03 Mar 2020 17:45 IST

Covid-19: Impact on China’s manufacturing and the global supply chain

The market crash makes it clear that the world hasn’t seen anything like this since the financial crisis

Classic economic theory emphasises that what separates a free market economy from other market forms is the idea of substitutes. If you’re a Pepsi lover and see that your favourite product is missing from the retail shelves, you move over to Coke or stop consuming Pepsi altogether until things come back to normal.

For the last 30 years, as China’s manufacturing prowess grew, the world’s companies stood idly by and gave Chinese companies even more work. Economy of scale is an extremely powerful force in nature and soon, China began to convert millions of acres of hinterland to create mega manufacturing plants the size of which the world had never seen.

During a visit to Shanghai 15 years ago, I returned stunned at the Chinese hegemony in consolidating the global supply chain. One manufacturer only made small screws — literally, thousands of different types — in a factory so large that you could drive fast on a four-lane highway for about a mile and still see the same factory building out your window. A big cross street would appear — for workers and delivery trucks — and this would be immediately followed by another factory of similar size perhaps making small washers and nuts for these screws. A hundred square miles of industrial park would contain about a hundred such factories, all making mechanical parts for electronic goods.

And in Guangzhou, hundreds of miles away, you could see the same set-up. And in Tianjin and Shenzhen and Dalian. About 15 years later, this massive manufacturing and shipping infrastructure has only got bigger, better, cheaper, and more efficient. The world is completely dependent upon China for every imaginable manufactured component in every industry — iron, steel, aluminum, textiles, cement, cellphones, personal computers, shoes, chemicals, toys, electronics, rail cars, and ships. There has never been such global domination throughout human history.

Manufacturing might

If you are a small computer parts manufacturer in Mexico City or Germany, you stand no chance to compete on price or variety or the ability to deliver large quantities of product through a highly advanced supply chain, from factory to port to ships to a docking pier in your customer’s country. There have been meek attempts to mimic the ability of the Chinese in this critical cog of the manufacturing wheel. Each has come up woefully short.

A few years ago, Apple set up a factory in Texas to make its most expensive Macs — responding to President Trump’s Make in America campaign — and was relying on a small Texas company to produce fasteners. Something went wrong when the designated trucker did not show up at the fastener company. The company’s owner then put several boxes of product in his car and drove them to Apple’s assembly plant. Hand deliveries from a small business owner in his private car was not exactly the kind of supply chain that Apple wanted to see or rely on.

What the massive spread of Covid-19 in China, where it originated, has done is severely disrupt these manufacturing megacities. Plants are locked down as workers are practically under house arrest. Highways in China are empty as truckers are forced to stay off the roads. Dockworkers at shipyards are staying home, and ships are no longer plying their international routes out of Chinese ports.

Meanwhile, international business travel has come to a grinding halt. In Hong Kong, Cathay Pacific expects to operate 40 per cent fewer flights in the coming months. The airline, a major conduit to ferry passengers into and out of China, would normally operate 368 flights in February and March. At present, only 39 flights are on its schedules, according to the South China Morning Post. The New York Times reported that on January 23, when things were normal in China, 12,814 flights operated within the world’s largest aviation market. Three weeks later, this number had dropped to 1,662.

Down in the dumps

China, the world’s most populous nation with the second most powerful economy has practically shut down — for work, trade, tourism, and life. Places around the world — South Korea, Iran, Italy, Japan, the US, and other parts of Europe, depend upon Chinese tourists for their very survival. The economy is severely hit as the Chinese stay home. Worse, the few Chinese who did travel to these countries are now blamed for the rapid spread of the virus in these very countries. A double whammy of outsized proportions.

Companies around the world, which rely on lean manufacturing methods to limit carrying an inventory of parts, are severely impacted. The concept of “just in time” manufacturing is to have trucks with various components pull into a plant with deliveries that would be consumed by assembly lines later that day. Many of these companies are now realising that not having the option of consuming Coke because Pepsi is no longer available poses an existential problem to their very business models. Even for those companies which did develop a backup supplier fearing this very scenario, the situation is hopeless if both suppliers are in China.

Markets are always an excellent barometer of the economy. For five consecutive days, global markets fell last week, wiping out $2 trillion in wealth on the American bourses alone. And we’re just getting started with the problem. It is clear that the modern world has never seen anything like it since the global financial crisis, which was dealt with after a lot of pain, when central banks around the world artificially printed money and flooded the banking system with currency.

If only the world could artificially print all the manufactured goods that China produces! That would easily solve the problem.