Article

Wuhan coronavirus poses significant risk to the global supply chain

The first waves of disruption are rippling through businesses across the globe. The U.S. government has declared a public health emergency.  This will impact many businesses, even those without direct Chinese exposure. 

We outline our suggestions for leaders at the end of this piece, but summarized at a high level:

  • Designate a virus response team - this issue requires focus
  • Understand exposure from suppliers - establish clear communication to China 
  • Anticipate logistics issues - there will be congestion once factories restart production
  • Work with customers - establish priorities in the event of shortages 
  • Make staffing plans - be ready for atypical supply and demand

Situation Overview

Chinese governmental containment efforts focused on preventing the spread of a new coronavirus have escalated in response to rising infection rates and death. The strain, known as 2019-nCoV, can cause respiratory illness and pneumonia. The outbreak originated in the city of Wuhan, the capital city of the central Hubei Province home to over 11 million people and a significant number of businesses. So far, China has reported 60,107 people are sick and 1,369 have died from the disease.* This number jumped 15,000 cases from February 11 to 12, due to a change in the way the government counted confirmed cases. Previously, the Chinese government required cases to be confirmed with test kits, but those are in short supply so they are now counting clinical diagnosis as well. This outbreak is putting significant stress on the healthcare infrastructure in Wuhan, so it is likely that there are many more cases not yet identified in hospitals.

Wuhan is an important logistics and manufacturing hub in central China home to a significant piece of the global supply chain for automotive, electronics, equipment manufacturing, and biotechnology.

Substantial travel restrictions

The White House announced the U.S. will deny entry to foreign nationals who recently visited China and quarantine returning Americans. As a policy, Delta Airlines suspended all flights to China from February 6 to April 30.  Other airlines are limiting service and are facing pressures from pilot unions that do not want to fly.

As cases emerge around the globe, U.S. public officials will have to asses the competence of foreign public health officials. Balancing exposure and viral health risks with the benefits of trade and travel will be a constant challenge in developing its own containment strategy. There are now 14 cases in the U.S. that the CDC describes as well contained.

Thousands of Chinese business are closed at least two weeks, no sign of reopening

The Chinese government appears to have taken swift action to close transportation out of the city and recently escalated the quarantine in Hubei province. The governor of the Hubei province, Wang Xiaodong, said during a press briefing that companies in the region should not resume work before the end of February 13. Since that announcement in January, the situation has worsened. It seems unlikely that plants will be able to restart production as planned due to heightened quarantine measures.

This provincial closure impacts more people and businesses than Michigan, Ohio, Indiana, Alabama, Tennessee, Kentucky, and Georgia combined.

The Shanghai government enacted similar travel and work restrictions for their 25 million people. The business and school closure originally extended the "Lunar New Year holiday by an additional week within the city to February 9," but further extended closures to Feb 17. 

Increasing global supply chain vulnerability, U.S. plants are already reducing production

China's swift quarantine action is an effort to protect its citizens and prove global public health competency after criticism for their handling of the 2003 SARS outbreak. China needs to be perceived as a reliable production partner, a second outbreak containment seen to be slow or inadequate could decrease foreign investment and trade. A short-term consequence of the harsh government quarantine measures is the stoppage of business. These unexpended delays extend beyond the stoppage preparations made for the Lunar New year. If factories are unable to produce parts, it will interrupt global production, especially regarding electronic components.

Hubei province is a "key player in China's auto industry. Wuhan hosts production facilities for seven major domestic and foreign manufacturers and hundreds of auto parts suppliers. Complicated supply chains and just-in-time production could mean that production outages in Wuhan factories have broader spillover effects," noted Shaun Roache, S&P's Asia-Pacific chief economist. Many Chinese plants of auto suppliers and OEMs have closed, this has cascaded throughout Asia, forcing South Korea's Hyundai-Kia to stop production due to unavailable wiring harnesses.

In Canton, Mississippi, Nissan is reducing the production of its Titan trucks. 

Automotive and electronics will not be the only industries impacted. China plays some role in most supply chains, including pharmaceuticals. "Roughly 80% of active ingredients used by commercial sources to produce finished medicines come from China," said Christopher Priest, deputy assistant director, U.S. Defense Health Agency.

Prepare like an aggressive product launch - What can be done to protect your business 

Due to shipments on water, there is some time to prepare. The majority of the impact on U.S. and European manufacturers will be delayed 30-40 days from the end of the planned Lunar New Year, but this is fast approaching. While public health workers focus on treating the illness, business leaders need to take decisive action. Set a rallying point where the team can get behind.

For the majority of organizations, assigning full responsibility to the existing logistics team members for an unknown duration will add crippling, distracting, stress. Success will rely on access to dedicated expertise. 

Treat it as you would a critical product launch. In this case, the customer is the organization and the product is an actionable plan to keep the supply-chain flowing in a crisis. Delivery of a high-quality plan could begin with the shocks already identified in this article but must also consider what a rapidly developing situation would look like.

Ask yourself: 'Who in my organization is ready to address the crisis?'  

The task requires the ability to address second-order consequences spanning domains including logistics, planning, customer negotiations, finance, and workforce management. There can be a choice between ability and availability. When the likelihood of massive damage is small, pulling seasoned operators away from their position strains current business. However, if the virus escalates to a world-scale, a less-experienced team member may discover they are in over their head several days too late. Whether you build internal expertise or supplement your team with external talent, the required first step is committing to the problem soon. Establishing the crisis team will improve the flow and quality of communication in your organization. Articulated lessons learned, collected, processed and disseminated from a core crisis team can accelerate the development of crisis responsiveness.

The core crisis team will need to work with suppliers to comprehend both direct and indirect Chinese exposure. If conditions worsen, re-affirming customer needs and priorities can bring focus.  After visualizing the complete supply chain, efforts should be made with domestic and foreign suppliers to prepare the necessary production adjustments. Additionally, coordination with global carriers is required to facilitate expedites. When government travel bans are lifted, there will be immense pressure on the travel infrastructure for both goods and people.

Updates will be made to this article, last updated: Tuesday, Feb. 12 23:55 EST 

If you want help thinking about how your business can prepare, email us at VirusHelp@seraph.com.

About Seraph: 

Seraph's team of operational managers and senior consultants intercede on our client's' behalf to fix a crisis that is putting the business at immediate risk, turnaround a situation that is damaging the bottom line or restructuring to improve the balance sheet. Seraph has successfully delivered projects in the following regions: The Americas, Europe, China, and India. Seraph's Industry Expertise Includes Aerospace, Automotive, Energy Infrastructure, Healthcare, and Medical Devices. Through our other operating companies, we are continually looking for distressed situations where we can put our expertise and capital to work to create value.

28 January 2020