Beyond COVID-19: Supply Chain Resilience Holds Key to Recovery Explore how the global pandemic is reshaping supply chains and sectorial activity, and where to look for recovery as lessons emerge on long-term business resilience. 2 Beyond COVID-19: Supply Chain Resilience Holds Key to Recovery 3 Contents Introduction 4 An Overview of the Economic Impact 5 Global Supply Chain Disruption Highlights Importance of Risk Management 9 Building the New Normal 18 Professional Insights 19 4 Beyond COVID-19: Supply Chain Resilience Holds Key to Recovery 01 Introduction: COVID-19 Has Already Irrevocably Changed the Global Economic Landscape What began as a health scare in a single province in China has morphed into a global pandemic that has now spread to almost every country in the world, putting much of the global population in partial or total lockdown. Border restrictions and lockdown measures are set to cause a massive negative short-term impact on consumer spending, investment and disruptions to international trade and global supply chains, and the long-term impact remains uncertain. As a result, global GDP growth is expected Global manufacturing value-added output to average 0% for 20201 as a whole, a faster will rebound in 2021 with a 6% value-add in contraction than during the 2008 global manufacturing output compared to 2019. financial crisis. In 2021, for Asia-Pacific (excluding China), this value is set to hit 4%, while the US may The current expectation is that the global see up to 6% value-add and the pick-up in economy is set for a sharp, but short-lived Europe is currently estimated at 5%. But it recession as evidence shows that some won’t be a resumption of business as usual. economic activity tends to be delayed The pandemic has been a wake-up call to rather than destroyed entirely in this type many businesses about the importance of of shock. Sectors hit hardest by the pandemic being able to mobilize rapidly, set up crisis- are automotive, textiles and electronics. As management mechanisms and build the shown in our data modelling, which is built supply chain resilience that will see them with data from Oxford Economics, global through the other side. output is expected to drop as compared with Q4 2019 data. The downward trend Part of Baker McKenzie’s COVID-19 is at 13% for automotive and 8% for both response series, this report explores the textiles and electronics, and 5% for headline overall economic impact, the sectors most manufacturing as well as for aerospace and affected, and the criticality of supply chain other transport equipment. risk management as companies seek to strengthen operations and business resilience. However, these sectors are also likely to see the quickest rebound as pent-up demand is released in line with a recovery in sentiment, and production ramps up to make-up for previously lost output, by H1 2021. 5 02 An Overview of the Economic Impact As infection rates continue to rise around the world, economic growth is experiencing a sharp slowdown. Global growth to slow One major uncertainty concerns the duration Isolation measures implemented globally of the current outbreak and the possibility of to contain the outbreak have hit economic further waves. The east to west movement activity hard, while the sharp deterioration of the epicenter of the crisis which has in business and consumer confidence, engulfed Europe and now parts of the US, compounded by recent financial market highlights how countries are a different turmoil, will continue to reduce discretionary stages in dealing with the outbreak, meaning spending and investment. that supply and demand issues in particular markets could have long tail effects for global businesses 6.0 Forecast As a result, economic outlook forecasts have 5.0 been changing on a weekly basis, with the 4.0 latest predicting zero growth in global GDP this year (Figure 1). Globally, collapse in equity 3.0 markets are sparking a sharp tightening in % change y/y financial conditions that further accentuates 2.0 and extends the downturn, potentially exposing financial vulnerabilities among 1.0 businesses and households. 0.0 -1.0 -2.0 -3.0 2010 2012 2014 2016 2018 2020 2022 March forecast December forecast Downside scenario Figure 1. Forecast of COVID-19 on large downgrades to global GDP and trade growth in 2020 6 Beyond COVID-19: Supply Chain Resilience Holds Key to Recovery Global trade has also seen a significant Elsewhere, some parts of Asia are seeing a downturn, through reduced Chinese imports second wave of infections, highlighting the and the subsequent decline in activity dilemma facing authorities. Containment globally. As of March 25, Q1 2020 global trade measures may have to be relaxed and is expected to fall to over 4%, contracting reapplied a number of times leading to more for only the second time since the mid-1980s prolonged economic impacts. (Figure 2). And