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MANUFACTURING
GLOBAL SUPPLY CHAINS UNDER HUGE PRESSURE FROM COVID-19 IMPACT Manufacturing output will take at least 12 months to recover to 2019 levels
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ccording to a new report from Baker McKenzie and Oxford Economics, Beyond COVID 19: Supply Chain Resilience Holds Key to Recovery, the pandemic has produced an unprecedented global supply chain crisis, stemming from a lack of mapping and flexibility around the multiple layers of global supply chains and a lack of diversification in sourcing strategies. On the upside the report forecasts that the hardest-hit manufacturing sectors across the world will be also the first to recover by H1 2021 as a release in pent-up demand is driven by a recovery in sentiment, and production ramps up. The current global supply chain crisis is due primarily to the pandemic creating temporary 'manufacturing deserts', whereby a city, region or whole country's output dries up so substantially due to lockdown conditions, they become a no-go zone to source anything apart from essentials. The report highlights that the immediate impacts of a failing global supply chain are already being felt, from auto plants in Korea shutting down because of a lack of parts from China to smart phone manufacturers running dangerously low of components. As a result, global trade is expected to have fallen by more than 4% in Q1 2020, and decline even further in Q2
SMARTSMB / May 2020
As Mattias Hedwall, Global Chair, International Commercial & Trade at Baker McKenzie explains this has serious implications for global supply chains: "It is clear that the extended shutdown of parts of the world’s economy is now feeding through to impact supply chains as existing stocks are depleted. Businesses need to focus on how to minimize supply chain disruption and to adjust rapidly to a changing landscape. This includes among others, infrastructure, tax and employment implications of changes and the option of quickly reversing changes if the situation stabilizes quickly."
six months of this year compared to 2019, recover much of that drop in H2 2020 and finally exceed the 2019 position by early 2021.
Borys Dackiw, EMEA Co-Chair, Compliance & Investigations, and Gulf Head of Compliance at Baker McKenzie adds: "During this period of uncertainty, it is particularly important for companies to be alive to the risks arising from trade restrictions and supply chain issues, particularly when seeking out new sources of supply or dealing with new third party business partners."
All four key manufacturing sectors analysed for this report are predicted to start recovering in the second half of 2020 with the strongest recovery from the automotive and textiles sector growing at 10% and 8% respectively (relative to their levels in the first half of the 2020), and then all sectors will see at least some output growth on 2019 levels by 2021.
Impact on manufacturing sector globally While there remain a number of scenarios for the global economy over the next 24 months, Oxford Economics' baseline forecast is that global manufacturing will take a 5% hit in the first
As the table below shows the pace and extent of decline and then subsequent recovery varies by manufacturing sub sector. The automotive sector is set to see the biggest output falls globally in H1 2020 of 13%, followed by textiles (8%) and electronics (7%) although the forecast also shows the auto and other transport equipment sector is likely to see the swiftest recovery, along with textiles.
Impact on China Because of China's unique role in the global supply chain, and its sensitivity to drops in global demand as a leading export nations, the forecast sees a significantly deeper drop in output this year than the global decline as the table below shows, with sectors such as
