Blindsided on the supply side
Skip to main content
  • Home
  • Economy
    • Aviation
    • Bazaar
    • Budget
    • Industry
    • NBR
    • RMG
    • Corporates
  • Stocks
  • Analysis
  • World+Biz
  • Sports
  • Features
    • Book Review
    • Brands
    • Earth
    • Explorer
    • Fact Check
    • Family
    • Food
    • Game Reviews
    • Good Practices
    • Habitat
    • Humour
    • In Focus
    • Luxury
    • Mode
    • Panorama
    • Pursuit
    • Wealth
    • Wellbeing
    • Wheels
  • Epaper
  • More
    • Subscribe
    • Videos
    • Thoughts
    • Splash
    • Bangladesh
    • Supplement
    • Infograph
    • Archive
    • COVID-19
    • Games
    • Long Read
    • Interviews
    • Offbeat
    • Podcast
    • Quiz
    • Tech
    • Trial By Trivia
    • Magazine
  • বাংলা
The Business Standard

Thursday
February 09, 2023

Sign In
Subscribe
  • Home
  • Economy
    • Aviation
    • Bazaar
    • Budget
    • Industry
    • NBR
    • RMG
    • Corporates
  • Stocks
  • Analysis
  • World+Biz
  • Sports
  • Features
    • Book Review
    • Brands
    • Earth
    • Explorer
    • Fact Check
    • Family
    • Food
    • Game Reviews
    • Good Practices
    • Habitat
    • Humour
    • In Focus
    • Luxury
    • Mode
    • Panorama
    • Pursuit
    • Wealth
    • Wellbeing
    • Wheels
  • Epaper
  • More
    • Subscribe
    • Videos
    • Thoughts
    • Splash
    • Bangladesh
    • Supplement
    • Infograph
    • Archive
    • COVID-19
    • Games
    • Long Read
    • Interviews
    • Offbeat
    • Podcast
    • Quiz
    • Tech
    • Trial By Trivia
    • Magazine
  • বাংলা
THURSDAY, FEBRUARY 09, 2023
Blindsided on the supply side

Global Economy

Elisabeth Braw
06 March, 2020, 12:10 pm
Last modified: 06 March, 2020, 12:18 pm

Related News

  • Pacific islands urge Japan to delay release of Fukushima waste over contamination fears
  • The whack-a-mole economy: US manufacturers struggle with unpredictable supplies
  • Corporate China struggles with supply snags, demand slump as Covid cases spread
  • Wheat bounces off 2-month low, US view of higher supply caps gains
  • Made in Britain: Broken supply lines drive manufacturing back home

Blindsided on the supply side

CEOs are judged on their companies' quarterly results. Why spend money on resilience, so the thinking goes, for a contingency that's highly unlikely to occur?

Elisabeth Braw
06 March, 2020, 12:10 pm
Last modified: 06 March, 2020, 12:18 pm
A security guard wearing a face mask looks at his mobile phone in a closed Apple store in Beijing on February, 5, 2020. Photo: Foreign Policy
A security guard wearing a face mask looks at his mobile phone in a closed Apple store in Beijing on February, 5, 2020. Photo: Foreign Policy

On Feb 27, Apple CEO Tim Cook announced that the tech giant would be reopening its factories in China, which had been an early victim of the coronavirus. Like Apple, companies around the world are discovering that their China-linked supply chains bring not only financial advantages but risks, too. And COVID-19 won't be the last such risk. While everyone should spare a thought for COVID-19's victims, they also ought to learn lessons from the bug's disruption of the unsexy but vital supply chain.

At the end of January, when COVID-19's destruction in China was becoming apparent, US Commerce Secretary Wilbur Ross told Fox Business that "I think it will help to accelerate the return of jobs to North America." Coming at a moment when some 8,100 Chinese had been infected with the virus, it was an extraordinarily callous comment, but the line was consistent with the so-called decoupling from China the administration of US President Donald Trump advocates.

It was also incorrect. In the short term, the virus won't help bring jobs back to the United States. On the contrary, it's likely to cause reduced manufacturing in North America and other Western countries as failing arrivals of Chinese-made components cause production delays.

That's exactly what happened in 2011, when a devastating tsunami and earthquake hit Japan's Fukushima region. Japanese high-tech firms are part of many companies' global supply chains—and executives soon discovered just how vital that Japanese cog was.

Before the earthquake, the Fukushima region produced, among other things, some 22 percent of the world's 300-millimeter silicon wafers, which are used in semiconductors; 60 percent of critical auto parts; and a large share of lithium battery chemicals and the conductive film used in flat-panel liquid-crystal displays. Indeed, the Japanese suppliers did such a good job that countless global manufacturers had gone single-source—that is, they were only using the Japanese firms. That's fine most of the time, but not when an earthquake strikes and renders factories unusable.

