Global trade has been hit at an unprecedented speed and scale by the COVID-19 pandemic. A survey by the Institute for Supply Management conducted in March indicates that 75 percent of the companies reported supply chain disruptions in some form due to coronavirus-related restrictions. These companies with global supply chains faced an initial negative supply shock followed by a demand shock as more countries started imposing restrictions requiring people to stay at home. As a result, governments and businesses started to struggle to procure basic materials for key businesses and witnessed the fragility of modern supply chains. Smart, strong, and diverse supply chains are now required in order to run businesses smoothly across the world.
Global Supply Chains are Still Trying to Recover from Initial Disruptions
Since mid-February, domestic and international trade transactions suffered a week-on-week drop of 56 percent. The US, UK, and Europe experienced similar trends with a combined initial drop of 26 percent in the beginning of April, and a continued 17 percent decline in late April, 2020. Trade has flatlined in every region affected by lockdowns due to slow response in repurposing supply chains. Tradeshift, a Denmark-based business platform open to all countries, suffered an average drop of 9.8 percent in declining orders and invoices since March 9. The contractions in global trade have brought two side effects for businesses.
- Firstly, it takes longer to settle an invoice that might reverse a previous trend of faster payments. According to Tradeshift’s data, average international payment terms have risen by 1.7 percent to 37.4 days in Quarter 1 of 2020 from an average of 36.7 days in 2019.
- Secondly, lack of orders through the supply chain is causing new orders to slow and invoices to drop off. On the Tradeshift platform, average weekly order volumes and invoices have dropped by 15.9 percent and 16.7 percent respectively since March 9.
So far, businesses are still relying on money received from orders placed before the lockdowns. Some companies took the prudent approach of building financial cushions or credit lines in order to access cash. However, the coming months could be very difficult for global businesses as trade starts waning and financial buffers diminish.
Key Challenges Facing the Global Value Chains
Disruptions in the Global Pharmaceutical Industry Paves the Way for Emerging Markets
Under current circumstances, China, the largest producer of Active Pharmaceutical Ingredients (API), has limited its industrial production. This has caused a shock in the entire supply chain as importer countries struggle to find alternative suppliers. Countries like India, which is the leader in producing generics, are suffering from this as almost 70 percent of their raw materials are sourced from China. However, changing of pharmaceutical supply chains could benefit countries like Egypt, Indonesia, Saudi Arabia, and Mexico, who have large internal markets relative to others in their regions. Less dependence on countries like China means a growing demand for these countries to address. Saudi Arabia, for example, is already looking for fostering local production while sourcing products from various countries to reduce the impact of disruptions.
Although changing supply chains is an option, an immediate change will be challenging for some countries like Mexico, which relies on India and China for 90-95 percent of its APIs. These countries in the Latin America region will likely suffer shortages of certain pharmaceutical products due to lack of direct air connection with the world’s largest producers. Despite delays in certain components of the supply chain due to reduced transport options, some border authorities have implemented measures to ensure supply of essential medical goods to customers. Similar prospects lie for Bangladesh as the country exported medicines worth USD 130 million in 2019, with a growth rate of 25.56 percent.
International Food Value Chain Complexities are Making Supply Chain Management Challenging
As with pharmaceuticals, complex value chains and variations in production has made supply chain management of foods challenging for many countries. The global supply chains for food items can be divided into two commodity types viz; staple crops (wheat, maize etc) and high-value crops (fishery products, fruit, and vegetables). The agriculture markets currently face a two-fold dilemma as staple food production is capital intensive whereas high-value crops production is labor intensive. Supply chain challenges for staple crops lie in logistics, whereas those for high-value agricultural commodities require stakeholders to address potential labor shortages along with logistical challenges, since these products are highly perishable.
Argentina is the world’s largest producer of soymeal livestock feed and the third-largest soybean producer after the US and Brazil. Despite the significance, Argentina has been struggling to maintain undisrupted food-related logistic services. Specifically, there have been challenges in transporting goods from agricultural lands to ships. Local municipalities have gone against the government’s orders to permit cargo vehicles to large soymeal factories. In March 2019, there were typically 6,000 daily truck shipments connecting the agricultural producers. However, there were 1,500 truck shipments this year during March due to bottlenecks such as delays and restrictions.
Bangladeshi Supply Chains in Shambles due to Restrictions
Currently, activities at Chattogram port, which handles 80 percent of the country’s external trade, have come to a standstill as the number of import containers has exceeded the port’s storage capacity. On 23rd May, the volume of import containers at the port reached 49,468 TEUs (Twenty-foot Equivalent Units) whereas it has a storage capacity of 49,019 TEUs. A bulk portion of import containers stuck at the port constitute raw materials for the RMG sector followed by other industrial raw materials.
