Impact of COVID-19 on Global Supply Chains: What Changes Are Here To Stay?
The corona virus (COVID-19) has devastated supply chains globally due to which the manufacturing entities have been particularly badly impacted. .
 
Indeed, COVID-19 has proven to be a crisis where manufacturing companies have faced supply, demand and work force availability shocks. 
 
Several questions arise regarding this issue: (1) What will the manufacturing and associated supply chains look like in the days, months and years to come? (2) Will Michael Porter’s cost leadership (1980) still be relevant in choosing supply chain partners or will there be other considerations like reduction of supplier and buyer concentration risk? (3) Will domestic manufacturing increase at the expense of globalisation and what factors will propel it? and (4) Will we see more nationally integrated supply chains in the future? These and other questions are taken up in a series of articles.
 
During the COVID-19 crisis, manufacturing supply chains have been disrupted in many countries because of their over-dependence on China due to lower cost of production and the overall favourable environment in China for manufacturing.
 
However, having suffered greatly because of lack of access to components, intermediate goods and even finished products due to the COVID-19 crisis and the Chinese lock-down during January – March 2020, many countries are now waking up to the fact that they need to diversify sources of supply and also have fall back domestic suppliers because none of them wants to get locked down again. 
 
The key that companies are now looking for is reduction in supplier concentration risk from a single country or geographic source or location.
 
 
Thus, there is going to be no one preferred location as countries and companies are all trying to diversify away the concentration risk of suppliers and supplies—be it for components, intermediate goods or finished products. That is very clear and Mike Porter’s cost leadership being a key factor in choosing (global) suppliers has been substituted by the need for multiple, reliable, valid and consistent, even domestic suppliers from alternative locations. 
 
The converse is also true whereby suppliers are also looking for diversification of buyers including domestic buyers across locations to reduce buyer concentration risk. Clearly, risk diversification across global supply chains to reduce concentration risks in suppliers, buyers and other stakeholders in the chain is very much in vogue and a trend that is here to stay. 
 
As a very knowledgeable industry observer from the US notes, “I believe supply chains will focus more on complete diversification and resilience and optimize cost within that constraint. This would take the shape of national diversification, beyond just firm diversification. If you have diversified your vendors from single source to three or four, but they are all in one country, then we have not eliminated geographic supply shocks. Single source diversification is not enough and we would need single country diversification.” 
 
All of this, of course, implies multiple suppliers from multiple countries including one or two mandatory domestic suppliers. That would be the new normal. 
 
A second change that is coming is to the just-in-time (JIT) inventory system, based on the innovative Toyota Production System. Having been locked out of supplies due to shutdowns across and within nations, companies are now being forced to use the just-in-case (JIC) inventory system—this implies use of more and larger warehouses and increase in inventory carrying costs, all of which will have to ultimately be borne by the customers. Of course, supply chains will still try to optimise cost; but, all said and done, costs for the end consumers are bound to increase.
 
A third issue that is relevant here is the one of enhanced domestic production. Certainly, every country will have domestic suppliers, which could enhance cost of production depending on the strategic context, but that is a cost that countries and customers would gladly bear rather than be locked out. 
 
However, that could be offset by the huge advantages that come with automated production and other aspects that accrue now from Industry 4.0—apart from increased productivity you are also going to see other advantages with the use of robotics and artificial intelligence (AI), including machine and deep learning.
 
Industrial giants like US and Germany should lead the way here as they have had very strong manufacturing bases for decades and also because they are perhaps more amenable to assimilating automated production and associated aspects. 
 
In fact, the US may perhaps well and truly become the leader here, in the post COVID-19 world. While increase in domestic manufacturing may sound like music to ears of politicians in the US, like Bernie Sanders or Joe Biden or even President Donald Trump, it necessarily will not mean employment for the same kind of folks who worked in manufacturing decades ago. New kinds of skills are going to be required and a lot of that will have to do with robotics, AI and related fields. 
 
And for countries like India, to take advantage of the above global changes and become one of the many preferred destinations, we need major taxation, labour law, land acquisition, ease of doing business and other reforms. In other words, the entire ecosystem must be productive—"ecosystem productivity is a function of a number of factors: political stability, business friendly regulations and favourable taxation, cooperative unions, infrastructure quality, and well-developed industrial clusters"
 
Much will also depend on how well India is able to contain COVID-19 and its fallout economically as well as how many Indian manufacturing SMEs and large companies live out and survive the COVID-19 crisis.
 