COVID-19's brutal world tour is not over yet, nor are the resulting supply-chain disruptions. The trouble is no CEO actually knows his or her companies' complete supply chain. As I pointed out in an article last year, suppliers are just the first tier of the supply chain. The suppliers have suppliers of their own, who may, in turn, even have a third layer of suppliers. Michael Essig, a professor of supply management at the Bundeswehr University in Munich, calculated that a multinational company such as Volkswagen has 5,000 suppliers (the so-called tier-one suppliers), each with an average of some 250 tier-two suppliers. That means that the company actually has 1.25 million suppliers—the vast majority of whom it doesn't know.

Even if a company tried to keep track of all of its tier-two suppliers, it would struggle to do so. "COVID-19 can become a wakeup call for both businesses and government authorities," Daniel Jonsson, deputy head of the Department of Social Security and Safety at the Swedish Defence Research Agency, told me. "Here's a very real opportunity to study which operations fare reasonably well during disruptions and which ones succumb. The latter may need government contingency incentives."

In fact, supply-chain vulnerabilities may only become apparent when there's a crisis. A new report by corporate data analytics firm Dun & Bradstreet calculates that some 51,000 companies around the world have one or more direct suppliers in Wuhan and at least 5 million companies around the world have one or more tier-two suppliers in the Wuhan region, COVID-19's epicenter. Fully 938 of the Fortune 1000 companies have tier-one or tier-two suppliers in the Wuhan region, Dun & Bradsteet reports. When a crisis strikes it is, of course, extremely difficult to fix the problem because companies are all looking for substitutes at the same time—and the market doesn't simply have lots of specialized companies able to spring into action if there's trouble elsewhere.

Indeed, even though the US pharmaceutical giant Merck and some other companies affected by the Fukushima earthquake responded by creating large inventories of critical components, many multinationals appear to have forgotten the lessons learned from Fukushima. Indeed, when COVID-19 hit China, Apple was stuck. So were other companies. Microsoft—hardly a risk-seeking company—announced that its quarterly sales would be lower than expected as a result of the virus's impact on its supply chains.

Such reports have caused stock markets to plummet. The last week of February was one of the worst since the 2008 financial crisis for both the Dow Jones Industrial Average and the London Stock Exchange.

Why didn't executives learn from the Fukushima disaster? Many probably did but failed to take action, though some firms—including Levi's—have cut their Chinese suppliers for fear they'll be harmed in a US-Chinese trade war. "And many companies have built supply chain risk management in order to identify problems and take action at an early stage," Essig told me. "The coronavirus is showing whether such systems work."

Creating inventories, or moving to dual-source, is expensive, and natural disasters are relatively rare. According to the US Geological Survey, most years there's only one major earthquake worldwide. What's more, CEOs are judged on their companies' quarterly results. Why spend money on resilience, so the thinking goes, for a contingency that's highly unlikely to occur?

But the world is changing. Severe-weather events are increasing. Like earthquakes, flooding can cause factories to temporarily close. Equally troubling, nation-state aggression is shifting its focus to the private sector. China is emerging as an extremely skilled practitioner in using its companies to weaken other countries through means including intellectual property theft, cyber aggression, and predatory takeovers of cutting-edge firms—so skilled that the US government has made the issue a priority.
Long international supply chains, then, pose an enormous vulnerability, not just to the companies relying on them but to the countries where those companies are based and where their products are delivered. Consumers are, of course, ultimately affected, too. That makes it extraordinarily tempting for one country wishing to harm another to do so by disrupting the supply chains of companies seen as representing that country.

Last year, long before the coronavirus paralyzed markets, German-based Adidas's sales growth declined when the company's suppliers—nearly all of whom are based outside Germany—failed to keep up with customer demand. Imagine the effects if the Chinese government, or any other government with lots of companies supplying Western conglomerates, decided it wanted to harm another country.

For example, what if the Chinese government instructed Chinese companies to delay or halt deliveries to Swedish companies in order to punish Sweden for standing up for Gui Minhai, a Hong Kong-based bookseller who has just been sentenced to 10 years in prison? Two years ago Gui, a Chinese-born Swedish citizen who had published books critical of Chinese leaders, was abducted by Chinese agents while traveling in China with two Swedish diplomats. Gui received his sentence in February, following an apparently coerced confession and forced return to Chinese citizenship. Delaying or halting Swedish firms' supply chains would cause a great deal of harm—and it would be virtually impossible to prove that the disruption had been instigated by the Chinese government.

Ross's comment about the virus helping bring US jobs back was nasty and inaccurate in the short term, but it did point to a larger reality: In the longer run, it's safer for companies to have their production closer to home. Such localism also benefits the national security of the businesses' home countries. Given the low cost of shipping and developing-country wages, it's unfortunately also much more expensive, and thus unlikely to happen.

Instead, businesses should make a concerted move to diversification. To be sure, having additional suppliers in other countries would cost more, as would maintaining large inventories, but it would also guarantee a modicum of stability in case of crises—whatever those crises might be. The businesses currently slumping on Wall Street and other stock exchanges are surely now wishing they had done so.

