Global Supply Chain Impacts Business

Global Supply Chain Impacts Business

China’s harsh lockdowns have impacted global supply chains and forced a rethink.

Global supply chain disruptions are hitting home in many different ways. Builders have to leave jobs half-finished while they wait for materials to make it through ports, retail outlets are desperate for new season stock, restaurants have only a half a wine list.

And that was before the latest, extreme lockdown measures China has instituted across the country, focused on major manufacturing hubs and largest ports.

Since 2020, the world has been adjusting to fractured supply lines and many economists have forecast a move away from reliance on China as the world’s largest supplier of manufactured goods.

However, warnings of international consequences from China’s zero-COVID policy seem to have had less impact.

In March 2020, a survey by Gartner Inc of 260 global supply chain leaders found one-third had moved sourcing and manufacturing activities out of China or planned to do so by 2023.

The survey showed, however, that the pandemic was only one of several factors putting global supply chains under pressure.

“Global supply chains were being disrupted long before COVID-19 emerged,” said Kamala Raman, senior director analyst with the Gartner Supply Chain Practice.

“Already in 2018 and 2019, the US-China trade war made supply chain leaders aware of the weaknesses of their globalised supply chains and question the logic of heavily outsourced, concentrated and interdependent networks. As a result, a new focus on network resilience and the idea of more regional manufacturing emerged. But this kind of change comes with a price tag.”

Over the past few decades, globalisation has been a prime mover in the allocation of capital, resources, personnel and information. Economies have gradually formed supply chains for products and services by virtue of their comparative advantages. They occupy different positions in the chain, so there is a global supply and consumer market where economies are interdependent.

Some countries control the global supply chain based on the strength of their natural resources, core technologies, monopoly position, big markets or other advantages and as the world leader in the manufacturing of goods the world uses daily, China is one of the strongest.

Again in 2020, the Bank of America Global Research put a price tag on what it would cost for all foreign, non-Chinese firms to repatriate their manufacturing operations currently in China: $1 trillion over a five-year period.

And that figure did not include the higher operating costs that would be associated with doing business in more developed markets, which “could act as a drag on margins”.

Even in Australia two years ago, analysts were predicting dire supply chain issues if China continued its lockdown measures, all of which now seem to be coming to fruition.

The Committee for Economic Development of Australia said in 2020 that there were calls for structural adjustment policies to domesticise Australia’s essential goods manufacturing in the hopes of building long-term national resilience against similar crises in the future.

“We know there will be impacts to our national supply chains, but what is still unclear is how deep these impacts will be and how long they are likely to last,” CEDA chief economist Jarrod Ball said back in 2020. “Whether this pandemic marks the start of a new global trade paradigm remains uncertain.”

In May this year, with entire cities such as Shanghai in lockdown, interruptions to the international supply chain became a grim reality.

“We believe the macro impact of China lockdowns could be quite high and something which the market is not yet pricing in,” said Jay Huang, managing director of Greater China Research at AB Bernstein.

Bernstein’s analysis finds that China manufactures the majority of overseas demand for containers, ships, rare earths and solar modules – along with the bulk of mobile phones and PCs.

Chinese factories no longer only complete the final assembly for those electronic products but also manufacture components like LCD panels and integrated circuits.

Compared to pre-pandemic levels, Shanghai export container costs are now five times higher and air freight rates are twice as high.

“Hence there would be higher export of inflation, especially to China’s large trading partners but at the same time delay China’s own demand recovery,” Mr Huang said.

Like most other countries, businesses in Australia often base their inventory ordering on a just-in-time basis to allow for flexibility in ordering, to respond to changes in demand and to minimise excess stock.

So flow-on effects of China’s lockdowns and the hit to supplies over the past few months have included reduced labour or closures of factories and distribution centres, reduced transport and logistics capacity due to travel restrictions, and more stringent biosecurity and customs controls.

CEDA forecast that the worst affected businesses in Australia due would be in wholesale, retail, manufacturing and construction sectors.

Approximately 18 per cent of Australia’s imports are sourced from China according to CEDA and telecommunications equipment, like computers and smartphones, account for over a fifth of their value.

A substantial amount of these imports are everyday consumer goods like clothing, footwear, furniture, recreational goods and plastics, as well as refined petroleum used by businesses and households to power vehicles and machinery.

And with China’s own inflation now expected to surpass 5.5 per cent, it will not only be the supply of these goods to Australia that will be affected, but their price, and small businesses will most certainly feel the impact.

Recent Posts

Master the Art and Science of Delegation

Master the Art and Science of Delegation

Delegation is a skill often discussed but rarely mastered, especially by small business owners who a

Read More
The heart of the matter – succession planning for the family business

The heart of the matter – succession planning for the family business

Succession planning in a family business is a complex and often emotional process that involves more

Read More
How to Prepare Your Business for the Export Market

How to Prepare Your Business for the Export Market

The export market is ripe for small business expansion, provided they research the opportunities bef

Read More

Partners

Stay Connected

Sign up with your email address to receive news and updates