To summarise, given the on-going COVID-19 crisis, the re-engineering of supply chains is going on and the objectives are to ensure lower supplier and buyer concentration risk, greater chain resilience and enhanced chain adaptability. 
 
If this re-engineering works out as planned, it should result in several aspects such as the following:
 
(a) vulnerability reduction for primary producers and other chain stakeholders—one important aspect is ensuring seamless flow of materials and components. Most stakeholders in the supply chain became extremely vulnerable to due to dearth of raw materials, intermediate products and finished goods during the COVID-19 shutdown and thereafter;
 
(b) improved and stable returns to various chain actors;
 
(c) productivity increases in the entire chain especially due to automation and use of robotics, artificial intelligence and related tools to offset the cost increases caused by diversification of supplier/buyer concentration risk and also adoption of just-in-case inventory system;
 
(d) newer kind of employment generation across the supply chain, although the skills-sets required may be very different from those necessary in the past; and
 
(e) reliable and consistent supply of quality and affordable goods and services to chain customers at various levels of analysis as well as end users and the like. 
 
(Ramesh S Arunachalam is author of 12 critically acclaimed books. His latest release in January 2020 is titled, “Powering India to Double Digit Growth: Five Key Steps To A Robust Economy”. Apart from being an author, Ramesh provides strategic advice on a wide variety of financial sector/economic development issues. He has worked on over 311 assignments with multi-laterals, governments, private sector, banks, NBFCs, regulators, supervisors, MFIs and other stakeholders in 31 countries globally in five continents and 640 districts of India during the last 31 years.) 
 
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    The Bailout Is Working — for the Rich
    The economy is in free fall but Wall Street is thriving, and stocks of big private equity firms are soaring dramatically higher. That tells you who investors think is the real beneficiary of the federal government’s massive rescue efforts.
     
    Ten weeks into the worst crisis in 90 years, the US government’s effort to save the economy has been both a spectacular success and a catastrophic failure.
     
    The clearest illustration of that came on Friday, when the government reported that 20.5 million people lost their jobs in April. It marked a period of unfathomable pain across the country not seen since the Great Depression. Also on Friday, the stock market rallied.
     
    The S&P 500 is now up 30% from its lows in mid-March and back to where it was last October, when the outlook for 2020 corporate earnings looked sunshiny. Companies have sold record amounts of debt in recent weeks for investment-grade companies. Junk bonds, historically dodgy during an economic swoon, have roared back.
     
    If you’re looking for investors’ verdict on who has won the bailout, consider these returns: Shares of Apollo Group, the giant private equity firm, have soared 80% from their lows. The stock of Blackstone, another private equity behemoth, has risen 50%.
     
    The reason: Asset holders like Apollo and Blackstone — disproportionately the wealthiest and most influential — have been insured by the world’s most powerful central bank. This largess is boundless and without conditions. “Even if a second wave of outbreaks were to occur,” JPMorgan economists wrote in a celebratory note on Friday, “the Fed has explicitly indicated that there is no dollar limit and no danger of running out of ammunition.”
     
    Many aspects of the coronavirus bailout that assist individuals or small businesses, meanwhile, are short-term or contingent. Aid to small businesses comes with conditions on what they can do with the money. The sums allocated by the CARES Act for stimulus and expanded unemployment insurance are vast by historical standards. But the relief they provide didn’t prevent tens of millions from losing their jobs. The assistance runs out in weeks, and the jobless live at the mercy of a divided Congress, which will decide whether that help gets extended and, if so, for how long.
     
    It’s a bailout of capital. “If the theory is: Let’s make sure companies are solvent and the workers will be OK, that theory could work. But it’s a trickle-down theory,” said Lev Menand, a former New York Fed economist who now teaches at Columbia Law School.
    We do know one thing, he said: “It worked for asset holders.”
     
    The Fed’s efforts, universally praised for their boldness and speed, have come in two stages. First, in February and March, the central bank shored up capital market “liquidity,” which marks how willing investors are to buy and sell. The central bank role is to be a “lender of last resort,” working through banks so they can get money to companies and people.
     
