Global Value and Supply Chain in Crisis

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Global Value and Supply Chain in Crisis -

Opportunities and Challenges for Developing-country Firms

Bachelor Thesis

Thong, L.N. Huynh

Student ID: 11965

[email protected]

Vietnamese-German University

(Binh Duong New City, Binh Duong, Vietnam)

Study program: Economics and Business and Administration

Supervisor: Dr. Lennart Johnsen

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

Abstract

The first part of this paper highlights major factors that cause disruption in the global value and supply chain ensuing the start of Covid-19, namely manufacturing utilization, lead-time and demand variability. Regarding the bullwhip effect that arises therefrom, two main causes are identified: demand signal processing for the downward pattern of demand in recession, and shortage gaming for specific sectors that have an upsurge in demand. The second part discusses the post-pandemic scenario, which includes the geographic relocation away from China and the transition towards the resilient, agile and sustainable digital supply network. From there, opportunities and challenges for developing-countries firm are presented. The opportunities include productivity boost, consumer market growth, technological know-how and capabilities development and a chance to climb up the value chain. At a supply chain level, the bullwhip effect can be mitigated and supply chain planning and operation can be improved via digitization and close collaboration. The challenges consist of meeting the performance requirements and

Corporate Social Responsibility standards, pursuing business growth and the risk of climbing up the value chain.

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

Table of Contents

Abstract ...... I

Table of Contents ...... II

Acknowledgement ...... IV

List of Figures ...... V

List of Tables ...... VI

List of Abbreviations ...... VII

1. Introduction ...... 1

2. Critical Analysis ...... 3

2.1. Covid-19 supply chain disruption and the bullwhip effect ...... 3

2.1.1. Definition and causes of the bullwhip effect ...... 3

2.1.2. Supply chain disruption and the bullwhip effect ...... 6

2.2. Systematic vulnerability of the value and supply chain ...... 14

2.2.1. Geographic concentration of GVCs and GSCs ...... 14

2.2.2. Visibility in the extended supply chain ...... 19

2.2.3. The dispute over JIT inventory and lean manufacturing ...... 21

2.3. Post-pandemic scenario and opportunities & challenges for developing-country

firms 23

2.3.1. Geographic diversification ...... 24

2.3.2. The transition towards a more transparent, agile, resilient and sustainable supply chain 33

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

3. Summary and Outlook ...... 40

References ...... VIII

Statutory Declaration ...... XXII

III

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

Acknowledgement

I owe a great debt of my sincerest gratitude to my supervisor Dr. Lennart Johnsen, who not only enlightens me with his immense knowledge and extensive expertise but also inspires me with considerable encouragement and charismatic leadership. Had it not been for his careful guidance and valuable suggestion, I would not have been able to reach the completion of this paper.

I would also like to extend my gratitude to the professors and teaching assistants of two academic courses at the University of Bremen, namely International Management and Global Logistics, whose amazing work and dedication motivates me to come up with the subject of this paper during my exchange semester.

I would like to thank my father, whose legal expertise of an experienced lawyer greatly assists me in the part regarding the force majeure clause in business contracts. Many thanks to my brother, who as a third-year Bachelor in Electrical and Computer Engineering at Vietnamese-German University provides me useful information for the part regarding the production of electronics circuit boards, and also the Internet of Things and automation in the digital supply network. Last but certainly not least, I would like to thank my mother, who as an English teacher lays a foundation for my academic English, thus without whom I would not be able to write a single word.

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

List of Figures

Figure 1 Reported manufacturing utilization of U.S. firms’ Chinese suppliers...... 7

Figure 2 U.S. firms’ reported average lead-time for inputs sourcing from respective regions...... 8

Figure 3 Percentage change in U.S. firms’ demands ...... 11

Figure 4 Percentage change in U.S real GDP in quarters of 2020 ...... 13

Figure 5 Companies that have suppliers in China’s impacted regions in February ...... 15

Figure 6 Percentage change in HHI of exports by sector, 2000-2018...... 16

Figure 7 China's proportion in the world’s production of electronics devices ...... 17

Figure 8 The extended upstream supply network ...... 20

Figure 9 Amount of multinational companies’ suppliers by tier ...... 20

Figure 10 Change in U.S. manufacturing import mix 2018-2019, in billion dollars ...... 24

Figure 11 The transition towards the digital supply network ...... 34

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

List of Tables

Table 1 Expansion of companies in/into Asian LCCs and others in 2020 and ensuing years .....26

Table 2 Strategic importance vs. complexity of supply matrix ...... 36

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

List of Abbreviations

CPG Consumer-packaged goods FDI Foreign Direct Investment GSC Global Supply Chain GVC Global Value Chain IPC Institute for Interconnecting and Packaging Electronic Circuits ISM Institute for Supply Management MIT Center for T&L MIT Center for Transportation and Logistics OEM Original Equipment Manufacturer PPE Personal Protective Equipment R&D Research and Development SME Small and Medium Enterprise

VII

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

1. Introduction

“Up until this month1 , a large part of our population believed that pandemics were a medical discussion and not a supply chain discussion. Now we know differently.” (Wright, 2020, as cited in Martichenko, 2020). Covid-19 caught the world by utter surprise as a black swan event typically would: no one could expect it with reasonable foresight (apart from apparently Bill Gates2) and we try to rationalize it in hindsight. Demand for PPE exploded while it was nowhere to be seen, as the birthplace of the notorious virus happened to also be the world’s manufacturing factory. It was not just PPE, thus, but many critical parts, components and products were missing from China, affecting firms in then-impervious countries and causing major disruption along the global supply chains. “Global” is the operative word, for the configuration of companies’ value and supply chains is spatially distributed around the world. The value chain is a collection of value-adding activities that the firm conducts to create value in a product for its customers, such as design, R&D, production, sales and distribution, etc. (Cavusgil et al., 2017). The supply chain is a network consists of organizations that involve in coordinating the flow and transformation of products, components, information, decision and capital from the point of origin (the ultimate supplier) to the final consumption (Cooper et al., 1997; Handfield and Nichols, 2002). In order to leverage economies of scale, cheap labor and other location-specific advantages, companies adopt a strategy of outsourcing (procurement from independent suppliers) and offshoring (geographic relocation of internal business activities), stretching the value and supply chains across the globe. Thus is the rise of China, India and other low-cost countries, but also where the inherent problem arises: suppliers and facilities locating far away are not closely monitored and could go off the focal firm’s radar, exposing it to potential operational risks. Once the incident occurs, the impact quickly ripples along the supply chain before the firm could react or find alternative solutions, especially when the critical inputs are mainly procured from the impacted region. Such disruptive shortage crisis happened during the 2011 Japan earthquake-tsunami, the Thailand flooding, and it happens now on a much larger scale. Discussion in respect of the supply chain quickly breaks out in light of this pandemic’s unprecedented disruptive impact. Particularly, the supply chain should be

1 The statement is quoted in a white paper published in March, 2020. 2 According to Gates (2015).

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms viewed as a “biological ecosystem” whose “ultimate health” hinges upon the coherence of its many processes, in lieu of a linear link of organizations and sequential activities that should be efficiently coordinated (Kofinas, 2020; Martichenko, 2020). Kang (2020, as cited in The Economist Intelligence Unit, 2020) states that “supply chain needs uncertainty and that is currently lacking”, referring not only to the Covid-19 but the U.S.-China trade conflict that induces companies to pull part of their operations away from China. It is a strategic move to safeguard their supply chains from unpredictability, after for long the dimension of “procuring against risk” is overshadowed by “procuring for cost and efficiency”. The relocation from China is precipitated by this pandemic, yet there is much more: the emphasis on the “procuring for resilience” that could anticipate and mitigate future disruptive events, as seen now how devastating one could be. This opens up the opportunity for other low-cost developing countries and SMEs therein, especially the neighboring ASEAN countries who emerge as feasible substitutions for China. The chance is not obvious as it might seem, however, and developing-country firms could let it slip by not meeting the requirements or do not perform up to their full growth potential.

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

2. Critical Analysis

2.1. Covid-19 supply chain disruption and the bullwhip effect

2.1.1. Definition and causes of the bullwhip effect

The bullwhip effect is a phenomenon where the variance of orders to suppliers is more volatile than the variance of sales to customers, which is further exaggerated as orders travel upwards the supply chain (Lee et al., 1997). The effect is not peculiar to any sectors or business cycles, and has been found in consumer electronics, CPGs, retailers and apparel industry. Yet it might be more prevalent during a recession and the ensuing recovery periods, for the consumer demand tends to be more volatile and somewhat misleading. It hits harder for relatively small and especially developing-country suppliers, who have inflexible cash flow operations, limited financial capacity and problem-solving expertise. Participating in the further upstream part of the supply chain, therefore, could put them at the mercy of the bullwhip effect should customer demand abruptly plunge. More generally, in response to higher demand variability firms have to hold higher buffer stocks, which could significantly drive up the inventory cost. The phenomenon that emerges from a lack of coordination often results in a loss of mutual trust, which erodes relationships among members of the network. Lee et al. (1997) discover four major causes of the bullwhip effect, which are demand signal processing, shortage gaming, order batching and price fluctuation. Order batching represents a strategy to minimize fixed order cost and transportation cost, thus leverage economies of scale by stacking up demand and issuing large order quantities in one turn. Price fluctuation as a result of sales promotion and discounts falsifies the actual customer demand and increases demand variability.

Demand signal processing In a push-oriented supply chain, retailers analyze past demand information to update their forecasts upon which new orders depend. Distributors, manufacturers, etc. follow the same practice, exaggerating the actual pattern of the demand. Consider first a single-period newsvendor decision problem which involves the retailer and the distributor, the former being the sole decision maker.