Large business conglomerates like Meghna Group of Industries, City Group, Abul Khair Group, Bashundhara Group, and Akij Group are facing disruptions in three areas e.g. Chattogram port, productions in factories, and transportation within the country. Resistance from local people is preventing entry and exit of trucks, eventually hampering transportation to and from factories in different locations across Bangladesh.
As a remedy, Chattogram Port Authority (CPA) is trying to move some containers to private Inland Container Depots (ICDs) as an alternative measure to tackle the current situation. If the National Board of Revenue (NBR) permits, they will be able to transfer 15,000 TEUs.
Remittance and RMG Sector Struggle Amidst Lockdowns
- Bangladesh imported USD 5.02 billion worth of textiles and other raw materials in fiscal year 2018-19. 40 percent of the country’s capital machinery and spare parts for the garment industry comes from China, which has the epicenter of the viral infection. Due to current situation, Bangladeshi suppliers started facing troubles as buyers including H&M, Nike, Zara, Primark started closing their stores in major cities. Moreover, orders worth of USD 1.5 billion have already been postponed or cancelled by international buyers according to BGMEA.
- According to a World Bank report published in April, Bangladesh’s remittance is expected to fall by 22 percent due to the current economic crisis. It could come down to USD 14 billion in 2020 from USD 18.3 billion in 2019. Restrictions in host countries are causing migrant workers to lose out on wages.
Supply Chain Disruptions Cause Distress for Dairy Farmers
According to Bangladesh Dairy Farmers’s Association, approximately 110-220 thousand litres of milk worth BDT 570-600 million (USD 6.71-7.07 million) have been thrown away daily during the shutdowns. Most of produced milk was used by ice cream factories, sweetmeat shops, and eight large producers (Aftab Milk and Milk Producer Ltd, Akij Food and Beverage Ltd, American Dairy Ltd, BRAC Dairy and Food Project, Danish Dairy Farm Ltd, Igloo Dairy Ltd, Pran Dairy Ltd, and Bangladesh Milk Producers’ Cooperative Ltd) of pasteurized liquid milk. These entities are not buying enough milk during the pandemic as they are no longer producing food products like they used to as a result of the lack in consumer demand. According to the Palli Karma-Sahayak Foundation, the typical daily demand for liquid milk is 17 million litres per day. 12 to 14 million litres or approximately 70 percent of this demand is met from the country’s 70,000 local farms.
Cold storage capacities need to be built to save rural farmers during the current crisis. In order to avoid wastage, cream separator machines can be introduced to produce ghee or cheese that can be stored more easily than liquid milk. To protect the agriculture sector of Bangladesh from the supply chain disruptions, the government has allocated BDT 50 billion (USD 588.83 million) for the agriculture sector, from the total financial incentive fund of BDT 727.5 billion. The World Bank has decided to help 17,69,733 rural dairy farmers with a grant of BDT 5 billion to be distributed in cash.
The Way Forward for National and Global Supply Chains
- Going forward, large companies, both national and international, should think more about offsetting risks and diversifying their supply chains. It is already evident as giants like Honda, Toyota, and Samsung from Asia’s larger economies are already looking at a “China+1” strategy to reduce dependence on a single supplier country.
- According to expert predictions, China might lose their central position in many global supply networks to Mexico, Brazil, and some emerging markets in South-east Asia. The two reasons behind it are:
- The initial shock from the China-centered supply chains caused by the industrial shutdown across the country in February and March.
- The US-China trade war, which had already been pushing some companies to look elsewhere.
- Companies in electronics, textiles, and energy sectors are the most likely to relocate parts of their operations to the South-east Asia trade bloc as the region offers multiple energy trade options and has scope for private sector participation. This could be a good opportunity for Bangladesh.
- The Bangladesh government needs to take initiatives to bring goods carrier vehicles out on roads to keep port activities and countrywide supply smooth. Also, businesses need to get their imported goods released from the ports following the relaxation of government restrictions.
- According to Moody’s, the disruption in RMG supply chain due to global coronavirus outbreak will be a temporary one as demand will increase in the global market later this year. The international credit rating firm further added that Bangladesh’s proximity to Asia’s largest markets, with growing middle-class populations, would continue to support industry performance. However, the country might face a downward pressure on its Ba3 (not prime in the short run but has a stable outlook) rating level if there is a marked deterioration in the government’s fiscal position, erosion in the government’s revenue base, or sharp increase in financing costs.
It is quite evident that the COVID-19 crisis will have long-lasting implications on how supply chains function. Companies today have an opportunity to use this challenging period to assess investment needs, evolve supply chain planning functions, and reposition the company to support growth once economies rebound.
Saim Ahmed Shifat, Content Writers at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: [email protected]
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