COVID-19 respects no borders and has laid bare some of the vulnerabilities of globalisation. Going forward, we need to look more deeply at how to build a world that protects global supply chains more effectively — and the all people that depend upon them.
The extraordinary events associated with the spread of the COVID-19 virus over the past few months has highlighted various vulnerabilities associated with globalisation. Globalisation has both driven economic and political liberalisation and has similarly been driven by this liberalisation itself in what some would term either a virtuous or a vicious circle. We have seen new technologies creating anarchy with old companies and the rise of ultra-low-cost competitors. Likewise direct control has become more difficult as we increasingly rely on complex international value chains through outsourcing and disintermediation.
We have gained from this but, with COVID-19, we are experiencing one of many drawbacks associated with this model. We have seen the globalisation of an epidemic that respects no borders. The speed with which the virus travelled across the world demonstrates that walls associated with the nation-state are no match for these sorts of outbreaks. In many respects we have been fortunate that something matching this scale has not happened earlier despite previous hints at this.
The other perspective is that of the epidemic of globalisation itself and what has been exposed as a result of this virus. The benefits of global supply and value chains and just-in-time manufacturing have lowered cost structures and facilitated specialisation associated with presumed competitive advantages. To give two examples. The giant Boeing 787 Dreamliner has massive plants in Italy, Japan and United States manufacturing the one-piece composite fuselage barrels and wings and these aspects need to be completely in-sync and integrated across the globe. A major American notebook computer has its LCD display manufactured in South Korea or Taiwan, the microprocessor and motherboard in China, the memory in Japan, the hard disk drive in Singapore, Thailand or the Philippines, and the battery in Malaysia or Mexico.
This model allows for specialisation and for economies of scale at an unprecedented level resulting in significant cost advantages. But it is premised on integration, coordination and synchronisation. It only works as long as every part of the value and supply chain is live. If any single part of this chain breaks down the entire model is exposed and this is what we are witnessing. Firstly factories in China stopped producing with ripple effects. Now in the past week as Chinese factories have come back on-stream, other parts of the global chains (for example, in Europe and the United States) have gone down once again showing that it only works if every block is functioning.
Emerging markets are likely to suffer disproportionately here. Not only because many of them depend on being integrated into these global chains (be it as producers of essential resources or as manufacturers) but because they are at higher risk for the uncontained spread of the virus due to less efficient health services. Furthermore, emerging markets that rely on exports of commodities and raw materials are facing a drop in their income in the short, medium and long-terms. The currencies of emerging countries are also under pressure, as investors are reducing risk in their portfolios due to the negative sentiment worldwide and are accordingly reducing their holdings in emerging markets to some extent. Lastly, many emerging markets have in recent years been issuing government debt in US dollars or euros and as their own currencies depreciate sharply it is putting massive strain on the fiscus to finance this debt.
All of this raises two pressing concerns — in the immediate and the medium term. Immediately, we face the question of different strategies to control and mitigate the virus and questions raised around the economic costs of a containment strategy versus the economic cost of inaction and more infection. Suddenly everyone seems to have become an expert on viruses and the flattening of epidemiological curves! But we also need to be thinking about what happens beyond the epidemic. Will supply chains come back on stream effortlessly in a synchronised manner or will certain blocks (perhaps even tiny suppliers — notably those in emerging economies — that could not withstand the cash flow pressures) now be missing and expose the entire value chain? Will companies in the medium term reflect on this experience and change operations in a way which protects them slightly more for when the next one comes; and it will.
And how should emerging economies be reflecting on this in terms of life beyond the virus? Unfortunately not all emerging markets are equal. If you are China you have a voice as an indispensable cog in the machine as both producer and consumer. If you are Tanzania or Zambia or Lesotho your voice becomes drowned out and your orders disappear without a second thought, with no guarantee that your place in the chain will be there months from now. How we as emerging markets need to future-proof ourselves in global supply chains is too big a conversation for this piece, but we need to be building our unique competitive advantages by identifying factors that make us valuable, rare, inimitable and where we have the organisational capabilities to exploit these. Only then will we be heard.
It has been said that a good crisis should not be let go to waste and one can only hope that we reflect more meaningfully on what happens beyond. For now we need to support those at the frontline in the healthcare sector but also those at the frontline of keeping essential supply chains going. The farm labourers tending the fields, the factory workers processing your food, producing your toilet paper and medicines, the lorry drivers and warehouse workers ensuring that it is getting to your stores, and the workers in the stores that are serving you and remain in contact with the population exposing themselves and their families in the process. They may not be celebrated but you will not survive if they were to self-isolate. Don’t underestimate the value of these supply chains that are often invisible in our minds. Not all heroes wear capes.
John Luiz is a professor at the UCT Graduate School of Business and University of Sussex Business School.