The retailer incurs a cost c for each unit as well as a fixed set-up cost ck every time an order is

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

placed. Inventory shortage is penalized by cp and there is a cost of holding excess inventory ch, which includes warehouse space, utilities, labor salaries, etc. and the opportunity cost of product spoilage. Demand 푥 is a non-negative continuous random variable that is distributed by 푓(푥). The total inventory cost is: 푞 ∞ 퐼(푞) = 푐 ∙ 푞 + 푐ℎ ∙ ∫ (푞 − 푥) ∙ 푓(푥) 푑푥 + 푐푝 ∙ ∫ (푥 − 푞) ∙ 푓(푥) 푑푥. 0 푞 First order condition reads: 휕퐼(푞) 푞 ∞ = 푐 + 푐ℎ ∙ ⌈∫ 푓(푥) 푑푥 + 푞 ∙ 푓(푞) − 푞 ∙ 푓(푞)⌉ + 푐푝 ∙ [푞 ∙ 푓(푞) − ∫ 푓(푥) 푑푥 − 푞 ∙ 푓(푞)] = 0 휕푞 0 푞 푞 ∞ 푞 푐 + 푐ℎ ∙ ∫ 푓(푥) 푑푥 − 푐푝 ∙ [∫ 푓(푥) 푑푥 − ∫ 푓(푥) 푑푥] = 0 0 0 0

푐 + 푐ℎ ∙ 퐹(푞) − 푐푝 ∙ (1 − 퐹(푞)) = 0. 푐 −푐 Solving for the optimal inventory yields 퐹(푞∗) = 푝 , which means the optimal order quantity is 푐푝+푐ℎ 푐 −푐 푐 −푐 푞∗ = 퐹−1 푝 . The model suggests that the retailer’s best response 푞∗ is chosen at the 푝 -th 푐푝+푐ℎ 푐푝+푐ℎ fractile of the distribution of demand, i.e. so that the probability of not enduring a stock shortage is 푐 −푐 푝 . Consider a multi-period decision problem that was presented in Lee et al. (1997)’s postulation 푐푝+푐ℎ with a replenishment lead time 푣 between the moment orders are placed and the time they arrive.

Demand that appears at t is satisfied during the period 푡 + 푣 by the system stock 푆푡: on order 푞푡 and the stock on hands. The decision variable 푆푡 of the retailer is more dynamic as it includes the current inventory level in addition to the order quantity 푞푡. The inventory minimization problem is: ∞ 푡+푣 푡+푣 ( ) 푡−1 min 퐼 푆푡 = ∑ 훽 퐸푡 [푐 ∙ 푞푡 + 푐ℎ ∙ (푞푡 − ∑ 푥푡) + 푐푝 ∙ (∑ 푥푡 − 푞푡)], 푆푡 푡=1 푡 푡 where demand at t is assumed to be a linear auto-regression of demand in the previous periods 푥: ∗ 푥푡 = 푑 + 푝 ∙ 푥푡 + 푒푡. The optimal solution 푆푡 is similar to the critical fractile above: 푐(1 − 훽) 푐푝 − 푣 ∗ −1 훽 푆푡 = 푓푣+1 ∙ [ ]. 푐푝 + 푐ℎ

∗ From 푆푡 they show that: 2푝(1 − 푝푣+1) 푣푎푟(푞 ) = 푣푎푟(푥 ) + ∙ 푣푎푟(푒 ). 푡 0 (1 + 푝)(1 + 푝)2 0

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

For all 0 < 푝 < 1, the variance of the orders that the retailer file to the distributor is strictly larger than the variance of customer demand, and strictly increasing in the order lead time 푣. When there is a drop in customer demand, the retailer further reduces the orders considering it still holds excess inventory amid an updated forecast of declining demand for the next period. The phenomenon repeats itself at every stage of the supply chain which amplifies the reduction in orders, making lower-tier suppliers the most vulnerable.

Shortage gaming Participants in the supply chain only seek optimization for their own interests and objectives. In a period engulfed by the fear of shortage, retailers file orders that exceed their actual needs to obtain a higher share of the scarce resources. Consider a static simultaneous game where the manufacturer under constraint produces an output 푦 randomly distributed by 푔(∙), which is used to supply for 푛 identical retailers. Output 푦 is not known before the decision 푞푖 is made, thus there are two potential outcomes in the expected inventory cost. The first one is the normal newsvendor scenario if manufacturing capacity sufficiently satisfies the sum of orders 푄. Should 푄 exceed the capacity of the manufacturer, then each player receives a proportion of the output, which is 푞𝑖 푦. Each 푄 scenario is associated with the respective probability of whether 푦 is larger or smaller than 푄.

퐼푖 (푞1, 푞2, … 푞푖, … 푞푛)

∞ 푞𝑖 ∞ = 푐푞푖 + ∫ [푐ℎ ∙ ∫ (푞푖 − 푥) ∙ 푓(푥) 푑푥 + 푐푝 ∙ ∫ (푥 − 푞푖) ∙ 푓(푥) 푑푥] 푔(푦)푑푦 푄 0 푞𝑖 푞 푄 𝑖∙푦 ∞ 푄 푞 푞 + ∫ [푐 ∙ ∫ ( 푖 ∙ 푦 − 푥) ∙ 푓(푥) 푑푥 + 푐 ∙ ∫ (푥 − 푖 ∙ 푦) ∙ 푓(푥) 푑푥] 푔(푦)푑푦. ℎ 푝 푞 푦=0 0 푄 𝑖∙푦 푄 푄 Players do not know each other’s order quantity, but because this is assumed to be a symmetric game, they could rationalize that others would have the same optimal strategy. The symmetric Nash equilibrium, thus, would satisfy:

∗ ∗ ∗ ∗ ∗ ∗ 휕퐼𝑖(푞 , 푞 , … 푞 , … 푞 , ) 휕퐼𝑖(푞 , 푞 , … 푞 , … 푞 ) 1 2 𝑖 푛 = 𝑖 = 0. 휕푞𝑖 휕푞𝑖 Lee et al. (1997) attest that such 푞∗ in the symmetric Nash equilibrium is weakly larger than the optimal solution 푞∗in the newsvendor model. The key takeaway is that the introduction of the manufacturer’s restrained capacity alters the retailer’s behavior in a decision game she mutually faces with her counterparts. Mathematically, a change in 푞푖 shifts not only the function but also 5

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

the boundary 푄(푞 ) = ∑푛 푞 + 푞 and 푞𝑖 ∙ 푦 of the integral. The decision maker, therefore, takes 푖 푗≠푖 푗 푖 푄 into consideration the manufacturer’s constrained capacity and other players’ strategies besides the distribution of demand.

2.1.2. Supply chain disruption and the bullwhip effect

Martichenko (2020) asserts that Covid-19 has already impacted all American companies in March. According to the surveys 3 conducted by ISM (2020), by early March 75% U.S. respondents reported disruption in their operations and capacity, which rose to 97% in May.

Manufacturing utilization The notorious virus stemmed from the Hubei province of China and rapidly spread to other parts of the country at the beginning of this year. Mandates and measures followed suit, not only with regards to social interaction but also economic activities. Factories and facilities were soon in temporal shut down, whilst travel ban prevented labors from reaching those that were not. As a result, China’s Manufacturing Purchasing Manager Index reached its historic bottom low of 35.7 in February, which prior to the pandemic fluctuated closely around 50. With factories being left idled and the scarcity of workers limited productivity, manufacturing utilization substantially declined. According to ISM (2020), American firms reported in March that production in their Chinese suppliers dropped to 50% of its full capacity. The staffing level also shrank to 57% in large part due to travel restrictions. Kilpatrick and Barter (2020) find that it hit harder for SMEs: only 43% of which restarted production by the end of February, at much less capacity. Manufacturing utilization slowly increased to 53% of normal operation by April notwithstanding the rising staff level (ISM, 2020). In the most recent ISM survey in July, it was yet to reach full capacity and accounted for 76% of normal level.

3 The three surveys are published at https://www.ismworld.org/supply-management-news-and-reports/reports/covid-19-resource- center in March, April and July 2020. The number of respondents are different in each issue (559 in April and 676 in July). The respondents consist of U.S. manufacturing and non-manufacturing organizations.

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

Figure 1

Reported manufacturing utilization of U.S. firms’ Chinese suppliers

100% 88% 80% 76%

57% 53% 50% 50%

0% March April July

Manufacturing Capacity Staffing level

Note. Data are from ISM (2020).

Factory downtime in China imminently exerted the ripple effect on the country’s close trade allies. Europe’s production capacity dropped by half as of May, which in turn affected the EU supply to the U.S. Germany, whose export structure relies on supplying heavy machinery and equipment to China, saw a drop of roughly 1.6 billion euros in export to the latter from December 2019 to February 2020 (Destatis, 2020). Moreover, a Nissan and Hyundai factories in Japan and Korea had to shut down in February due to a shortage of auto parts and electrical components supplying from China (Yamamoto, 2020). The decline in China’s manufacturing level influenced the production of other firms within its supply chain, in both the demand and supply dimension. Either way, there likely occurred the bullwhip effect. On the demand side, German machinery manufacturers facing a sudden drop in orders from China would reduce their orders to their further upstream suppliers. From a supply perspective, the dearth of critical components from China disruptively halted productions of manufacturers in then-impervious countries, which in turn affected the orders of other parts and components suppliers. Reported Chinese manufacturing capacity increased in July as China recovered, while Europe and the US produced at 64% and 74% capacity respectively (ISM, 2020). However, the data did not

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms account for the November second outbreak which forced European countries back into lockdown. In the third quarter of 2020, factories reestablished as the pandemic eases in China, which is extrapolated to have a GDP growth of 5.2% in July-September (Wong and Kihara, 2020). The dense cloud of uncertainty, therefore, to some extent disperses with regards to Chinese production. There is concern of product quality, however, as many PPE sourced from China were found inadequately poor in quality. Europe canceled the delivery of 10 million substandard protective masks from China (Petrequin, 2020), while the U.S. also found major quality issue in the Chinese supply (Hufford and Maremont, 2020). Fakes and counterfeits are likely to appear in the time of scarcity due to suppliers’ misconducts when striving to fulfill large orders (Sheffi, 2015). This happened during previous incidents in Japan and Thailand, now proves more alarming than ever as poor quality in PPE is a serious matter of life and death.

