The Perfect Storm: How Wuhan’s COVID-19 Outbreak is Turning into a Global Supply Chain Problem

February 08, 2020 | Supply Chain Risk Management

Wuhan, the capital of Hubei province, was home to over 10 million people and is among the most populated cities in China. However, Wuhan is not merely a traditional base for manufacturing industries. Over time, the city has successfully positioned itself as one of the most progressive business cities in Asia, with over 350 research institutes, three national development zones, 1,656 hi-tech enterprises, four technologic and scientific development parks, numerous enterprise incubators and investments from 230 global Fortune 500 firms.

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The outbreak of the novel Coronavirus (nCoV), which started in Wuhan, has now become a global pandemic with over 350,000 confirmed cases and over 15,000 deaths. In its response to initial spread of the deadly epidemic, the Chinese government imposed a quarantine transport restriction and barred all non-emergency vehicles from entering the city.

The World’s Factory is Closed

Multinational companies with offices and factories in China were the first to face disruption in their supply chains. The shutting down of businesses and factories, as well as the cancellation of air travel in and out of China, resulted in production disruptions. A consumer demand slowdown was witnessed in commodity markets, which showed concerns regarding the impact on demand for raw materials from Chinese manufacturing. An analysis by Panjiva reported that, between Jan. 20 to 26, the prices of crude oil fell by 7.4% while copper prices reduced by 5.7%.

Impediments to logistics operations as a result of lockdowns majorly affected industrial production across automotive and high-tech manufacturing for semiconductors and optoelectronics. Provinces that account for over 69% of the China’s GDP remained closed for an extra week after the Lunar New Year. This led to closed restaurants, factories and shops, freezing household spending and leaving ships stuck at port. China is the logistics and manufacturing hub of the world with more than $2.5 trillion worth of exports. Companies across diverse sectors, from IKEA to Apple, are dependent on China.

An Impact Felt Across Industries

Optics Valley, located in Wuhan, is the birthplace of the proprietary ultra-long-haul optical transmission system in China, and serves as the base for several memory chip companies. Wuhan also serves as a major manufacturing hub for the automobile industry. The city has five automobile enterprises, more than 500 automobile parts enterprises and over 10 passenger vehicle factories. The lockdown caused by the coronavirus pandemic is going to see automotive companies such as Honda, Nissan and General Motors suffer from reduced production. Several carmakers in the U.S. and Europe are facing disruptions from a lack of China-made automotive parts. According to a report in the Changliang Daily, the output of the automobile and parts industry based in Wuhan was around $57 billion.

According to the Chinese Ministry of Commerce, Wuhan is the biggest land, air and water transportation hub in China. It is an important transport interchange — with three major ferry ports, rail stations and an airport. This was partly how the coronavirus managed to spread so quickly across so many countries and infect such a vast number of people. The cancellation of air routes will have an adverse effect on the global supply chain as air is the primary mode of transportation for perishable, fragile or high-value goods that require quick delivery. The disruption of air travel is going to significantly impact the pharmaceuticals, chemical products, machinery and hi-tech goods industries, depleting accumulated stocks both in China and abroad.

Conclusion

The coronavirus pandemic serves as a reminder to supply chain professionals about the importance of risk management, which not only aids in the mitigation of unexpected costs but also supports performance improvement. Leading supply chain organizations should include a framework to continuously measure their key risk indicators and proactively prepare scenarios for foreseeable and uncontrollable uncertainties such as labor, compliance, capacity, material and financial issues.

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