Monday, March 09, 2020

How supply chains and ecosystems will be shaped by the corona virus

Right now the global economy is in a bit of an uproar over corona virus and its impact on people, businesses and economies.  Starting in China, the virus has significantly slowed the production of goods from a core portion of China, which will have knock on effects to supply chains in Europe and in the US.  Travel and trade will likely slow, as governments try to contain or mitigate the spread of the virus.

We are likely to learn some new things from this pandemic, but more importantly is to see the opportunities for innovation, especially where there are gaps or weaknesses in the somewhat surprisingly fragile ecosystems, and to think about what the future looks like after a global response to the virus.

First, let's talk about fragile ecosystems.

Built for the best case

Over the last 15-20 years, as China has built a powerful manufacturing base, the global economy has increasingly become networked.  So many businesses rely on core products originally built in China that entire supply chains and shipping routes have emerged to support the flow of goods and services.  China even has a "belt and road" strategy to strengthen the supply chain and flow of goods.  However, it is apparent that in this case, and many other cases, these supply chains are somewhat fragile, and built without consideration of some important issues.  If a simple virus can shut down an entire supply chain, then the supply chain was built with the best case in mind, or has not considered the impact of factors that are adjacent to the supply chain but do have some influence.  Clearly the virus can infect workers in China, which leads to plant shut downs and less exports.  Perhaps the virus can migrate on the products from China as well - I don't know that to be true, but perhaps it could be.  Since China is often the epicenter for much of initial flu and virus origin, it stands to reason that corporations and governments that structure supply chains should consider the impact of virus origination in China and strengthen or protect the origin of the supply chain.  Or, corporations may eventually decide that housing the vast majority of manufacturing in China, close to the origin of yearly viruses, is a bad idea.

Of course this isn't really a new insight - placing all your manufacturing eggs in one basket is rarely a good idea.  Diversifying the development and manufacturing of a product could mean more costs, but could also mean that production continues when one plant suffers from an earthquake, or a typhoon, or other natural causes. 

I would think that many companies will be reconsidering their over-reliance on China as a manufacturing location, to seek to diversify manufacturing to more locations. The costs will increase, but the ability to continue production, and to shift some production away from China, could be a positive move.

This isn't the first time

What many people fail to recall is that we've been through something very much like this before.  In the years leading up to World War I, the economy was globally connected, with a lot of trading and economic development around the world.  After the war and partially due to the Spanish Flu, which was far more deadly than the corona virus, economies increasingly became nationalistic and raised tariffs.  As a short history lesson, more people died from the Spanish flu in 1918-1919 than died in the war.  While corona is serious, we've seen far more deadly pandemics.

So the second question becomes:  do we repeat history by closing our borders and raising barriers and tariffs as the virus continues its spread, and where does that lead?  In the 1920s and 1930s it led to a global depression, and eventually a world war.  I'm not quite so pessimistic about the future - I think we all stand far too much to lose in an economic downturn.  However, we should learn from the past.  Santayana said that those who fail to understand history are doomed to repeat it.

The good news out of this is we can anticipate what the outcome looks like, and we know what the likely outcomes of some of the options are, and can make better choices.

What comes next

Perhaps the most important question of all is:  what comes next?  The corona virus will end, hopefully in just a few months, and the nations and people will breathe a collective sigh of relief.  Then we'll have to make some decisions.  Do the day to day operations of all the supply chains go back to where they were, with little or no change?  Do human interactions continue as before, or do we put more plans and programs in place to prepare for more epidemics?

So, for example, do companies adopt far more telecommuting and working from home?  Do universities accelerate distance learning for more classes, to keep people from congregating?  Is there enough internet bandwidth to support far more people working from home?  Will companies continue to place all their manufacturing assets in China, or will they look to distribute the manufacturing to other locations, or perhaps return them to home shores and run them with robots?

Emerson said that "a mind, once stretched by a new idea, never returns to its original dimensions".  It could also be true that a country or government or people, once confronted with a crisis, won't accept the solutions from the past.  Perhaps the biggest impacts from the corona virus will be the way we live and work in the future.  Hopefully we won't simply isolate ourselves from each other, but will find new ways to work together and congregate regularly but safely.

This is an inflection point - a time when the way we live and work could be changed by how we react and respond to the threats of the virus, which seems to have an inordinate economic impact.  We innovators ought to be looking at future trends and outcomes to decide what attributes or factors of our economy are likely to change, and what that will mean for business and society.  We have the learnings from the past, and plenty of signals and signposts along the way.  As our minds are stretched and challenged by this virus, how much will our future dimensions be changed?

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posted by Jeffrey Phillips at 7:25 AM


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