Lead-time and blank sailing 50 percent reported reduction in the country’s manufacturing capacity in the first quarter of 2020 must result in a double in lead-time for supply flowing from China. In fact, 57% U.S. respondents reported that they experienced more than double the normal lead-time from Chinese Tier-1 suppliers in March, compared to December 2019 (ISM, 2020). Moreover, roughly half experienced delays in transit time and supply chain information within China’s border. In the electronics industry where many firms’ suppliers locate in China, 15% (81%) of electronic manufacturers reported being quoted a 6-week (4-week-or-less) delay in shipment (IPC, 2020). The problem of longer lead-time to the U.S. quickly dispersed to products sourced from Europe, Japan and domestically in April (ISM, 2020). In the July survey, average lead-time declined Japan and Europe, while remained twice as much the normal time for China and South Korea (ISM, 2020).

Figure 2

U.S. firms’ reported average lead-time for inputs sourcing from respective regions

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

250%

222% 217% 215% 209% 200% 201%200% 200% 200% 195% 195% 179%

150%

100% March Arpil July

China Japan South Korea Europe The US

Note. Data are from ISM (2020).

Whilst lead-time from other regions to the U.S. fell in July in line with the increasing manufacturing utilization, that of China only marginally decreased and remained more than double the normal time despite the country’s rise in production level. This can be elaborated if one looks at the imbalance in mode of transportation across the Pacific. As Chinese production halted with factories being shut down, export from China to the U.S. in the first quarter of 2020 significantly plunged by 28.3% compared to last year (U.S. Census Bureau, 2020). Demand for space on vessels evaporated as closed Chinese factories were unable to send out outbound cargo trucks. Meanwhile, restriction caused port labors to dwindle, which increased the waiting time of cargo handling in congested ports. Since the amount of to-be-sailed cargo plummeted, carriers further increased blank sailing - a practice of neglecting ports or canceling the whole voyage - to maintain the freight rate, extending a phenomenon that normally occurs during the Lunar New Year. In February, 19 out of 62 blank sailings on the Asia-West Coast North America (WCNA) were related to the Covid- 19 pandemic (Mongelluzzo, 2020). Zimmerman et al. (2020) report that blank sailing as a percentage of operation capacity reached record high of 16% for Asia-WCNA and 14% for Asia- Northern Europe in February, including inactive container ships waiting to sail back to Asia. By June the number of inactive fleets accounted for 11.6% of capacity- an all-time record high (Alphaliner, 2020, as cited in Hand, 2020a). Up until August, the aggregate blank sailings announced by three major carrier alliances reached 126 regarding Asia-North America trade route, while that of Asia-Europe was 94 (Sea-Intelligence, 2020, as cited in Knowler, 2020). This partly

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms elucidates why lead-time did not improve at the same pace with the reported recovery in production. Furthermore, it highlights a shortage of empty containers and equipment for inland U.S and Europe due to the lack of imported containers influx. There might be a bullwhip effect of empty containers, therefore, as firms increase orders to secure their proportions of the scarcity (Shih, 2020). The final quarter of 2020 sees a reduction in blank sailings, especially for the route Asia-North America. Alphaliner (2020) in the November report indicates a downward pattern of inactive container fleets. At the time of writing, demand for Chinese goods is resurging as the holiday season approaches, whilst Chinese productions are being pushed to fulfill orders. Vessels that arrive at the U.S. hikes up in number due to Christmas demand, making extremely crowded ports even more congested. Meanwhile, economic restriction in the U.S. causes lack of manpower at ports and terminals, decreasing down cargo handling speed. Moreover, chassis that brings containers inland does not return in a quick manner due to a lack of truck drivers. A dire dearth of chassis, thus, makes the overwhelming situation worse while elongating the time empty containers stay inland (iContainer, 2020; EgeTrans, 2020). Empty containers sit in depots for around 61-66 days in China and the U.S. before being turned around, compared to a 45-day global average that is disruptively long in its own right (Container xChange, 2020). The availability of 40HC containers reached record bottom low of 0.01 CAx point in the last week of November, compared to 0.48 of same period last year (Container xChange, 2020). Ocean freight rate skyrockets, whereas ocean carriers respond by repositioning empty containers back to Asia, causing inland agricultural U.S. exporters further shortage (Hand, 2020b). Notwithstanding the reduction in blank sailing, congested ports and container shortage still cause uncertainty in ocean lead-time by the end of 2020. Regarding air freight, the White House issued a travel ban from China at the beginning of February, which contributed to 55,000 flights called off by American Airlines up to March. Travel restriction prevented passenger flights from flying across the Pacific, which means 48% of air cargo that normally travels via airliners could not reach destinations (Zimmerman et al., 2020). Air cargo lies in passenger planes’ bellies includes vital industrial and electronic components, hence the delay of which aggravated lead-time for U.S. manufacturers. Air freight rates East-West, which was on a downward pattern since 2017 due to declining demand, soared up in April of over $2.5 per kg and followed an upward trajectory, due to air capacity shortage (Zimmerman et al., 2020). Zimmerman et al. (2020) also label air cargo transport with “uncertainty”. Although they report that rebounding

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms demands in late 2020 from reestablished factories are yet to cause air overcapacity, the situation is subjected to major change that arises from both supply and demand dimension. Post-pandemic economic recovery could exceed current air cargo capacity, or a new Covid-19 variants can lead to an abrupt supply shock, as seen in the recent case of flights from the UK being banned from several European nations in December. Due to the nature of large proportion of air cargo being carried by passenger planes, air freight capacity and lead-time is much more vulnerable to disruption.

Demand variability It is not surprising that aggregate demand declined under strict Covid-19 mandates and restrictions amid a loss in consumer confidence. Most American companies reported an on average drop of 5% in their demands in April (ISM, 2020), which correlated with the decrease in U.S. real GDP in Q1-2020 (The U.S. Bureau of Economic Analysis (BEA), 2020). The decline is further worsened as of the second quarter, where most respondents experienced a 15% drop amid a further shrinkage of U.S. real GDP (see Figure 3 and 4). Demand signal processing model suggests that orders filed to upstream suppliers would be further reduced or even canceled. MIT Center for T&L (2020) warns that such bullwhip effect in a recession would be “too much to withstand” for small suppliers. A massive plunge in demand for apparel around the world put developing-country firms in jeopardy amid large-scale cancellations of orders and force majeure invocations from brand manufacturers. A Bangladesh factory owner reported that all of his orders have vanished, as many suppliers in the country and Vietnam, Cambodia, Myanmar and Indonesia suffered from a zero- cash-flow apocalypse (Turton and Bopha, 2020). The matter soon turned to a battle of survival for small businesses while it hit harder for Bangladesh (an estimated loss of $3 billion in April) compared to Vietnam ($467 million) (Turton and Bopha, 2020), due to the huge proportion of the textile industry in the former’s export, which devastated its economy.

Figure 3

Percentage change in U.S. firms’ demands

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

60% 50%

40%

20% 13% 8.80% 5%

0% Overall Demand Healthcare & Social Assistance Food, Beverage & Tobacco -5% products

-20% -15%

April July

Note. Data are from ISM (2020).

There were certain sectors that proved to be an exception. Demand in healthcare and social assistance naturally skyrocketed at a rate of 50% by April, while that of food, beverage and tobacco products rose by 8.8% (ISM, 2020).The two figures in the July survey, albeit still sustained the increasing momentum, have slackened in pace. This hints some degree of shortage gaming behavior in the consumers of CPGs. The pandemic in the U.S. was by no means abated in the second quarter of 2020 (in fact it became more severe), yet consumers’ buying of necessity goods increased at a diminishing marginal rate. As their storages were already piled up with amounts beyond their sufficient level of consumption, they felt less the need for another bulk purchase. Consumers adopt panic-buying practice because others have the same strategy as they are influenced by the overreacting media, not that their actual level of consumption has increased. If retailers strive to massively restock in response to this falsified demand, empty shelves in months could be turn into a situation where full containers line outside stores waiting to be unloaded (Shih, 2020; Martichenko, 2020). Seifert and Markoff (2020) argue that firms in the supply chain are competent enough to be cognizant of this delusive pattern of demand, implying that they would not stock up their inventories. Yet in the period engulfed by fear of shortage, pipeline inventory proves to be a favorable strategy for not only consumer-related supply chains but also industrial ones (Wilding et al., 2020). In fact, 35% of American firms in the April survey reported that they were holding excess inventory on purpose, while 25% were holding less due not to a different

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms strategy but the inability to maintain their normal levels in a game of shortage (ISM, 2020). In the July survey, about 40% of firms were holding more inventories than usual, amid deteriorated confidence for sufficient North America operations (ISM, 2020). The bullwhip effect regarding the rising demand in some sectors such as CPGs, therefore, is likely caused by shortage gaming rather than demand signal processing.

