COVID-19 Global-Impact: Global Economic and Supply Chain Effects

At the rate it is spreading across the globe, COVID-19 has become a global nightmare. Since China informed the World Health Organization of a cluster of 41 patients with mysterious pneumonia on December 31, 2019, the world has seen COVID-19 cases balloon to 785,777 across 200 countries and territories, with 37,815 deaths at the time of writing.

In the Philippines, from the first confirmed COVID-19 case on January 30, 2020 – a 38-year-old Chinese national – COVID-19 cases have since increased to 1,546 confirmed cases, with 78 deaths.

The rapid outbreak of COVID-19 presents a frightening health crisis that the world is struggling with. In addition to the human impact, there is also a significant commercial impact that is being felt globally. As viruses know no borders, the impact of the disease will continue to spread. In fact, about 94% of Fortune 1000 companies are already seeing disruptions due to the COVID-19 pandemic.

Economic Effects

Recent research on the COVID-19 pandemic’s effects on the global economy by the Asian Development Bank traced the impact to several key channels, including the decline in domestic consumption in disease-affected countries, disruptions in production and trade lines, the alarming effect on business travel and touring, and the effects on health due to disease and mortality risks. Their study estimates income loss of $77 – $347 billion (0.1 – 0.4% of the global GDP). About two-thirds of this total is accounted for by China. China is expected to be worst hit, not only because the pandemic started there, but also due to its position in the global production chain.

Researchers from the Center for Economic Policy and Research also note that COVID-19 hit the heart of ‘Factory Asia’ – this includes not just China, but also Singapore, Japan, and South Korea.

Almost all of the Group of 7 (G7) – the world’s seven largest advanced economies – have been hit by COVID-19. Collectively, China, Japan, Italy, Germany, France, the United Kingdom and the United States account for about 60% of the global economy, 65% of global manufacturing, and 41% of global manufactured exports. Based on researchers’ calculations, countries such as Japan may face 10% GDP loss, while the United States and Germany may each lose up to 8% of GDP.

Furthermore, experts have raised the risk of a global debt crisis because of the financial fragility in the wake of COVID-19. Financing for many emerging market economies may experience a sudden stop due to both a real supply side slowdown and a significant turn in investor and consumption sentiment throughout the world.

COVID-19 and Global Supply Chains

The economic impact of the COVID-19 pandemic has demonstrated how businesses should respond to supply chain disruption.

In the recent decades, there has been an exponential growth in global trade flows. As a result, there has also been a rise in the complexity of supply chains, many of which have evolved into an entangled web of third-party transactions. Outside of highly regulated industries, few businesses properly inspect the chain of distributors, manufacturers, sub-manufacturers, and logistics handling agents who are all accountable for making final transactions a reality.

Recent events, most notably the COVID-19 outbreak, have demonstrated how vulnerable our global supply chains can be to any type of disruption – be it human, economic, or political. Businesses of all types and sizes need to take the time to fully understand the inherent risks and consider how they can decisively respond if disruption emerges in their supply chain.

But, what can businesses do?

Today, businesses need to ask some crucial questions of their own supply chains. While some questions may seem obvious, getting clear answers can often be challenging.

  • Do you understand where your input goods are produced or manufactured? While this question may seem easy to answer, the complexity begins when you move down below your tier one suppliers. Who supplies the raw material, the sub-assembly components, and other necessary materials that goes into the product?
  • Do you have any emergency supply options? For instance, do you have alternative manufacturing facilities and/or suppliers that could be called upon? If you do, how quickly can they produce your needs and at what cost?
  • Do you know what your logistics route looks like? Having working capital tied up in stock sat on docksides can be difficult from both a liquidity and operational perspective. In such cases, do you have alternative transport routes and at what cost?

Financial Considerations

On top of the operational impact, businesses also need to consider the impact of the supply chain disruption due to COVID-19 on their bottom line.  

First, businesses need to pin-point the orders affected by the supply chain disruption, as well as the impact that this will have on existing inventory run down. Without knowing the scale of the issue at hand, it can be very hard to make smart financial or operational decisions. As any disruption evolves, updating this assessment with a frequent risk management process should be a crucial component of managing through the COVID-19 outbreak.  

Where possible, the credit and margin implications of sourcing from alternative suppliers at least temporarily has to be considered. Using a local supplier may result in an uplift in costs – and while this may be easily absorbed on a few lines, this may become increasingly hard if supply disruption affects a big proportion of inputs or Stock Keeping Units (SKUs). Recognizing how these costs may or may not be transferred to the customer may help prioritize your business response.

The next step that businesses need to consider is to translate these into a revised liquidity profile. This includes evaluating any new working capital dynamics and keeping a short-term cash forecast with a range of possible contingency/mitigation scenarios. This will be important to provide external funders and other stakeholders with confidence and trust in a management team’s grasp of the situation and its potential outcomes.

The Bottom Line

The COVID-19 pandemic has caused certain restrictions to be placed upon the flow of both people and foods across international borders and even domestic territories. People and goods are the lifeblood of all business and disruption of these flows – even for a short time – can have a severe impact on the immediate condition of your business and the economy in general.

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