Outbreak: What the Coronavirus Means for Domestic Supply Chains

Should we be worried?

 

First things first, it’s okay to be worried about the coronavirus. There are a lot of good reasons, both economic and personal, to be afraid of a potential pandemic. Viral and bacterial diseases like malaria and pneumonia kill millions of people every year, and the threat of antibiotic-resistant strains continues to loom large.

It’s no surprise that the coronavirus, hailed as a super contagious super flu, has grabbed headlines and terrified thousands as its infection count rockets past 70,000 worldwide. But there is a lot of confusion and misinformation about the virus, and about what it means for US trade as Chinese factories struggle to hit pre-outbreak production levels.

Let’s look at the facts.

 

What is the coronavirus (COVID-19)?

The term “coronavirus” doesn’t refer to an individual virus, but a family of viruses that circulate in both humans and animals (namely camels, cats, and bats). “COVID-19” is the official name for the disease that caused the 2019 outbreak in Wuhan China, and that continues to spread today. The terms are used interchangeably in the news.

 

Where does the coronavirus come from?

It’s not clear, but organizations like the Center for Disease Control and the World Health Organization are both working to identify the source. The genetic tree of the virus indicates it originated in bats, but it’s difficult to say whether it jumped directly to humans or to another animal first.

 

A researcher in a protective suit examines a camel

MERS, a different form of coronavirus, is commonly found in camels.

 

Experts do know the earliest cases of COVID-19 were identified in Wuhan China. More specifically in people linked to Wuhan’s large meat and seafood markets, indicating the virus was originally spread from animals. Business Insider points to the Huanan Seafood Wholesale Market as a likely culprit, but the claim is highly disputed by Chinese authorities.

 

How does the coronavirus spread?

From animal-to-person and from person-to-person. Primarily the later now that the virus has spread beyond Chinese borders. Luckily the coronavirus isn’t believed to be airborne. Instead it spreads via “respiratory droplets” in coughs and sneezes that travel up to six feet around the infected person. These droplets may survive on contaminated surfaces for anywhere from five minutes to nine days.

 

How dangerous is the coronavirus?

While the coronavirus is more contagious and more dangerous than a standard flu, COVID-19 is also far less deadly than other coronavirus strains like SARS or MERS. The largest study of the disease to date, conducted by the Chinese Center for Disease Control and Prevention (CCDC), has found the death rate for COVID-19 is around 2.3% and poses the greatest risk to the sick and elderly.

Here’s the CCDC’s fatality demographics breakdown:

 

A graph of the COVID-19 fatalities by age, the majority are 80+

 Image courtesy of the Chinese Center for Disease Control

 

The US Center for Disease Control has described the immediate risk of this new virus to the American public as “low at this time” but the organization has also released this statement about the overall, long term risk of COVID-19:

“The potential public health threat posed by COVID-19 is high, both globally and to the United States. The fact that this disease has caused illness, including illness resulting in death, and sustained person-to-person spread in China is concerning. These factors meet two of the criteria of a pandemic.”

 

How has the coronavirus impacted global trade?

The World Trade Organization has already named the coronavirus as a distinct threat to global trade. Manufacturing is down due to factory quarantines, and there are fewer and fewer cargo ships docking in Southern California ports in a situation deemed “a disaster, frankly.”

As time passes, the impact of the disease will only intensify. Tom Rafferty, China research head at the Economist Intelligence Unit, cautions that an extended outbreak will lead to “long-term dislocation in supply chains.” A prediction that’s already come to pass for major Chinese manufacturers like Toyota and Foxconn whose factories have reopened but continue to operate well below capacity, slowing production to a trickle.

As a result, there’s been a staggering 13% drop in containerized retail imports in February.

“Projecting container volume for the next year has become even more challenging with the outbreak of the coronavirus in China and its spread,” Hackett Associates Founder Ben Hackett said in a National Retail Federation interview. “It’s questionable how soon manufacturing will return to normal.”

 

How will the coronavirus impact North American manufacturing?

Like all things coronavirus related, that really depends. The conversation around nearshoring (transferring business operations from far flung locales to nearby countries) reached something of a fever pitch in light of the Chinese trade war concerns. Now, with the coronavirus disrupting single-stream supply chains, the conversation has resumed in earnest.