Figure 4

Percentage change in U.S real GDP in quarters of 2020

40% 33.40%

20%

0% Q1 Q2 Q3 -5%

-20%

-31.40% -40%

Note. Data for Q3 does not fully reflect the economic impact of Covid-19. Reprinted from “Gross Domestic Product (Third Estimate), Corporate Profits (Revised), and GDP by Industry, Third Quarter 2020”, by the U.S. Bureau of Economic Analysis, 2020 (https://www.bea.gov/news/2020/gross-domestic-product-third-estimate-corporate-profits-revised-and-gdp-industry-third). Copyright 2020 by the U.S. Bureau of Economic Analysis.

The U.S. BEA (2020) reports extreme volatility in the real GDP of 2020. After the second quarter’s dramatic drop, demand drastically rebounded in Q3 as a result of lifted restrictions in the U.S. and reestablished productions in China. Particularly, rising demand accounted in large part for a surge in personal consumption expenditure and health care & social assistance. As discussed above, the pattern could be misleading and falsify true underlying long-term demand. One-third out of 651 business executives, especially in the chemicals sector, claim that demand variability makes their companies prone to disruption (Lund et al., 2020). Wilding et al. (2020) warns that demand during and post-pandemic is subjected to a “boom and bust” cycle, where a massive upsurge could soon be followed by a sudden trough. While a post-Covid situation may see fewer cases of panic-buying, 13

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms social measures and movement restrictions induce households to travel less frequently to supermarkets, thereby purchase each time with larger quantities than normal. Moreover, consumers switching to alternatives due to the dearth of specific products may cause misleading insights in other sectors. Long-term underlying demand possibly reflects only in the rise of home- based products, telecommunication devices, healthcare products & PPE and autonomous vehicles (Wilding et al., 2020).

Summary and conclusion During this pandemic, the bullwhip effect entered in both patterns of demand. Demand signal processing constitutes the effect when 1) Chinese firms lower their orders during factories shutdown and 2) falling final customer demand amid restrictions and loss of confidence. In special sectors that experienced an upsurge in demand, shortage gaming behavior accounts for larger orders and higher inventory level of firms and retailers, who had to cope with limited supply and longer lead time. It was factory downtime in China that initially doubled the lead-time for Chinese supply, yet later on the imbalance mode of transport emerged as a dominant reason. Blank sailing, congested ports and container shortage cause concerns for ocean transport. Air freight is more vulnerable to the status of the pandemic, as airliner that carries air cargo is more prone to travel ban.

2.2. Systematic vulnerability of the value and supply chain

The major disruption underline inherent problems of the global supply chain. As it turned out, many of firms’ lower-tier suppliers of critical inputs and products located in the impacted regions of China. They might not be aware of this early enough to respond in time.

2.2.1. Geographic concentration of GVCs and GSCs

Perhaps the most salutary lesson that not only firms but countries draw from this pandemic is the heavy reliance on China’s manufacturing capacity and supply network. In February, 5 million companies across the globe suddenly found themselves having Tier-2 suppliers in affected regions, 938 of which are the Fortune 1000 (Dun & Bradsheet, 2020). CPG producers abruptly realized

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms many of their inputs are indeed sourced from the Hubei province (Lund et al., 2020), while 28.4% wholesale traders found that their Tier-1 suppliers were neutralized (Dun & Bradsheet, 2020).

Figure 5

Companies that have suppliers in China’s impacted regions in February

Note. Data are from Dun & Bradsheet (2020).

Geographic concentration on a value chain scale has been a recent phenomenon in some industries due in large part to economies of scales and scope. Industrial clusters are formed to reap the benefit of close coordination of knowledge and information. Factor endowments also play a crucial role, whether it is human capital, special geographic location or natural resources. Herfindahl- Hirschman Index (HHI) of exports4 of some sectors rise dramatically during the last two decades, implying that in these industries a few countries have dominantly gained the most share of the world total exports (see Figure 6). Some of these sectors are labor-intensive, namely apparel and

4 HHI of export is calculated by summing the square of each country’s share in exports.

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms textile, suggesting the concentration on outsourcing from particular cheap-labor countries such as Bangladesh. Regarding the textile industry, China exported half of the world’s textile face masks and 42.8% of protective garments, according to OECD (2020).

Figure 6

Percentage change in HHI of exports by sector, 2000-2018

Note. Reprinted from “Risk, resilience and rebalancing in global value chains”, by S. Lund, J. Manyika, J. Woetzel, E. Barribal, M. Krishnan, K. Alicke, M. Birshan, K. George, S. Smit, D. Swan and K. Hutzler, 2020 (https://www.mckinsey.com/business- functions/operations/our-insights/risk-resilience-and-rebalancing-in-global-value-chains). Copyright 2020 by McKinsey & Company.

China becomes a geographical cluster of the electronics GVC initially by virtue of an inexpensive labor force, a huge consumer market and increasing technology innovation capability. Claiming the world’s largest market share in export of electrical machinery, parts and equipment (International Trade Center, 2019), the country is the top producer from final products like computers, smartphones to sophisticated electronic components (see Figure 7). These components

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms have a wide application in many sectors, namely automotive, pharmaceuticals, medical and naturally consumer electronics. Apart from the now eroded advantage of cheap labor, China enjoys a special factor endowment. According to U.S Geological Survey (2020), it produces 62.85% of the world’s rare earth minerals in 2019, which are vital for the production of magnets, batteries and other parts that are used in electronic devices, including medical devices like ventilators. The country claims 80% of the U.S total supply of rare earth minerals and accounts for over one-third of the world’s reserve, ranking second to none.

Figure 7

China's proportion in the world’s production of electronics devices

Note. Data are from Lund et al. (2020).

Some GVCs are more spatially distributed yet still vulnerable, since the lower stages that produce key inputs are geographically concentrated. China emerges as a huge player in the chemical GVC and accounts for 40% of the world chemical-industry’s income (Hong et al., 2019), albeit more countries begin to participate in the chemical and pharmaceutical industries (see Figure 6). The country produces 94% of the world’s supply of Chloramphenicol5 (Lund et al., 2020) while claiming high proportion of other antibiotics imported by the U.S. in 2019, namely tetracycline

5 An antibiotic used in the treatment of bacterial infections such as meningitis, typhoid fever, cholera, etc.

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

(90.1%) and penicillin (51.8%) (Mikulic, 2020). China participates in the lower-value, earlier stage of the chemical GVC, providing basic chemicals for other countries to produce more delicate pharmaceuticals at higher stages (De Backer and Miroudot, 2013). Hence, although the pharmaceuticals GVC is more widely distributed, the production of fundamental ingredients in the early stage is not.

The opportunity cost of geographical concentration It becomes painfully apparent that due to such dependence on China’s production, a country-scaled supply chain disruption can soon turn to a matter life and death, where there occurs a dearth of PPE, electronics components for medical devices and drugs that help tackle illnesses. More generally, sourcing from a single geography through this pandemic proves disruptively problematic for businesses and countries. From the demand point of view, many suppliers in a concentrated country severely suffer should customer orders suddenly halt in affected regions, as seen in the Bangladesh textile industry. From the supply perspective, putting all eggs in one bag naturally intensifies the risk of bottleneck. When a region packed with many suppliers entered shutdown, the shortage crisis rapidly rippled through the entire network. Without diversification, businesses struggled to quickly find alternative sources while the disruption dispersed to impervious areas faster than the virus itself. Even after China resumed manufacturing, disruption continued as aforementioned lead-time and blank sailing issues made it harder for products and inputs to arrive. Scales economies that yields low cost per part is one of the raison d’être for geographic concentration, now sees itself being vitiated by the escalating total landed cost in light of a major disruptive event.

The difference from previous events Similar lesson has been drew from the earthquake-tsunami disaster in Japan and the flooding in Thailand, both occurred in 2011. While the heartbroken human losses should never be overlooked, the vulnerability in a concentrated supply network was clearly presented to businesses. The incident in Japan caused an enormous disruption in sophisticated supply chains of giant automotive manufacturers like Toyota and Suzuki, for many of their parts suppliers were located in the affected region. Plants in impervious places found themselves in a dire scarcity of parts, while such ripple effect soon traveled beyond Japanese soil to reach the operation of Ford, GM, etc. The Thailand

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms flooding neutralized several industrial zones in the country for months, two of which included factories of the world’s giant computer disk drives manufacturers. Yet there is a difference compared to this crisis: Covid-19 affects both supply and demand, the former by a much larger scale. Disruptive as they might be, the effects of previous incidents were limited within an industry. The impact of this pandemic, on the other hand, is a life-and-death matter that spreads among people. Lockdown restriction were imposed from region to region and eventually the entire country. This time there are two flows of supply disruption: in the supply network and of the “incident” itself, which snarl up every industry and throw everyone on the same boat. Moreover, China has emerged as a huge player in the world’s economy while the whole country becomes a massive geographic concentration. Interdependency between China and the U.S. as well as other countries intensifies the disruption dramatically to an economy-wide level that is never seen before (Kofinas, 2020; ISM, 2020). The lesson remains the same: efficiency at the expense of resilience, just that now the cost is so enormous it will never be overlooked again.

