Industry supply chains in the aftermath of COVID-19
Kim Catechis and Damian Taylor, Portfolio Manager for Asia discuss how COVID-19 and the trade wars have accelerated trends impacting global supply chains, for better and worse.
This video is part of our weekly AFTERMATH video series led by Kim Catechis, Head of Investment Strategy, where members of the Martin Currie investment team discuss the far-reaching impacts of COVID-19 on the economy, the equity market, society, politics, the environment and our portfolios.
The pandemic has shone a light on challenges facing companies trying to monitor suppliers, and how well they maintain standards towards environmental and social factors.
Kim: Thanks for tuning in. This is the AFTERMATH, and this week we are looking at the complex sector of Industrials. And to help me parse through the questions, I have with me Damian Taylor from our Asia team. Damian, good to see you.
Damian: Yeah, thanks Kim. Good to catch up with you too.
Kim: I guess Damian, the obvious place to start is, you know, with all the stuff going on around COVID-19, supply chains breaking down etc. What happened, globally, with supply chains in the first six months of this year?
Damian: Yeah, sure, okay. So, if you dial back a little bit and think about when we first became aware of the Coronavirus outbreak, just probably before Chinese New Year, I guess.
The initial focus was on Hubei Province and what impact did it have on supply chains, given this province had a pretty sizable auto and electronic manufacturing base. And certainly as we started to have conversations with companies, it was pretty clear that factory closures, as they spread across China, were impacting production schedules in Eastern Europe and North America.
For example, an Indian motorcycle manufacturer told me back at the end of March, that the main challenge they were dealing with up until then was a lack of supply of parts they needed to comply with the new emission standards requirements. And they had been sourcing those parts from China.
But as the virus spread globally subsequent lockdowns quickly be shifted from a supply side issue to a demand issue, and everything around that demand contraction really has dominated the headlines since.
However, as lock downs begin to gradually ease, and demands slowly recovers. I think many companies will have to take another look at their supply chains.
Kim: Alright, that's helpful. As a conclusion what would you say are the standout long term changes that we should expect?
Damian: A lot of commentators will try to assess how COVID-19 has impacted various aspects of the economy. I've often concluded that we will see an acceleration of trends that were already in place before the pandemic.
I think that's equally the outlook for industrial's supply chains. So, if I look at the environment facing industrial companies over the last couple of years, there are a number of factors that were influencing supply and chain strategies.
Firstly, there was the issue of increasing trade tensions which resulted in the re-introduction of the trade tower, notably with the US and China.
But we also had rising neighbour costs and that was also an issue in China, particularly more recently. Related to this was demographics and shrinking workforce populations, particularly in Japan and the West, but also becoming an issue in China.
I think finally the cost of technology has been falling and making automation a potentially appealing option in some areas.
But I think there is also an increasing awareness and concern about Environmental, Social and Governance (ESG), and the pandemic has shone a light on challenges facing companies trying to monitor suppliers and sub suppliers, and how well they maintain standards towards environmental and social factors.
So, when you pull all this together you can see the appeal of considering shortening or reshoring some, or all, of your supply chain. But this is a debate that has only just starting, I think some are open for reshoring, while others suggest local production for local consumption model is more appropriate.
I don't think there will be a one size fits all solution. More complex manufacturing supply chains have been built around clusters or centres of excellence, which can’t easily be packed up and shipped to another region.
But there will be opportunities in other sectors for increased automation and/or reshoring which will be more potentially achievable.
Kim: Now, when I'm listening to some of these schools of thought that you are mentioning here, I can’t help but think things like autarky self-sufficiency etc. you know, it kind of goes along the lines of the theory of shortened supply lines, bringing things back home. And we all know that's actually sub optimal on so many levels. I guess one of the questions that is still there in my mind is, does this mean that ‘just in time’ as a concept is dead?
Damian: Look I think that's a really interesting question and I think it’s probably one that will probably be hotly debated in executive offices and boardrooms. I think there is a real possibility that, as part of the operational risk assessment, that the ongoing drive to eke out efficiency gains at the stock level may take a pause.
Maybe the outcome will be different depending on the reshoring vs localisation strategies. Well If I think about a typically automotive OEM, they are generally running with more materials, work in progress and finished good inventory levels with a sales ratio of about 10%. So, any increase in those inventory levels is really going to put a strain on your working capital requirements, and ultimately profitability.
So, I guess in conclusion, the old adage that a chain is only as strong as its weakest link, is just as true today as it ever was. I expect industrial supply chain audits to have an even heightened focus on production capabilities and flexibility, logistics capacity and financial strength.
Kim: Okay, that's great, Damian thanks, that's very very helpful.
There you have it, folks. This is our whirl wind tour around this sector. Thanks very much for tuning in, and give us your feedback good or bad, and tune in next week, we’ve got a totally different sector for you there.
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