Nearer Shores: The COVID-19 Case for Localized Supply Chains

The coronavirus is proving deadly for unprepared supply chains.

We’ve talked about the coronavirus before. Namely, we talked about the impact COVID-19 was going to have on domestic supply chains in the near future.

Well, it’s the near future, and shelves are looking a bit too empty for anyone’s liking.

For the average person, the coronavirus promises little more disruption than a few weeks of working from home and cancelling of travel plans. But for logistics professionals, it could mean a complete reassessment of global trade and a massive shift away from China.

It’s time to rethink our supply chains.

Here’s why.

 

Reason 1: China may continue producing pandemics

 

China has been a center of global health concerns since the turn of the 20th century. SARS, Bird Flu, and not one but two deadly flu epidemics (in 1957 and 1968 respectively) are just a few entries in a laundry list of zoonotic infections birthed on Chinese soil.

Multiple news outlets and academic institutions (including Smithsonian Magazine) have been warning of a Chinese flu on the scale of the coronavirus for years. Netflix’s eerily timed docuseries Pandemic: How to Prevent an Outbreak similarly included interviews with seasoned public health professionals, many of whom pointed the finger squarely at China as the source of the next crisis, only to be proven correct mere months later.

Health conditions in China have done nothing but improve with multiple noteworthy successes in the past 20 years. However, Chinese food production continues to be a source of fear and uncertainty for global health. As do “wet” markets, which have been blamed as the source of COVID-19 among other outbreaks.

What does this mean for manufacturers and supply chain professionals? It means more attention on the pitfalls of outsourcing. Per the Washington Post, “[The] coronavirus epidemic will do what the trade war did not: prompt American companies to lessen their reliance on China.”

A sentiment echoed in no uncertain terms by Forbes: “COVID-19 will end up being the final curtain on China’s nearly 30 year role as the world’s leading manufacturer.”

Their (and our) pick for the next manufacturing superpower? Mexico.

The conversation around the coronavirus has shifted into a conversation about the viability of a single-source supply chain, about the very real possibility of future pandemics, and about building more sustainable localized production models.

 

 

Reason 2: Executives are looking to Mexico, and logistics professionals will have to bridge the gap

 

According to 160 executives who participated in Foley & Lardner LLP’s 2020 International Trade and Trends in Mexico survey, most of the executives surveyed plan on moving business to Mexico within the next five years.

“Our survey shows that a large majority of executives are moving or have moved portions of their operations from another country to Mexico,” says Foley partner and litigator Christopher Swift.

 

 

Executives like Bhawnesh Mathur, chief executive of Masterwork Electronics, who is looking to Mexico to solve his supply chain woes. It’s a trend reflected in the stock market where Mexican equities were largely spared from plummeting prices. Due, in part, to the optimism surrounding the future of Mexican manufacturing.

But the transition will likely be complex. China is deeply entrenched in the general global supply chain, and moving away from such low prices and well-trod logistical paths promises to be a major challenge. A challenge that will fall squarely on the shoulders of logistics professionals to navigate.

Moving from an ocean-based to a land-based shipping model is a daunting task, especially when there’s a border involved. Don’t speak Spanish? Then you might struggle to communicate with the 88.4% of Mexicans who don’t speak English. No clue on customs? You’re not alone, it’s a complicated process that involves shelter companies, two customs brokers, and lots of paperwork.

Cross-border shipping is difficult. It can be done, but it will not be easy alone.

 

 

Reason 3: Chinese trade isn’t getting any more stable

 

At this point, the trade war with China is old news. To make a long story short: The US government grew concerned about the rising trade deficit with China (among other things), and hiked tariffs as a result. Importers and consumers have shouldered the cost and the situation remains unresolved.

Some predict worsening relations and a world-wide trade war. Others think trade wars with China are just the new normal. Experts seem to agree there is no ready end in sight. But regardless of where you fall on the China issue, it’s clear that China is an issue. A murky issue. No one knows what’s going to happen, and all this uncertainty is leading to a mass exodus fueled as much by tariffs as it is by instability.

A glance at the stock market of late reveals just how risk averse investors have become. And right now, risk abounds. If you add the coronavirus into the mix you’re left with the perfect storm of policy, pandemic, and panic all working to throw a wrench in trade predictions. It’s more difficult than ever to see past the horizon of 2020, and that difficulty is nerve wracking for manufacturers and importers alike. If you have interests in China, the entire affair feels like the worst-case scenario.