2.2.2. Visibility in the extended supply chain

As depicted in Figure 5, the number of firms that have suppliers who were in impacted regions soars by 10 times when it comes to the Tier-2 supplier. In an extended supply network, the lower- tier supplier could be the common source of firms’ Tier-1 suppliers (see Figure 8). Ultimately, there are suppliers that provide inputs for the whole industry, whom “everybody needs but not everybody knows” (Kofinas, 2020). In fact, most businesses often turn a blind eye to suppliers beyond Tier-1, albeit they rely on the entire network to fuel their operations. The dollar value of inputs sourced from lower-tier suppliers are often small compared to the final product’s revenue, and firms tend to neglect relatively low expenditure in their risk assessments. Even when they try, fully tracking and understanding suppliers through opaque multiple layers require high level of digital technology and committed resources. With the outsourcing practice, visibility throughout the network becomes more limited with suppliers far away from home. Geographic concentration is indeed alarming, yet the underlying problem is that businesses may not even know their lower- tier suppliers are regionally clustered. The matter is worsened when multinational companies can have thousands of suppliers beyond Tier-1 (see Figure 9).

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

Figure 8

The extended upstream supply network

Note. Adapted from “Supply Chain Management: Implementation Issue and Research Management”, by D. Lambert, M. Cooper and J. Pagh, 1998, The International Journal of Logistics Management, 9(2), p.7. Copyright 1998 by Douglas M. Lambert.

Figure 9

Amount of multinational companies’ suppliers by tier

Nestle 717 5000

Apple 638 7400

Airbus 1676 12000

GM 856 18000

Tier-1 suppliers Suppliers beyond Tier-1

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

Note. Adapted from “Risk, resilience and rebalancing in global value chains”, by S. Lund, J. Manyika, J. Woetzel, E. Barribal, M. Krishnan, K. Alicke, M. Birshan, K. George, S. Smit, D. Swan and K. Hutzler, 2020 (https://www.mckinsey.com/business- functions/operations/our-insights/risk-resilience-and-rebalancing-in-global-value-chains). Copyright 2020 by McKinsey & Company.

The problem of lacking visibility in the supply network Elliot et al. (2019) find that roughly 25% (12%) of disruptive incidents in supply chains occurred at Tier-2 level (Tier-3), which were on the rise compared to the decline in that of Tier-1. One-third of the respondents did not even search for the original source, suggesting that the figure for lower- tier level could be higher as firms coped better with risks from Tier-1. Keeping themselves aloof from lower-tier suppliers makes businesses unaware of the risks and weak spots in the network beyond their direct partners. The lower-tier suppliers are relatively small in terms of financial capacity and resources, while lacking the capabilities to cope with major problems. Leniency also breeds their recklessness: a study finds that 22 lower-tier suppliers in the pharmaceutical, automotive and electronics GVC do not meet sustainability standards in the absence of monitor and pressure from their customers (Villena and Gioia, 2018), one of which supply for all the three GVCs. When issue arrives, there likely occurs a supply failure and vulnerable small suppliers could even go out of business. Missing critical inputs could halt the production of the entire industry, while potential new source of supply poses the risk of quality degradation or even fakes. When problem occurs, not knowing these suppliers costs firms precious time to realize, react, interfere or find and assess alternative solutions. While the expenditure could be relatively low in the first place, the loss of sales is much more dramatic, or in this case beyond the profit scheme of business. Firms should be aware that further upstream suppliers could also participate in other adjacent industries and GVCs, albeit possibly at different tiers. Disruption, therefore, could come from other industries and affect the firms before they know it, should they not be well-aware of their suppliers.

2.2.3. The dispute over JIT inventory and lean manufacturing

Supply chain has evolved from the stage of Ford’s mass production into an era of lean manufacturing and just-in-time philosophy (JIT). Originally initiated and successfully implemented by Toyota, the notion is predicated upon eliminating waste, pull-oriented production and continuous improvement. The goal is to ensure the right quantity of inputs arrive at the right time and place to be processed, upon the request initiated by the customer (Slack et al., 2007;

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

Skjøtt-Larsen et al., 2007). Inventories are optimized at minimal level, for parts and components will be handled and transferred to the next stage precisely at the moment they are needed. Product quality is ensured as issues that emerge from one part will be conspicuous to others, where the tackle of which is a mission shared among all members of the network. For its tendency to maintain minimal level of inventory, JIT often incurs the finger of blame from the media whenever there occurs a crisis of shortage. Wysocki Jr. and Lueck (2006), in an article that now proves prophetic, assert that offshoring and near-empty inventory policy of drugs, medical supplies and PPEs would turn disastrous in a flu-related pandemic. Just-in-case (JIC) inventory buffer should be the solution, they argue, in the manner of government piling military terms for national security. Then-president of Lean Enterprise Jim Womack comes back at the article, rebutting that more buffer inventories along the chain is not optimal so long as the assembling capacity could not match to quickly turn parts into finished products, while holding buffer stock of finished units would result in a financial disaster (Womack, 2006). Low inventory is but a mean, not the end goal of lean philosophy. Prudent users of JIT include just-in-case stocks apart from cycle stock to address downstream and upstream variability, naturally at a lower amount than the traditional approach (Skjøtt-Larsen et al., 2007). Small buffer stock can be held in response to normal, reasonable variations in customer demand pattern, while safety stock serves the purpose of mitigating the impacts of a sudden supply failure, say, due to bad weather or logistics issues. Yet one thing should be clear. Abnormal effects of such black swan event is not taken into account by businesses, where demand is extremely volatile and unprecedented measures cause continuous delays in the upstream supply (Martichenko, 2020). For its nature of interdependency and minimal inventory, lean supply chain suffers from disruption if there is a major problem and delay in one part of the network. 26% of business executives address low JIT inventory as a source of their operations’ vulnerability to Covid-19’s disruption, according to Lund et al. (2020). Kofinas (2020) suggests that JIT operation enables efficiency at the cost of resilience to disruption of such black swan event. It is not sagacious, however, to leap to the conclusion that this is the final chapter of JIT. The practice has huge advantages of cost-efficiency, high quality, visibility, and responds much better to demand variability thereby reduce the bullwhip effect. One could hardly expect businesses, on grounds of private profit and expeditious operation, to contemplate emergency inventory policy for disastrous events (Martichenko, 2020). JIT still adequately works under normal conditions at

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms the end of the day, and as Womack (2006) asserts, perhaps such catastrophic event is “beyond its framework”. Critical products such as medical supplies and PPE could be viewed as public goods, therefore, and government intervention to secure an emergency stock could be a solution. Yet moving forward, firms certainly raise keen awareness about the level of their inventories, preparing for future pandemics or other disruptive events such as a trade conflict. More “what-if” cases will be proposed, and JIT may see itself under modifications in some industries (MIT Center for T&L, 2020). Wilding et al. (2020) project that in the “new normal”, cost efficiency will lose its priority to the security of the supply chain, as businesses are more willing to incur higher inventory cost by holding more buffers for safety reasons. Pisch (2020) argues that holding additional inventory will work in favor of JIT instead of against it, for the effective coordination and close information communication reduce the cost of managing extra buffer stocks.

2.3. Post-pandemic scenario and opportunities & challenges for developing-country firms

Experts generally believe that GVCs and GSCs would change from the pre-pandemic period, otherwise firms are “probably doing something wrong” (Wilding et al., 2020, p.15). Yet the degree of alteration may vary among industries, for every disruption is different in its own “misery” and “cascade of effects” (Sheffi, 2015, p.39). Generally, businesses would endeavor to have a reliable and resilient supply chain that enables visibility and effective communication with their suppliers in the opaque extended supply network. Some will seek alternative supply sources to reduce the risk of bottleneck lest the next disruptive event should happen. This part discusses not the emergency solutions but a post-pandemic scenario and strategic decisions of focal companies that could affect developing-country firms, especially those who are in Asian low-cost countries6 . Southeast Asian nations have a reputation for nimbly coping with vexing situations and recovering therefrom, for instance, they handled the 1998 Asian and 2008 worldwide financial crisis better than others (Bradley et al., 2020). With a growing 600-million-consumer market, spatial proximity

6 According to Kearney analysis (Van den Borsche et al., 2020), Asian low-cost countries include China, Taiwan, Hong Kong, India, Bangladesh, Sri Lanka, Pakistan, Thailand, Singapore, Vietnam Malaysia, Indonesia, Philippines and Cambodia.

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms to China and the recent RCEP free trade agreement7, ASEAN emerges as a prospective candidate for the next major manufacturing and economic hub of the world.

2.3.1. Geographic diversification

An accelerated phenomenon Some firms already diversified their supply bases away from China prior to the pandemic, on grounds of economic profit in light of the country’s diminishing cost-advantage and more importantly, a 25% tariff of the U.S. government on Chinese imports. By July 2019, over 50 multinational companies were moving some productions out of China, including tech giants such as Apple, Dell, HP, etc., who seem to favor a reroute to Southeast Asia (Hoshi et al., 2019). Chinese private manufacturers found themselves also in the loop when the tariff margin proved substantial for their revenue; some were under pressure from their OEM customers. Van den Borsche et al. (2020) show that of the $90 billion drop in the U.S. manufacturing imports from China in 2019, one-third was absorbed by 13 other Asian LCCs, half of which by Vietnam. Near-shoring to Mexico also proved a feasible solution.

Figure 10

Change in U.S. manufacturing import mix 2018-2019, in billion dollars

7 The free trade agreement Regional Comprehensive Economic Partnership (RCEP) is signed on November 15, 2020 between Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, South Korea, Thailand, and Vietnam.

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

$90

$31

$14.26 $13

China loss Other Asian LCCs gain Mexico gain Vietnam gain

Note. The gain of Asian LCCs and Mexico are related to the loss of China, and may include transshipment from China to the U.S. Adapted from “Trade war spurs sharp reversal in 2019 Reshoring Index, foreshadowing COVID-19 test of supply chain resilience”, by P. Van den Borsche, B. Levering, Y. Castano and B. Blaesser, 2020 (https://www.kearney.com/operations- performance-transformation/us-reshoring-index). Copyright 2020 by Kearney.

