In the midst of the COVID-19 pandemic, future global economic activity has become increasingly uncertain. Specifically, there is an ongoing debate about how supply chains might change once the world emerges from this crisis. Max Arias, a senior at The Wharton School has analyzed current global trends in the context of Covid-19 to predict how global supply chains may evolve in response to unprecedented global disruption. Maxwell Arias highlights changes he expects to see on a global scale as world economies adjust to new realities.
Max Arias of The Wharton School believes that most industries will not consider the COVID-19 pandemic to be an anomalous event, but rather a new structural risk of global supply chains necessitates long-term adjustment. He argues that the extent and speed of supply chain movement and economic decoupling away from China depends on several factors including relative cost structures, manufacturing capacities of other nations, and government created monetary incentives. “What is most certain is that supply chains for medical devices and important pharmaceutical reagents will be the first movers. They will either be either nationalized completely or at least shifted to North America,” Maxwell Arias explains. The US government will not tolerate PPE and drug shortages during a crisis because of a foreign nation again.
One adjustment we might see for many consumer goods companies, according to Max Arias of Wharton School, is a switch to a “make where you sell” model in which product manufacturing is moved closer to the United States or other locations where products will be sold, leveraging automation to offset higher labor costs. This is a potential reaction to increased skepticism toward the Chinese government given news that they covered up the severity of the COVID-19 virus for several months, and may not have ever provided a full picture of the virus on China.
Decoupling supply chains from China would be a long-term effort, likely taking 5-10 years thanks to how deeply entrenched the country is in the supply chain. But we may start to see things move in that direction as companies consider the best way to avoid potential economic disasters in the future. Maxwell Arias sees this as a positive move for many businesses looking to ensure long-term security. Over the next few years companies will be even more interested in moves the Chinese government makes that either support or suppress business interests.
Despite the negative aspects of having a supply chain deeply rooted in the Chinese economy, and the harsh realities of those ties that have been revealed lately, there are still reasons for businesses to consider maintaining ties with China. As Max Arias of Wharton School points out, the qualities that drew companies to China in the first place may be the same qualities that keep them there. Significantly lower cost structures allow for cheaper production in China compared to most other countries, and those cost savings can make or break some companies. The decision each company will need to make is whether the benefit of lower prices is worth the risk of supply chain disruption if another situation similar to the COVID-19 pandemic arises.
Maxwell Arias lends his expertise in global supply chain economics to an analysis of the current COVID-19 pandemic. Max Arias believes that the scenarios that have emerged in the last few months and the level of disruption experienced by many industries will cause many companies to begin transitioning away from reliance on China as part of their supply chain.