while many emerging markets (excluding Already, the massive pullback in discretionary China) have so far been relatively less and social spending will likely lead to impacted, the pandemic has the potential the sharpest quarterly contraction in US to have a disproportionally severe impact household spending on record in Q2 2020. on public health and economic growth in markets already under strain in Latin America, Africa and South Asia. Rescue/bailout GDP growth Trade growth 1.0 measures brought in by governments may 0.5 not be as effective as intended in protecting 0.0 businesses and employment. -0.5 -1.0 -1.5 -2.0 % change q/q -2.5 -3.0 -3.5 -4.0 -4.5 Q3 19 Q4 19 Q1 20 Q3 19 Q4 19 Q1 20 December forecast March forecast Figure 2. Forecast of COVID-19 Impact on Trade and Growth “Following constrained activity in the global initial public offering (IPO) market during 2019, we expected activity to remain subdued in 2020. However, the emergence of COVID-19 has resulted in stock market falls — the likes of which we have not seen since the 1987 Wall Street crash — radically altering the global economic outlook.” Adam Farlow Chair, Capital Markets (EMEA) London 7 Spotlight on China: “Deal flow will definitely be slower as Economic and health concerns investors tend to be more cautious in concluding deals given the circumstances, Oxford Economics forecasts that the Chinese says Grace Tso, M&A Partner, Baker economy will contract in 2020 for the first McKenzie. The value of assets may go time since the end of the Cultural Revolution down and we are expected to see a in 1976 (Figure 3). However, as China begins decline in China inbound and outbound to see signs of stabilization after initial deals. Whether it is a matter of short-term months of high-alert, there are opportunities investment sentiment or will have a rippling to begin reviving economic activity. effect to other sectors will depend on whether the epidemic can be contained in a shorter period of time.” 16 Forecast 14 Martin David, Asia Pacific Head of Projects for Baker McKenzie, expects to see 12 “increasing opportunity for the Chinese 10 private sector to engage with the inevitable diversification of supply chain operations 8 and production in China and its impact on 6 domestic production and export.” David % change y/y notes that while “no sector will be immune, 4 we anticipate opportunities in industrial 2 manufacturing will be the most challenged and conversely, present the greatest 0 opportunity for investment and growth.” -2 -4 -6 2010 2012 2014 2016 2018 2020 2022 March forecast December forecast Figure 3. Forecast of China GDP growth 8 Beyond COVID-19: Supply Chain Resilience Holds Key to Recovery How employment is affected by Susan F. Eandi, Head of North America COVID-19 Global Labor & Employment Law for Baker McKenzie, suggests that for those Climbing unemployment rates have become who “have lived through prior global a clear indication of the pandemic’s impact pandemics, now is the time to revisit on the global economy. In the US, initial preparedness protocol and re-evaluate the jobless claims soared to an unprecedented same for changes in locations of workforces 6.6 million in the week commencing 30 and evolution in local laws.” March, increasing 12-fold in just one week. Further large scale job losses in the coming By contrast Eandi remarks that for those weeks is likely to see the unemployment “who are new to the scene, planning for rate surging above 10% in April. The and responding to a potential pandemic situation is not unique to the US as the requires that multinational employers focus UK has also seen a drastic increase in on three key issues: how to maintain a safe unemployment claims, over half a million workplace, how to maintain operations people registering to claim the main welfare in the face of a pandemic and how to benefit in just nine days2. The economic minimize exposure to potential liabilities uncertainty signals that as businesses begin that may result. The key message for any to fold or file for bankruptcy due to the employer is to be prepared to act swiftly virus, knock-on effects like unemployment in order to ensure minimal changes to and even weaker consumer spending will productivity and operations.” further aggravate economic activity. The pandemic has cast a spotlight on Elsewhere, reduced working hours, the future of work and emphasizes temporary redundancies, and increased the undeniable importance of business sickness and isolation has hit labor supply. resilience. As companies flex and reassess However, other industries are likely be more their workplace strategies, they will resilient and it is likely that employment also examine how work models may losses may not be as pronounced as GDP be completely transformed from this losses, with productivity set to take the hit experience through the adoption and use in the short-term.