Firms that diversified from China nimbly shifted their sourcing and mitigated the pandemic disruptive impacts much better than those who did not (Kilpatrick and Barter, 2020; Kofinas, 2020; Baker McKenzie, 2020), albeit that was not their initial intention. On the other hand, half of U.S. firms who did not have a back-up plan for China suffered from immediate disruption in February (ISM, 2020). Companies often prioritizes procurement for cost and efficiency upon the altar of procurement against risk, of which they have thought differently ensuing the trade war. The relocation from China in 2018-2019 was an action taken to diversify risk, which is precipitated and reinforced by the event of Covid-19.

Not the end of the China era Yet diversifying from China does not necessarily mean that manufacturing activities would be completely washed off Chinese soil. The country has a diminishing advantage of low cost, or in other words, cheap labor force is not the only reason why companies settle in China. More specifically, they rely on technology innovations and the efficiency of the whole Chinese supply ecosystem, which is not attainable anywhere else any time soon (MIT Center for T&L, 2020). Another important factor is that the country has a lucrative, fast growing and huge consumer market. Rather than completely leaving China, thus, a strategy of “China-plus-one” is more likely prevalent. Moreover, a just-in-case double sourcing albeit averts disruption impacts sometimes

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms doubles the trouble for businesses. Products from different sources may not be identical in quality, which cause further concerns regarding compatibility with manufacturing processes and after-sales service (Sheffi, 2015). Finally, assessing alternatives, relocating facilities and negotiating with other suppliers take time. Diversification often means that a whole new supply network is established, which could not be done in the short run (Wilding et al., 2020).

2.3.1.1. Opportunities for developing-country firms

The increase in manufacturing export of Southeast Asian nations to the U.S. in 2019 does not necessarily imply a true reconfiguration however, as Chinese producers were transshipping products to the U.S. through Vietnam and Mexico. This practice will not likely to prevail post- pandemic, since temporarily dodging the tariff bullet does not represent a true risk diversification. The perceived disruptive impact of a major event far exceeds that of the economic profit risk, hence rather than merely “against risk” firms will raise their awareness to a broader level of procuring “for resilience”. The opportunity for developing countries, therefore, is intrinsically greater and there could even be a relocation of the whole supply ecosystem. Foxconn besides assembling Iphone in Vietnam now plans a $270-million investment in the country to produce telecommunication equipment and computer-related products. Samsung and Qualcomm intend a value-chain-level expansion by setting up R&D facilities. Table 1 summarizes notable firms that expand in/into developing Southeast Asian countries and others in 2020 and ensuing years, most of which are in the electronics industry. Covid-19 either induces or bolsters their decisions. Vietnam still emerges as a dominant winner by virtue of its close geographical location with China, a similar export structure to the U.S. and a skilled labor supply to meet the same product standards.

Table 1

Expansion of companies in/into Asian LCCs and others in 2020 and ensuing years

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

Company Destination Product/Production activities Scale  Liquid crystal display  Full-scale production and other computer-  $270 million Foxconn Vietnam related parts investment  TV and telecom equipment  Computer-related,  Full-scale production Indonesia Petragon telecom and consumer and Vietnam  Vietnam: $1 billion electronics investment in 2 phases India, Wistron Mexico and  Iphone components  $1 billion investment Vietnam  Product assembly Apple’s

Airpods  30% of classic  classic AirPods and assemblers Vietnam AirPods production AirPods Pro (Luxshare- and some of AirPods ITC, Inventec) Pro. The rest remains in China.  Smartphones (Pixel 4a  Full-scale production Google Vietnam and Pixel 5)  Small volume in the  Notebooks and desktop Microsoft Vietnam beginning then level computers (Surface) up production  $ 220 million  R&D activities on investment in R&D Samsung smartphones and Vietnam center Electronics information technologies  Personal computers:  Personal computers not available  R&D and testing  First R&D facility in Qualcomm Vietnam facilities Southeast Asia Hoya Corp * Laos and  Hard-drive parts  Not available Vietnam Shin-Etsu Vietnam  Rare-earth magnets  Not available Chemicals * Sumitomo  Not available Rubber Malaysia  Nitrile rubber gloves

Industries * Southeast  Including medical Asian equipment, 27 Japanese nations, semiconductors, phone  Not available firms * India and components, power Bangladesh modules…

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

Hyundai  Automotive vehicles  $138 million Vietnam Motor assembly expansion

 Automotive vehicles  Expansion in Suzuki Motor Myanmar assembly production capacity

 Automotive vehicles Toyota Myanmar  First assembly plant assembly

 Adhesive tapes used in  $60.4 million tesa Vietnam automotive and investment electronics industry

Note. Author’s summary. Information are from Nikkei Asia (https://asia.nikkei.com/). Foxconn, Wistron and Petragon are contract manufacturers for OEMs such as Apple, Google, etc. When the company listed is an OEM, it is because the available information does not state clearly its contract manufacturer who produces the products. * 30 Japanese firms who receive a government subsidy of 23.5 billion yen to relocate to Southeast Asia.

Growth in productivity and consumer markets A large influx of FDIs significantly boosts the manufacturing sector, increases the capital stock, improves productivity and offers growth opportunity for countries and firms. FDIs can foster the development and integration of process automation and robotics adoption for SMEs, who normally do not have adequate resources and capabilities. Particularly, Korea enhances the infrastructure and brings about automation and robotics in manufacturing processes by virtue of technology transfer and knowledge sharing with ASEAN companies 8 . Siemens establishes a three-in-one competence center9 in Singapore in 2020, seeking to train and support Southeast Asian firms who embark on advanced manufacturing (Siemens, 2020). Robotics and automation adoption exponentially raise productivity and frees workers from repetitive tasks to acquire skills in higher- value-creating jobs. Real wage and living standards increase, therefore, which culminate in

8 2016 Memorandum of Understanding between ASEAN-Korea Center and the Korea Institute for Robot Industry Advancement. 9 The competence center includes: Digital Enterprise Experience Center, Additive Manufacturing Experience Center and Rental Labs (Additive Manufacturing).

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms lucrative consumer markets that attract more FDIs. Myanmar receives further FDIs from automotive manufactures by virtue of rising demand of the middle class for automobiles in the country. The pandemic may encourage more near-customer supply chains, thereby growing domestic market brings another advantage. In addition, brand manufacturers’ movements encourage their competitors and suppliers to follow suit, thus create opportunity for other industries. Chinese car manufacturers are increasing production in Myanmar in response to Japanese competitors, while German tape maker tesa addresses a move to Vietnam as “to supply for our customers” in the ASEAN region.

Acquiring technological know-how and climbing up the value chain In light of the arrival of many companies in the electronics and automotive industry, Southeast Asian firms have a perfect chance to acquire technological know-how. Collaboration with lead firms (Apple, Dell, etc.) and platform leaders10 (Qualcomm, Intel, etc.) can fruitfully result in innovation, industrial upgrading and technological expertise and capabilities development. Cooperation enables firms to take advantage of the learning process, then climb up the value chain or even become a full brand manufacturer with their own products. Vietnamese conglomerate Vingroup working in concert with Qualcomm now eyes a own branded 5G-compatible-smartphone export to the U.S. in 2021, while providing contract manufacturing service of 2 million units of 4G-compatible one for AT&T wireless carrier (Onishi, 2020b). In the automotive industry, Thai Rung Union, Proton Holdings (Malaysia) and Vingroup after years in cooperation with General Motors, Toyota, Nissan, Mitsubishi etc. have launched their own branded cars. The Vietnamese corporation also leverages Siemens and Bosch advanced digital solutions throughout the production process, which is entirely performed domestically. Myanmar-based manufacturers and assemblers could follow the same path as the country recently welcomes FDIs from Japanese and Chinese automakers.

10 Platform leaders are firms that successfully inject their products as vital components into other firms’ products (Sturgeon and Kawakami, 2010), for instance Qualcomm’s chipsets and Intel’s microprocessors. 29

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

Supply of critical products China’s inadequacy in supplying PPEs costs its credibility in the eyes of the EU and U.S. Much as politicians and the media might favor re-shoring, drugs and medical consumables companies prefer a more potential reconfiguration to Southeast Asia due to manufacturing cost. Medtronics procures ventilators’ parts from Vietnamese Vingroup manufacturing, while Sumitomo Rubber Industries will move their production of nitrile gloves to Malaysia. Particularly more European pharmaceuticals companies are targeting Vietnam in light of the EU-Vietnam free trade agreement, after the recently announced expansions of Novartis and AstraZenca in the country (Onishi, 2020a). Vietnam is also on the verge of becoming the world’s factory of masks (Hoang, 2020b) while the government drafts a long-term plan to dramatically expand its capacity in the medical industry, targeting both domestic demand and export orders (Onishi, 2020a). Thailand sees itself in the same move, promoting 12 FDIs in medical equipment as ASEAN is growing to be a dominant medical hub (Macan-Makar, 2020). More importantly, local firms could leverage the cooperation with leading medical and pharmaceuticals companies to achieve the universal standards and international certifications. With their supports, best practices and know-how will be acquired in dealing with the logistics and transportation of delicate healthcare products. Thai Siam Bioscience in concert with AstraZeneca will produce and globally distribute the UK-based Covid-19 vaccine (Phoonphongphiphat, 2020), while Vietnamese Nanogen Pharmaceutical aims to introduce their own vaccines in the second half of 2021 for the domestic market (Onishi, 2020c). FDIs from the medical and drugs industry boost local firms’ capacity and capabilities, securing the domestic supply of such critical products.