Meanwhile, North American trade has held steady for decades. The USMCA has already been ratified by the US and Mexico, and promises to bolster trade by billions of dollars. Nearshoring seems like a surefire counterpoint to the current chaos of China.

It’s not all doom and gloom for China, and corporate juggernauts like Apple have dedicated themselves to weathering the storm. But relying exclusively on China with zero contingencies holds less and less appeal as the pandemic rages on.

 

 

Reason 4: Fuel prices are dropping, but emissions remain a concern for shippers

 

No two ways about it: oil prices have cratered partially due to the fear surrounding the coronavirus. Normally this would be a cause for celebration in logistics, and act as a beacon of hope for long-distance supply chains who have been at the mercy of steadily rising fuel costs.

Unfortunately, tanking fuel prices can’t save manufacturers from the increasing costs of emissions.

New International Maritime Organization regulations have already hit the shipping industry, and public consciousness of environmental issues remains high. The UN has repeatedly called for zero emissions from the maritime industry, even acknowledging that such measures would be decidedly less cost effective for shippers. And while ocean shipping remains the most fuel efficient shipping method, the “bunker fuel” tankers burn has every regulatory hackle raised.

 

 

Air freight and air travel have both come under comparable scrutiny for emissions, and aviation threatens to consume a quarter of the world’s “carbon budget” by 2050.

OTR shipping is guilty of its own environmental sins, of course, but there are considerably more inroads (excuse the pun) toward emission-free and environmentally friendly trucks. Green trucking technology already exists, most famously via Tesla, and transitioning away from nonrenewable fuels poses less of a challenge for trucks than planes or boats.

For manufacturers contending with stricter and stricter CO2 limits, the future may be more roadworthy than seaworthy. Supply chain experts will be tasked with keeping operations above board, and finding green solutions where mandated.

 

 

Reason 5: The economy is tanking, and supply chains will have to compensate

 

Stock market crash aside, the coronavirus is hurting everyone’s bottom line.

The Harvard Business Review paints a grim picture for manufacturing, predicting literal months of slump. The New York Times is more optimistic that we might not be staring down the barrel of a recession, but clarifies “The coronavirus will damage the economy” just in case there was any uncertainty.

Luxury goods have become the canary in the coal mine, revealing depressed demand and the complications of international quarantines. How far and fast the effects will spread is hard to predict, but it’s looking like few will be spared.

There is hope that industries that are not connected directly to the outbreak will be more insulated from the peaks and troughs of the epidemic. Fortunately, and unfortunately, logistics is not one of those industries.

Demand for transport remains high, but the demand is subject to tectonic shifts. Ports are empty, but air freight prices have absolutely skyrocketed. Which is complicated by the new European Travel Ban cutting down on commercial flights that carry people and cargo.

Businesses are clamoring for restocks of essential goods and are now looking to carriers and 3PLs to provide alternatives that aren’t already in place.

Supply chains everywhere are stretched to their limit, and all these empty shelves demand costly and rapid re-sourcing from local, non-China suppliers. But it’s not enough just to find local outfits, the goods need to be moved, and setting up an entirely new transport network in the middle of a health crisis is difficult to say the least.

The logistics industry is going to feel the accelerations and decelerations in real time and will need to act fast to find stability through the economic turbulence. Making the connections between businesses and new suppliers, and new suppliers and local storefronts, will take some major doing.

 

 

The Silver Lining

 

The coronavirus exposed truths about modern supply chains that professionals have warned against for years. The concentration in a single country. The tight deadlines. The cost cutting. It was all bound to come to a head, and now it has in a very big way.

But as painful as this learning experience continues to be, many businesses are walking away more prepared for the next crisis. And if Jamie Metzl, member of the World Health Organization’s international advisory committee, is to be believed the next epidemic will be a lot worse.

What your individual business should do to diversify and crisis-proof your supply chain will vary dramatically depending on your needs. Take this opportunity to look closer at those needs and build out contingencies to meet them in a worst-case scenario. Whether that includes finding multiple channels for sourcing parts, moving some or all of your operations out of China, or reaching out to 3PL’s to navigate new markets, it’s time we do our part to be prepared.

 

 

Forager is a logistics technology company setting the new standard for cross-border shipping with a combination of purpose-built technology and industry expertise. We’re automating cross-border freight with access to instant pricing and capacity, backed by a team of bilingual exception management experts and cross-border industry veterans. We provide unmatched visibility and service on either side of the border. You can follow us on LinkedIn, Facebook, Twitter, and Instagram for more industry news and updates.