After all, a string of fine quarterly results doesn't matter much when supply-chain disruptions—whether caused by animal-triggered viruses, Mother Nature, or hostile governments—can wipe away months of gains or billions of dollars in market value in a matter of days.

World+Biz / Top News

Supply / Fukushima

Comments

While most comments will be posted if they are on-topic and not abusive, moderation decisions are subjective. Published comments are readers’ own views and The Business Standard does not endorse any of the readers’ comments.

Top Stories

  • Illustration: Dalbert B. Vilarino for Bloomberg Businessweek
    If you have to have a recession, make it a rolling one
  • Turkey seeks Bangladesh's assistance to combat earthquake aftershocks
    Turkey seeks Bangladesh's assistance to combat earthquake aftershocks
  • Photo: PID
    Rail connectivity will ease Dhaka's traffic jam, says PM

MOST VIEWED

  • Indian billionaire Gautam Adani speaks during an inauguration ceremony after the Adani Group completed the purchase of Haifa Port earlier in January 2023, in Haifa port, Israel January 31, 2023. REUTERS/Amir Cohen/File Photo
    Fresh risk for Adani as MSCI probes free float of group stocks
  • Illustration: Dalbert B. Vilarino for Bloomberg Businessweek
    If you have to have a recession, make it a rolling one
  • IFIs like the IMF will need to provide new finance early on. Photo: Reuters.
    Pakistan Finance Minister says expect IMF matters to be settled today - Dawn
  • FILE PHOTO: The logo of the Adani Group is seen on the facade of its Corporate House on the outskirts of Ahmedabad, India, January 27, 2023. REUTERS/Amit Dave/File Photo
    Adani stocks slip after 2 days of gains as MSCI to review free float status
  • Oil pumping jacks in an oilfield near Neftekamsk, in the Republic of Bashkortostan, Russia.Source: Bloomberg
    Oil settles up for third day as interest rate concerns ease
  • U.S. President Joe Biden makes a statement about the U.S. midterm elections during his visit in Phnom Penh, Cambodia November 13, 2022. REUTERS/Kevin Lamarque
    Biden says he sees no recession in 2023 or 2024

Related News

  • Pacific islands urge Japan to delay release of Fukushima waste over contamination fears
  • The whack-a-mole economy: US manufacturers struggle with unpredictable supplies
  • Corporate China struggles with supply snags, demand slump as Covid cases spread
  • Wheat bounces off 2-month low, US view of higher supply caps gains
  • Made in Britain: Broken supply lines drive manufacturing back home

Features

Google’s investment bodes well for Ireland’s economy.Photographer: Hollie Adams/Bloomberg

Layoffs alone won’t solve tech's problems

5h | Panorama
Mirsarai Autism Centre has been established to facilitate 7,000 disabled, autistic children at a distant village of Mirsarai upazila. Photo Minhaj Uddin

Children are everyone's business

9h | Panorama
Caption1: One of Shaker Ibne Amin’s earliest and most favourite builds which he calls the ‘Soul’. Photo: Saikat Roy

3Monkey: Making the dream custom bike for every rider

9h | Wheels
Chinese automobile manufacturers dominate the 2023 Dhaka Motor Fest

Chinese automobile manufacturers dominate the 2023 Dhaka Motor Fest

8h | Wheels

More Videos from TBS

Quake death toll rising, passes 15,000

Quake death toll rising, passes 15,000

1h | TBS World
Ekushey book fair to see fewer releases this year

Ekushey book fair to see fewer releases this year

6h | TBS Stories
Sirajdikhan's delicious Patkhir is also in demand abroad

Sirajdikhan's delicious Patkhir is also in demand abroad

7h | TBS Stories
LeBron James NBA's all-time highest scorer

LeBron James NBA's all-time highest scorer

7h | TBS SPORTS

Most Read

1
Photo: Courtesy
Panorama

From 'Made in Bangladesh' to 'Designed in Bangladesh'

2
Master plan for futuristic Chattogram city in the making
Districts

Master plan for futuristic Chattogram city in the making

3
Photo: Collected
Crime

Prime Distribution MD Mamun arrested in fraud case

4
Maqsuda Begum made new executive director of Bangladesh Bank
Banking

Maqsuda Begum made new executive director of Bangladesh Bank

5
Photo: Rajib Dhar/TBS
Bangladesh

HSC results to be published Wednesday

6
30% companies see double-digit growth even in hard times
Economy

30% companies see double-digit growth even in hard times

EMAIL US
[email protected]
FOLLOW US
WHATSAPP
+880 1847416158
The Business Standard
  • About Us
  • Contact us
  • Sitemap
  • Privacy Policy
  • Comment Policy
Copyright © 2023
The Business Standard All rights reserved
Technical Partner: RSI Lab

Contact Us

The Business Standard

Main Office -4/A, Eskaton Garden, Dhaka- 1000

Phone: +8801847 416158 - 59

Send Opinion articles to - [email protected]

For advertisement- [email protected]