2.3.1.2. Challenges for developing-country firms

Meeting the demand The first challenge on a country level is to meet the demand of this massive influx of FDIs and supply chain reconfiguration. Southeast Asian nations are welcoming FDIs by building industrial parks, developing more ports and logistics routes, and adjusting tax incentive policies (Jibiki, 2020; Fukuoka, 2020). Vietnam is reported to face the risk of exceeding its current capacity in terms of skilled labors (IT talents, middle managers, etc.) and land occupancy (Hoang, 2020c). Industrial zones are occupied at 74% nation-wide, while those in the South nearly reach full

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms occupancy rate. Moreover, congested ports place a burden on stuffed containers handling amid a reported mounting concern for logistics infrastructure and a dearth of equipment (Fukuoka, 2020; Whelan, 2020). There is also a shortage of suppliers in response to a large demand, as some inputs still have to be sourced from China (Hoang, 2020c). Firms must try to keep up by setting up more warehouses and factories, conducting more training programs, developing capabilities and seeking digitization. Operational productivity in non-manufacturing activities and administrative tasks also needs to be increased (Bradley et al., 2020). Specifically in the medical and pharmaceuticals industry, Southeast Asian suppliers must satisfy the required standards in such complicated and strictly regulated supply chains. Manufacturing processes and product components have to hit a high level of precision to secure quality control, otherwise suppliers will let the opportunity slip away amid growing call for re-shoring of critical products. Local manufacturers of PPE are relatively small and lack of coordination, thus could fail to meet an outburst of export orders. There could occur a bullwhip effect as situations of the pandemic fluctuate in countries, causing further concerns in inventory levels and product quality assurance.

Pursuing business growth In light of the influx of capital, Bradley et al. (2020) report that emerging-Asia11 firms are capable of nimbly and profitably allocating scarce resources and capital expenditure, yet having trouble investing properly in R&D and strategic merge and acquisitions (M&A). Their revenues size are relatively small and the innovation capacity is limited compared to advanced-Asia countries and Greater China, therefore, affecting their performances and business growth. R&D investment as a proportion of sales of firms in emerging Asia straggles behind China and further away from the world, hindering product differentiation improvement (Bradley et al., 2020). With the recent settlement of FDIs, the region sees a 2% increase in the growth of M&A deal value in June, while that of other Asian-Pacific countries (excluding Japan and South Korea) notably declines (Ramesh et al., 2020). Bradley et al. (2020) note that “strategic M&A” means well-planned small transactions that could be added up over years in lieu of large ones, as the former could generate more synergies and thereby corporate value. Asian buyers either rely on internal executives or

11 According to McKinsey analysis (Bradley et al., 2020), Emerging Asia includes Indonesia, Malaysia, the Philippines, Thailand and Vietnam; Advanced Asia includes Australia, Japan, Singapore and South Korea. 31

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms have difficulty collecting market intelligence, causing vexing problems in identifying the ideal target and growth stage (Ramesh et al., 2020). The challenge is to develop adequate internal capabilities with industry expertise, while integrating from top level M&A investment strategies that could generate high value in the wake of this recession (Ramesh et al., 2020). In order to thrive, developing-country firms should focus on upgrading scale and investing wisely in R&D and innovation.

The risk of climbing up the value chain Only $8.46 out of Iphone 7’s manufacturing-cost $237.45 is captured in mainland China, i.e. roughly earned by Chinese low-cost suppliers, a proportion of merely 3.6% (Dedrick et al., 2018). Taiwan-based contract manufacturers like Foxconn, who own factories for testing and assembly in China and in near future ASEAN countries, capture 20%. Japanese and Korean lead firms like Sony and Samsung account for another 35%, while much of the value is created by Apple, who conducts technology-intensive product design, R&D, marketing activities and manages the whole supply chain. The same story occurs in the PC industry where lead firms and especially platform leaders like Intel captures most share of the value created (Sturgeon and Kawakami, 2010). Southeast Asian electronics suppliers could grow to become electronics manufacturing services (EMS) companies, who perform merely production tasks such as buying components, fabricating and assembling electronics circuit boards, or assembling and testing the final product. Original design manufacturing (ODM) companies in addition to manufacturing provide product design services. Circuit boards manufacturing processes are widely applicable for various electronics subsectors (Sturgeon and Kawakami, 2010), thereby EMS contract manufacturers could leverage the scale and supply for various clients. Most Vietnamese electronics suppliers are EMS contract manufacturers of printed circuit board and its surface-mounted technology components, most notably Fab 9, Sao Kim Electronics, Thanh Long JSC, Vector Fabrication. They have customers12 ranging from consumer appliances, consumer electronics to automotive industry, even lead firms such as Samsung, LG, and Panasonic. Yet contract manufacturers only enjoy a minimal mark-up when supplying generic electronics parts and face the risk of being easily substituted, as their

12 According to the companies’ websites.

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms customers have the market power (Sturgeon and Kawakami, 2010). On a higher stage, Vietnamese Vingroup besides phone contract manufacturing service strives to introduce their own branded Vsmart smartphone, by virtue of purchasing a design solution from Chinese ODM manufacturers. The design could have a modular hardware, parts and subsystems that are broadly compatible with several platforms, however, making it less likely for the product to stand out in customers’ eyes- which Chesbrough and Kusunoski (2001) dub the “modularity trap”. There were indeed customers’ technical complaints about the similarity of Vsmart and China-based Meizu’s smartphone, the latter happens to share the same ODM manufacturers (“VinSmart says”, 2019). Moreover, stepping up as a brand manufacturer means directly competing with customers, which could affect future orders. OEMs grow more wary after the emerge of Japanese and Korean brand companies that rival their dominance, thus limit the sharing of product R&D and conception with their Taiwanese suppliers (Sturgeon and Kawakami, 2010). This inherent risk of facing their clients and cooperative partners with undifferentiated products is prevalent in other industries. Parts and platform sharing is also a common practice in the automotive industry known as engineered badging. VinFast automaker seeks to differentiate its BMW-based product lines and generate customer value by having consumers vote on the designs of sophisticated Italian car design houses (Singh, 2018). Nevertheless, consultants remain skeptical about the company’s taping in the luxury niche as its products are deemed yet to be distinctive from foreign competitors, while the domestic willingness to pay is not fully ripe for high-end consumption (Hoang, 2020a).

2.3.2. The transition towards a more transparent, agile, resilient and sustainable supply chain

2.3.2.1. Establishing and monitoring the supply network- the era of digitization

As discussed above, multinational companies must expand the visibility in their supply network to tier-2, tier-3 suppliers or even beyond. There should be a focus on their inventory geographical locations, production schedules, stock levels and stock cover for a specific level of orders (Wilding et al., 2020; Kilpatrick and Barter, 2020). Non-member of the firm’s supply chain also deserves the attention, if their performances affect suppliers in the internal network. Mapping suppliers beyond Tier-1, however, is complicated and time-consuming with the traditional linear approach.

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

Companies should leverage advanced digital solutions, therefore, and seek to transform the supply chain into a more holistic, fully-integrated network. Deployment of the Internet of Things (IoT) sensors enables connectivity and communication via cloud computing, yielding the focal firm valuable real-time status on warehouses, transport conditions, the precise location of transport vehicles, etc. End-to-end insights including every flow of raw materials, components and finished products will be interpretably visualized, which allows the firm to track, monitor and swiftly react to mitigate or even anticipate and avert disruption (Bryan, 2019; Kilpatrick and Barter, 2020; Bergstrom et al., 2020). Furthermore, artificial intelligence (AI), 5G and machine learning can perform autonomous warehouse tasks, deliver and analyze valuable insights to forecast demand, and aid supply chain planning by presenting multiple scenarios with intelligent algorithms. Due to the social distancing rules ensuing the pandemic, the adoption of automation and robotics in transportation and warehouse workplace becomes more critical than ever (Wilding et al., 2020). Advanced technology fosters the dawn of digital supply network (DSN), which is previously admired for its agility and efficiency in serving customers, now proves a prerequisite for disruption alleviation and safety assurance in the wake of Covid-19. DSN also enables JIT operation in the post-crisis world, which could have some adjustments in inventory level. In order to successfully leverage its advantage, DSN should not be deemed just a sophisticated tool to implement business strategy but the very heart thereof (Bryan, 2019; Kilpatrick and Barter, 2020; Bergstrom et al., 2020). Reducing risk in the post-crisis world is not enough, there must be a strategic shift towards agility and resilience.

Figure 11

The transition towards the digital supply network

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

Note. Reprinted from “Covid-19 Managing supply chain risk and disruption”, by J. Kilpatrick and L. Barter, 2020 (https://www2.deloitte.com/global/en/pages/risk/articles/covid-19-managing-supply-chain-risk-and-disruption.html). Copyright 2020 by Deloitte.

