The state of supply chains current and post-pandemic

With many countries closing their borders and imposing self-isolation measures amid the coronavirus pandemic, many supply chains immediately slowed to a crawl. How this will affect the future of supply chains, however, is not so clear cut.

The current challenges

Channel enterprises that rely on supply chains have no doubt faced their fair share of issues over the first few months of 2020 with the coronavirus pandemic disrupting a major player – China.

As the coronavirus has caused supply networks to freeze up, the implications spread further than simply the manufacturing giants like Foxconns and Winstrons, according to Stephanie Krishnan, research director for IDC Manufacturing Insights.

The impact can be felt throughout second and third tier suppliers, which are responsible for some vital elements in the process, such as subassembly, subcomponents, raw materials and even packaging, which can all prevent products from continuing through the supply chain.

Logistics have also been constrained, Krishnan continued, stemming from airport closures in China and impacted airlines like Qantas and Singapore Airlines, which have dropped approximately 96 per cent of flights.

“We are seeing this because the demand on air, which is the normal mode of transport for technology shipments, has been taken up by medical devices and medical equipment, especially PPE [personal protective equipment],” she said.

“As a result, the charges for air cargo went up 300 per cent in the first month. Now, they've gone through the roof, they're astronomical. You've got companies like DHL calling force majeure on their contracts which means that they can charge pretty much anything they want.

“Calling that actually frees them up to basically prioritise cargo based on medical need or food need, but as a result, anybody else that's trying to fly goods is going pay a hefty penalty as a result.”

The impact on air is also affecting the ability to charter aircraft, with Krishnan claiming that charter costs have ballooned from US$300,000 to a range of US$600,000 to US$800,000.

These supply chain constraints are not just broadly across the region but are being felt in Australia and New Zealand. Krishnan highlighted that Australia is heavily dependent on China for certain products and components, such as those used for telecommunication equipment and parts and computers.

This then is likely to ripple outward, having a knock-on effect on New Zealand.

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China plus one

With this reliance, some markets are gearing up to pivot slightly away from China, but these sentiments have been around long before the coronavirus pandemic escalated. 

“From our own surveys last year and even generally, there is an interest in getting away from a single factory that is actually putting things together and moving towards a model where there is customisation closer to the market that it's actually going to,” Krishnan said.

“There will still be essential subassemblies or subcomponents that will be made, but you'll be looking at a more distributed model of development. What we're hearing is actually that there's going to be a ‘plus one,’ which organisations were already starting to move to with regards to the US-China trade war.

“Some of the companies that I've spoken to were actually kicking themselves because they didn't do this fast enough.”

A major factor to move slightly away from China has been the rise of wages, especially on the east side of the country, Krishnan added.

“Supply chains, especially for labour intensive markets, tend to chase low cost labour markets,” she explained.

“In China, back in 2011, salaries started to increase, especially in the east side. As those salaries increase and workforces, which included the supply chains for IT equipment, started to move west as they chased that low cost labour market."

For the IT supply chain, Vietnam has been a significant player outside of China, which Krishnan notes has been a huge beneficiary of US-China trade tensions.

Automation, she continued, will also play a part in the future of supply chains and the pull slightly away from China to China plus one, as long as the locations getting involved in the supply chain have a strong STEM basis.

“Vietnam has developed a strong tech base, they've even started producing their own mobile phones. You're looking at Malaysia who had a lot of other technology capabilities before they went to China for the low cost labour market," Krishnan said.

“India has a strong technology capability — They still have some building to do, but we've seen the press on mobile phone and computer manufacturers looking over there.”

How quick can these plus ones be up and running in the supply chain? For Krishnan, it depends on their output.

“If it starts off with assembly, that that can reasonably happen in the 12 to 24 month period, provided you know that they have access to the labour force,” she said.

“For example, look at Malaysia. You had Seagate in Penang, and they moved out to China. That happened over a one to three month period where they moved quite quickly and started employing the workforce over there."

Across the region as a whole, Krishnan said there is a shortage of manufacturing and supply chain-related jobs.

“Unless we start turning to automation to solve those problems, which could bring it into the cheaper price point, it just means that we won't be employing people, we'll be using other forms of technology,” she said.

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The future of supply chains

However, whole supply chains won’t just spring up in countries, and it’s unlikely this will occur in Australia or New Zealand, Krishnan said.

“We've got a couple of things that are working against this. One is the education investment in STEM. For Australia or New Zealand, there is an education investment but in terms of STEM and manufacturing capability, we are somewhat lacking. Just from our own history, we've priced ourselves out of manufacturing.”

“Will consumers or companies be willing to buy electronics at a higher cost to support that local market? Do we have the educational foundation? Are we producing enough STEM workers? Or do we have enough that can do the factory work at the price point that the Australian labour force requires legally?”

It’s not just companies outside of China jumping on automation, but in China as well, with workers taking training on artificial intelligence (AI) and robotics.

“Factory workers are moving away from physical devices to moving towards AI; workers are identifying objects for AI, so AI and machine learning algorithms can learn.”

While changes to the supply chain were in the works, the lasting impact of the coronavirus pandemic will increase the speed of the shift to China plus one.

“In a lot of cases, there has been a lot of risk built into the supply chain because we have relied on large factories producing multiple finished goods, being very focused on economies of scale, making sure that we get the right cost points out of that,” Krishnan said.

“At least a third of the industry was relying on this, but we've noticed a shift and organisations over the next three to five years, prior to even going into COVID-19, were already starting to think about having suppliers or distributors customising final products on demand.

“If China plus one is implemented, there will be a loss to China, but a lot of components are going to come from China and a lot of the technology capabilities are still going to be developed in China.”

This customisation is likely to occur closer to the final market and can include assembling devices to meet specific regional locations or to meet specific demands of target demographics, Krishnan added.

“This was already starting to happen, and this has put pressure on organisations to realise that didn't think about this quick enough, and I think this is spurring a lot of organisations into action,” she said.