“This may become the straw that breaks the camel’s back,” said Nick Vyas, an expert on global supply chain management at the University of Southern California Marshall School of Business for the Financial Times. “This outbreak will force them to factor the cost of failure into their calculation and might well strengthen the case for more onshore or near-shore operations.”

Meanwhile electronics manufacturers, faced with either delaying their schedules or finding alternative factories, have made a run on local outfits. “Manufacturers in Mexico have told me their phones are ringing off the hook.”  Says Andre Neuman-Loreck, Managing Partner at On Tap Consulting. The coronavirus has been a major wakeup call to the severe inflexibility of outsourcing, and when paired with rising tariffs on Chinese exports, it all paints a dire picture for supply chain experts.

“Supply chains should have flexibility and have the ability to deal with the fluctuation in demand and supply. It is about how quickly they can respond to disruption,” said ElMarie Hugo, senior director of industry strategy at Blue Yonder in a FreightWaves interview “The current outbreak is, of course, of an exponential nature. But if companies cannot – in a matter of three months – create alternative supply chains by sourcing from other locations, they are failing to have flexibility.”

A sentiment echoed by Fabien Gaussorgues, CEO of Agilian Technology Co. for the Wall Street Journal:

“We could already feel pressure last year to relocate to another country. We will certainly feel stronger pressure to do that in 2020.”

Whether the double whammy of additional tariffs and the fear of future outbreaks is enough to move the needle for other manufacturers is impossible to say. But with the USMCA on the horizon, promising to dramatically increase cross-border trade, Mexico is well positioned for another industrial boom.

“Major manufacturers were moving into Mexico way before the outbreak.” said Matt Silver, CEO of cross-border logistics company Forager “Toyota just opened a second plant in Apaseo el Grande, BMW opened a new billion-dollar plant in San Luis Potosi last year. There’s already interest in Mexico. This is more fuel to an already roaring fire.”

 

How will the coronavirus impact US freight?

In the short-term there have been launch delays for Apple, Facebook, and Tesla, resulting in empty trailers. Meanwhile Wells Fargo analysts are predicting that retailers’ shelves could be bare as soon as mid-April with Target and Walmart most likely to feel the crunch. Fewer containers in port means fewer goods being trucked to distribution centers stateside, equating to lower demand overall.

Predictably, container spot rates have dropped since the outbreak began, while airfreight prices literally soar to make up the difference. According to the DAT, domestic trucking transportation in the U.S. will be the last to feel the coronavirus’s impact. So if there is any serious fallout, it’s likely weeks away.

Luckily for American trucking companies, imports are only a small percentage of total overland freight. Meaning it’s probably business as usual for most carriers. Carriers who service domestic automakers might feel some squeeze as production slows due to a lack of Chinese auto parts, but for the most part demand should hold steady outside of the drayage sector.

In the long-term, should more businesses move into North America, it could mean some serious supply chain restructuring. Moving freight across a land border comes with a whole host of new complexities and complications that are difficult to navigate without help from the experts.

How much your individual business will be affected depends largely on the structure of your supply chain.

 

What can shippers do?

When it comes to manufacturing stoppages, not much. Trucking in mainland China has slowly resumed after many weeks of quarantines and delays. Chinese factories are slower still to get back to work, but progress is being made. Ultimately, it’s up to the authorities to contain and manage the spread of COVID-19 to clear the way for production to resume in earnest.

 

A woman placing a chart on an emergency response board in the CDC Emergency Operations Center

The CDC activated its Emergency Operations Center in response to COVID-19

 

Unfortunately, many supply chains can’t afford to wait due to short lead times, pushing some manufacturers to look for alternative sourcing closer to home. The transition from open ocean to the open road isn’t an easy one to make when you throw the US/Mexico border into the mix. Add in a time crunch and it becomes a daunting proposition. It is possible to tackle OTR cross-border shipping in-house, but it requires a lot of additional time and manpower that may not be available in a crisis. We always recommend leaning on cross-border professionals, it’s faster, it’s easier, and it eliminates confusion and errors that could create further delays.

Other businesses are simply weathering the storm. Manufacturing partner selection is a process that can take months, and many local build operations are already at capacity.

Either way, it’s a serious reminder for supply chain professionals to constantly assess and reassess their strategies from sourcing to shipping capacity. It’s not a matter of “if” the next big disruption will occur, but when. And as the old saying goes, an ounce of prevention is worth a pound of cure.