2.3.2.2. Identify the critical suppliers

Actively engaging in all business processes of a thousand-member supply chain is both not feasible and sagacious, even with the aid of state-of-the-art technology. Companies may want to allocate a little more interest to whom they deem essential. Lambert et al. (1998) propose 4 types of process links to deal with suppliers, in a descending order of their importance to the focal firm’s operation: managed, monitored, non-managed and non-member process links. Yet the first task is to identify who is indeed critical. As discussed above, the level of expenditure on procurement should not be the only major factor. In fact, focal firm should concentrate on suppliers whose products are vital for their product lines, especially those constitute a large fraction in total revenue. Another criterion is the availability of alternative solution for procurement. Firms often leverage economies of scale by single sourcing, yet this should be distinguished from the case of a “sole source”. Sole sourcing occurs because firms have no other choice: the supplier has market power by virtue of intellectual property rights, legal contract or technological and innovation capabilities (Sheffi, 2015). More generally, many firms often consider the well-known matrix of the strategic value or profit impact

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms of spending and the complexity of procurement in the supply market, which is originally postulated by Kraljic (1983). The strategic importance of the purchase includes its fraction of the total procurement cost, the impact on profit or the “value-at-risk” (Sheffi, 2015), or how it boosts the firm’s competencies and business growth. Olsen and Ellgram (1997) add the brand image factor regarding the supplier’s environmental and safety policy, which is increasingly the priority of millennial and Gen-Z consumers in the post-Covid-19 world (Deloitte, 2020). The complexity or vulnerability of supply can come from suppliers’ market power, limited alternative sourcing solution, the speed of technology for substitution, logistics difficulty (Kraljic, 1983). There should also be consideration regarding the product: the complexity manufacturing, number of components, level of specification and customization, or whether it is new and in the early stage of life cycle (Olsen and Ellgram, 1997; Sheffi, 2015). Focal firms should seek a strategic, closely-coordinated long-term relationship with suppliers in the upper-right quadrant (Strategic), while keeping a close eye on the lower-right (Bottleneck) and preparing for alternative solutions in the wake of this supply shortage crisis (see Table 2). Leveraging economies of scales is a textbook move in the upper-left quadrant, now may not be so prevalent amid the trend of diversification.

Table 2

Strategic importance vs. complexity of supply matrix

High Leverage Strategic

Strategic importance of the purchase Low Non-critical Bottleneck

Low High Complexity of the purchase

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

2.3.2.3. Assessing suppliers health and ensuring business continuity

As discussed above, relatively small lower-tier suppliers often do not follow sustainability standards. The next disruption could emerge from any source of risk such as a fire in the plant due to negligent safety precaution, labor strike, suppliers’ bankruptcy or consequent environmental issues. Hence, companies will determinedly monitor and ensure that their lower-tier suppliers meet the bar, even negotiate adjustments in the force majeure provisions of the contract. A record number of suppliers in China invoke the so-called Acts of God clauses ensuing Covid-19 (Baker McKenzie, 2020), which could make companies seek more specificity thereof by virtue of business continuity plan (BCP). 40% of companies did that according to Business Continuity Institute (2011), for instance, define what should be excluded from a beyond-foresight-and-control event, state a particular time-to-recovery, or negotiate a swift switch to alternative sources even with intellectual property issues (Sheffi, 2015). Corporate Social Responsibility (CSR) becomes increasingly important for brand reputation ensuing Covid-19. Public grows concerned about working conditions amid social distancing rules, laid-off policy and healthcare supports for workers. Moreover, safeguarding the environment against climate change becomes the utmost priority of Gen Zs and the second most of millennials (Deloitte, 2020). Ensuring the first two elements of 3P sustainability (people, planet, profit) along their supply chains yields firms great customer value. The aforementioned generations are expected to actively support businesses that suit their values, while could boycott those who do not (Deloitte, 2020). “Along the supply chain” is the operative words, since activists usually point the finger of blame not to the culpable suppliers but major consumer brand companies. Greenspace mounted a coordinated visual attack on Nestle’s buying of palm oil that allegedly destroyed Indonesian rainforests and culminated in the death of orangutans (Owyang, 2010). The Swiss giant did not purchase from any direct suppliers but via a commodity market, yet a minimal link in the supply chain is enough to expose the company to heavy brand damage. H&M, Zara, Mark & Spencer and other fast fashion brands got called out for sourcing vicose as fibers from Asian manufacturers who irresponsibly contaminated the surrounding environment (The Changing Market Foundation, 2017). Nike outsourced most of its production in Asia, where workers were suffering from underpayment, long working hours and terrible conditions in the 1990s (“Nike sweatshops”, 2021). Though the company initially disputed the allegation by claiming it did not

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms own those Asian suppliers, boycotting Nike is the epitome of the anti-sweatshop movement around the world. The sportswear giant later had to take a large-scale integrated approach in auditing and ensuring that their suppliers meet sustainability standards. In the wake of the Covid-19 vicissitude that boosts the demand for CSR, large brand companies are likely to follow the same path. Cisco embeds CSR in its foundation and senior leadership, engages in social investments for front-line healthcare workers while making sure its manufacturing suppliers follow onsite safety guidelines (Cisco, 2020).

2.3.2.4. “Collaborate, collaborate, collaborate” (Wilding et al., 2020)

The pandemic strongly emphasizes the holism of the supply chain and that disruptive problems could not be solved with individual efforts. By virtue of DSN, focal firms will require collaboration and coordination from members of its supply chain. Martichenko (2020) labels supply chain professionals as “system thinkers”, who are well aware that their decisions have intended consequences but perhaps also unintended ramifications. In order to be a valuable part that constitutes a successful network post-Covid-19, every member should thereby be a “system thinker”. Effective communication in a trusted supply network is the effective way to anticipate, detect and alleviate any potential disruption.

2.3.2.5. What it could mean for developing-country firms

The transition towards digitization and emphasis on collaboration bring great benefits. As discussed above, small developing-firm suppliers who participate in the upper stream are especially vulnerable to the bullwhip effect. The implementation of DSN enhances inventory management and the demand forecast process. Effective information exchange by virtue of digital solutions based on a holism principle could reduce orders fluctuation. The bullwhip effect will be cushioned if businesses could leverage advanced technology with augmented supply chain planning and operation (Khan, 2020). That being said, developing-country firms must develop their IT infrastructure, acquire know-how, train staffs and employees, while treating digitization as a foundation of strategy planning and business growth. Most importantly, they also have to become a “system thinker”, eliminate opportunistic behaviors and strive for effective coordination

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms with other links in the network. If their products are not hard to procure, they face the risk of being substituted by other local firms or those from neighboring countries. As discussed above, Asian manufacturers often irresponsibly engages in humane and environmental misconducts to the detriment of their clients’ reputations. This could hardly persist as focal companies would scrutinize vulnerable links to ensure a sustainable supply chain, and the malefactor will be substituted by other firms in the region. Apple carefully investigated the facility in India of its contract manufacturer Wistron with an at-the-site team, ensuing a local worker protest against underpayment in December (Phartiyal and Monnapa, 2020). Earlier in August, the tech giant postponed the commencement of its Iphone assembler Luxshare-ICT (Vietnam)’s facility due to a concern over the quality of workers’ dormitory (Owen, 2020). Complexity in the legal process turns out to be the issue, which in this case is out of the supplier’s hand. Yet what suppliers could and must do is following safety guidelines and precautions, addressing environmental issues, promoting and protecting human rights regarding wages, working hours, sexual harassment issues, hiring policy, etc. As discussed in table 2, maintaining CSR standards make the suppliers more strategically valuable to their clients, thus harder to substitute. Asian countries, especially low GDP per capita ones, are vulnerable to climate risks in both terms of the likelihood of catastrophic events (extreme heat, typhoons, flooding) and the ensuing socioeconomics consequences (Woetzel et al., 2020). Developing-country firms amid this large influx of industrial FDIs must strive for sustainability standards not just because they would regularly be on the radar of their customers, but for the sake of their own good.

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

3. Summary and Outlook The birth of what is an unprecedented contagious pandemic wrought an unparalleled disruptive impact in the global supply chain. Nearly every industry and company is to some extent affected, while ocean and air transportation at some points grind to a standstill. The bullwhip effect of a shrinkage in overall demand amid of lockdowns and restrictions wreaks havoc upon small suppliers. On the other hand, panic buying and shortage gaming in response to the dearth of critical products such as PPE and CPGs cause further shortage and bring misleading demand patterns. Companies learn the bitter lesson that procuring for resilience should be deemed as important as for cost efficiency. Geographic diversification is already a phenomenon ensuing the U.S.-China trade conflict, now rises up to a larger scale as many South Asian low-cost countries see themselves on the table. Digitization might just be the silver lining for a better fully-integrated, agile and resilient supply network that could cope with future disruption. Developing-country firms could leverage the opportunity to acquire capital, technological know-how and best practices, boost productivity by virtue of advanced technology and rise to higher segments of the value chain. On a supply chain level, digital solutions amid a call for close collaboration could minimize the bullwhip effect and aid supply chain planning and operation. Yet closer monitor and stricter requirements of CSR means usually-neglected human and environmental sustainability have to be thoroughly fulfilled, while capacity and capabilities must be quickly developed. Moreover, firms could be trapped in lower-value segments of the value chain, while striving for higher-value stages involves the inherent risk of facing their own customers with undifferentiated products. In general, Asian firms lack investments in R&D and tend not to perform up to their growth potential notwithstanding the capital influx. Future studies could focus on strategies that developing-country firms, especially in Asia, should devise and implement to increase scale, adopt digitization and foster innovation and product differentiation. The opportunity is golden yet not straightforward, and let fortune be bestowed upon whom who deserves.

Global Value and Supply Chain in Crisis - Opportunity and Challenges for Developing-country Firms

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Statutory Declaration Full name: Huynh Le Nhat Thong Matriculation number: 11965 Thesis title: Global Value and Supply Chain in Crisis- Opportunities and Challenges for Developing-country Firms

Supervisor: Dr. Lennart Johnsen

I herewith declare that I have completed the stated thesis independently, without making use of other than the specified literature and aids. Sentences or parts of sentences quoted literally are marked as quotations; identification of other references with regard to the statement and scope of the work is quoted. The thesis in this form or in any other form has not been submitted to an examination body and has not been published. This thesis has not been used, either in whole or part, for another examination achievement. I affirm that the digital and hard copy versions of this work are identical. I am aware that the digital version of my thesis will be checked for plagiarism with the support of a specialized software.

Date 23.01.2021 Student signature

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