    That expanded in the wake of the 2008 global financial crisis. The Federal Reserve, historically viewed as reserved Brahmins who controlled the money supply, stepped into a new job: “the dealer of last resort,” in the words of economist Perry Mehrling. The Fed bought assets and it bailed out the shadow banking system. “Shadow banking” takes many forms and can mean many things, but generally it describes activities that look like classic banking — taking in deposits and lending out that money — that are undertaken by, for example, a private-equity fund or another institution outside the traditional system of federally insured deposits. Continue Reading...
     
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    COMMENTS

    drbheda

    7 months ago

    It had happened in 2008 too. The disparity only increased post GFC, which shows that the elites gained at the expense of commoners. Here too most market ppl are not tired of pointing out what fed is doing & wants the GOI to bail these fat cats out. Ppl state in courts that they are penniless but have purchased yatch for their wife. Thankfully GOI has not fallen in their trap.

    ganesanjaicare

    7 months ago

    indian public lost huge money by way of crashing psu stocks to two decade low.wher as reliance gained and reached new all time high.

    Meet the Shadowy Accountants Who Do Trump’s Taxes and Help Him Seem Richer Than He Is
    The Supreme Court fight over Donald Trump’s tax returns has pushed his accounting firm into the limelight. In various episodes over 30 years, partners — including the CEO — have run into trouble for fraud, misconduct or malpractice.
     
    On May 12, after a six-week delay caused by the pandemic, the U.S. Supreme Court will hear arguments in the epic battle by congressional committees and New York prosecutors to pry loose eight years of President Donald Trump’s tax returns.
     
    Much about the case is without precedent. Oral arguments will be publicly broadcast on live audio. The nine justices and opposing lawyers will debate the issues remotely, from their offices and homes. And the central question is extraordinary: Is the president of the United States immune from congressional — and even criminal — investigation?
     
    Next week’s arguments concern whether Trump’s accounting firm, Mazars USA, must hand over his tax returns and other records to a House committee and the Manhattan district attorney, which have separately subpoenaed them. (There will also be arguments on congressional subpoenas to two of Trump’s banks.) Trump, who promised while running for president to make his tax returns public, has sued to block the documents’ release. The questions apply beyond this case. Trump has repeatedly resisted congressional scrutiny, most recently by vowing to ignore oversight requirements included in the trillion-dollar pandemic-bailout legislation. “I’ll be the oversight,” he declared.
     
    The president’s accounting firm has found itself at the center of this high-stakes fight. The American arm of a global firm, Mazars has portrayed itself as an innocent bystander in the war between Trump and his pursuers, dragged into the conflict merely for possessing the trove of subpoenaed records. It’s the firm’s first burst into the media glare apart from an unfortunate moment of tabloid coverage in 2016 after one of its New York partners stabbed his wife to death in the shower of their suburban home. (He pleaded guilty to manslaughter.) Mazars has said it will abide by whatever decision the court makes in the Trump matter.
     
    But Trump’s accountants are far from bystanders in the matters under scrutiny — or in the rise of Trump. Over a span of decades, they have played two critical, but discordant, roles for Trump. One is common for an accounting firm: to help him pay the smallest amount of taxes possible. The second is not common at all: to help him appear to the world to be rich beyond imagining. That sometimes requires creating precisely the opposite impression of what’s in his tax filings.
     
    Time and again, from press interviews in the 1980s to the launch of his 2016 campaign, Trump has trotted out evermore outsized claims of his wealth, frequently brandishing papers prepared by members of his accounting team, who have sometimes been called on to appear in person when they were presented, offering a sort of mute testimony in support of the findings. The accountants’ written disclaimers — that the calculations rely on Trump’s own numbers, rendering them essentially meaningless — are rarely mentioned.
     
    Trump’s accountants have been crucial enablers in his remarkable rise. And like their marquee client, they have a surprisingly colorful and tangled story of their own. It’s dramatically at odds with the image Trump has presented of his accountants as “one of the most highly respected” big firms, solemnly confirming his numbers after months of careful scrutiny. For starters, it’s only technically true to say Trump’s accounting work is handled by a large firm.
     
    In fact, Trump entrusts his taxes and planning to… Continue Reading… 
     
    This story was co-published with WNYC.
     
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