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Coronavirus and Supply Chain Leaders: 9 Must-Know Threats

February 26, 2020 | By River Logic

Coronavirus COVID-19 is a fast-spreading illness caused by the SARS-CoV-2 virus. The flu-like illness causes coughing, fever and shortness of breath and, in some cases, potentially deadly pneumonia. People in poor health and the elderly seem to be particularly susceptible. 

Because it's a viral disease, antibiotics aren't effective and there's currently no vaccine available. As of late February 2020, there have been more than 76,000 coronavirus infections and more than 2,250 people have died. While the rate of infection appears to be slowing in China, the disease has spread to other countries and there have been a spate of infections in South Korea and Japan.

It's still not known if this virus will cause a pandemic, but its effect on the Chinese economy has been significant, and this has impacted the global economy. Here are nine must-know coronavirus supply chain threats to consider.

1. Threat to Global Supply Chains

Over the last decade, companies have developed sophisticated supply chains that extensively rely on Chinese-produced components. Even sub-assemblies not directly sourced from China often contain crucial components from affected areas. The risk to global supply chains is exacerbated by the spread of infections to neighboring countries. It's been estimated that half the world's LCD panels, 85 percent of the world's rare earth processing capacity and 40 percent of textiles and clothing come from China.

2. Supply Shortages Due to Disruption of Tier 1 and Tier 2 Suppliers

An analysis of the impact of coronavirus by Dun & Bradstreet reveals that more than 50,000 companies have Tier 1 suppliers in affected regions of China and a further 5 million have Tier 2 suppliers in those regions. This means there's a significant risk of supply shortages. Affected companies include nearly all Fortune 1,000 American companies. Further, 90 percent of the businesses directly affected have U.S. headquarters.

3. Shutdown of U.S. Production Lines

Automotive production has already been disrupted in China, Korea, Germany and Japan. Additionally, GM has warned that production at two U.S. GM truck production plantsmight have to stop due to parts shortages. Fiat Chrysler is stopping production at its Serbian factory. And its not only automakers who are affected: Apple has warned that coronavirus will affect sales and has revised revenue forecasts.

4. Reduction in Chinese, U.S. and Global GDP

Dun & Bradstreet anticipate that Chinese GDP will fall by 1 percent and, if no effective vaccine is developed, by up to 3 percent. In the U.S., analysts expect the first quarter GDP to fall to 1.2 percent, down from 2.1 percent in the last quarter of 2019. Oxford Economics anticipate an even worse scenario where a spread of the virus to other regions, something that may already be happening, could cost the world's economy $1.1 trillion in lost income and knock 1.3 percent off global growth for 2020.

5. Reduction in Consumer and Industrial Demand

A knock-on effect of the coronavirus that will impact American companies is an anticipated reduction in consumer and industrial demand as resources are focused on containing the epidemic. The immediate impact will be felt in China as businesses remain shut down and consumers stay at home, but the knock-on effect will be felt in the U.S. A similar situation appears to be developing in South Korea where there's been a coronavirus spike and the military has been placed on lockdown. Even if the U.S. is spared in terms of infection, demand will be affected.

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6. Drop in Oil Price

Oil prices dropped sharply from a high of $63 in early January 2020 to a low of $49 in February. While prices have recovered slightly, they are still well below the peak and are not expected to increase notably while demand remains low, especially while China's restrictions on travel remain in place.

7. Pharmaceutical Shortages

China is the dominant supplier of medicines to the U.S., accounting for around 80 percent of all active pharmaceutical ingredients used in the country. Any disruption in supply could hit the U.S. hard in terms of ongoing medical care thanks to America's dependence on Chinese pharmaceuticals. Also, if and when a vaccine to the coronavirus is developed, the U.S. may be pushed to the back of the queue, as happened in 2009 during the H1N1 pandemic.

8. Decline in International Tourism

As the impact of the coronavirus became clear, China and Asia saw an almost complete collapse in tourism travel in the region. Additionally, flights into the U.S. from China have been impacted. Even if the epidemic is contained, it's expected that the U.S. travel industry will lose $5 billion in 2020 and a further $5 billion over the next few years.

9. Risk of a Bullwhip Reaction

As the economic impact of the coronavirus epidemic spreads, demand will fall, causing retailers to reduce inventories. These measures cascade onto wholesalers, manufacturers and their suppliers as each implement further cuts, potentially resulting in order cancellations and layoffs. When demand eventually returns, the opposite effect occurs. This is known as a supply-chain bullwhip whose oscillations put strain on suppliers, especially those that are leveraged, and can result in many going out of business.

River Logic Solution Sheet: Supply Chain Optimization

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