in biosciences.

Even though manufacturing and exports from Wuhan have come to a complete halt, CNY preparations turned out to be the savior for the global market. It was expected that there would not be any production from 25th January till 7th February, and the exports would start from 7th February onwards.

Like any year, importers from around the world had piled up inventory for these two weeks and had expected subsequent delays in shipment due to heavy load on ports. However, now it seems to be a matter of a few days that this inventory would run out. This would have serious consequences on the world market – both importing from China and exporting to China.

This may lead to severe financial repercussions across the globe.

Although other ports like Shanghai, Shenzen and Hong Kong may open soon, this will ease the impact on mobile, automotive and few other Industries. Mobile manufacturing plants in Shenzen are expected to open from 18th Feb onwards.

However, there would be a huge impact on the pharma industry because of the huge dependency on raw materials such as Active Pharmaceuticals Ingredients (API) for many drugs, which are mainly transported from Wuhan. Historically, India has been self-sufficient for these drugs until the 90s. But huge cost advantages and economies of scale have led to a significant increase in imports from China over the last 15 years, making seemingly impossible to head back to a situation where global demand may be completed from India or other locations.

Since a significant percentage of the imports into India are from Wuhan, it may not be practical for Indian manufactures to start scaling up within India or identify alternate locations in such a short time span. Unlike the automotive or mobile industry, pharma manufacturers usually keep sufficient stock to last up to two months. Hence, there is still some time left to take action on this situation.

However, in global settings, switching suppliers and ensuring the right quality, quality and cost in such a short time span will be very challenging. This may even lead to a global increase in medicine prices.

It is time to rethink the basic principles of procurement that there should be no dependency on one location or one supplier in order to maintain business continuity. In today’s scenario with pricing being the key, it is time to review the procurement strategy again.

The next few days will be critical to tell where we are leading and if this would turn into a full-blown crisis for all industries or only Pharma or if Wuhan recovers before supplies run out. Whatever may be the case, one needs to review supplier strategy and mitigate such risks for the future.

This article has been authored by Aditya Verma, Group Strategy Director at Varuna Integrated Logistics Pvt. Ltd.

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