Even if we can battle the coronavirus pandemic into submission, its consequences are likely to spark rethinking about how the world is doing business. This outbreak occurred at a time when globalization was still under severe pressure from the US-China trade war and growing confusion about the future of free trade in general.
The shocks which are undergoing global supply chains are likely to reverberate. The rivalry between the US and China has not been resolved and could reignite at any moment. It can no longer be ignored by companies that tariff agreements enshrined in the rules of the World Trade Organization would avoid unexpected spikes in protectionism. The process for conflict within the WTO has stopped operating.
Coronavirus effect on business has also revealed what many would find to be an unhealthy reliance on suppliers based in China. Hubei Province, where the outbreak started, is a high-tech manufacturing centre, home to highly integrated local and foreign firms in the automobile, telecommunications, and pharmaceutical industries. The province accounts for 4.5 per cent of Chinese gross domestic product; in Wuhan, Hubei’s capital, 300 of the world’s top 500 companies have facilities. Before it was a pandemic, the coronavirus epidemic triggered damage to supply chains in all continents.
The search for the most cost-effective suppliers left many companies without a Plan B. More than half of the companies surveyed by the Shanghai Japanese Commerce and Industry Club confirmed the outbreak had impacted their supply chains. In the event of a prolonged interruption, fewer than a quarter said they had alternative development or procurement plans. The knock-on effects could be higher because companies frequently do not know where their suppliers are located.
We may expect further shocks in the form of severe weather events or more disease outbreaks, in the absence of a globally organized response. Companies should think harder to diversify their supplier base to protect against threats to a single product, geographic area or trade policy shifts. That means building up in inventory and maybe even moving away from keeping near-zero inventories. Prices will undoubtedly grow but concerns about supply chain fragility in the post-Covid world will arrive right after those over prices. Companies will also be able to determine their second and third-tier suppliers’ resilience.
The Indian economy is likely to experience a sharp 4.5 per cent (de-growth) contraction during Q4 FY20 and is expected to slowly recover, posting a GDP growth of only 2 per cent in FY21. This includes primarily discretionary activities such as transportation, tourism and hospitality; labour-intensive sectors such as the construction, transport and manufacture of non-essential items; exports; and supporting sectors such as electricity.
Domestically, the impact of the coronavirus pandemic may lead to a slowdown in domestic demand, an erosion of buying power due to job losses or pay cuts and a trickle-down effect of demand delay would have a longer-lasting impact on some other sectors, particularly where demand is discretionary.
Coronavirus impact on business won’t end globalization, but it’s going to change it. To thrive, companies will need to adapt.