Chamber in Review
Shifting Sands in Supply Chains
Shifting Sands in Supply Chains <br/>供應鏈變化難測

Mainland China is slowly picking up steam after its 72-day lockdown, but the global spread of Covid-19 has resulted in three-quarters of the world’s economy implementing border closures, export restrictions and other emergency policies.

This has taken a toll on economies, hampered trade and export relations, and disrupted the supply chains of businesses from small to large. 

At webinar co-organized by the Chamber, the Commercial Service at the U.S. Consulate General, and Hogan Lovells on 2 April, a panel of three expert speakers discussed how businesses can adapt to export restrictions, border shutdowns as well as shipping and logistic issues brought by the present pandemic, and better prepare for future risks. 

“Just a few months ago, such changes to our way of life, businesses and the global economy were unimaginable,” said Chamber Chairman Aron Harilela as he opened the discussion. “Such unprecedented measures have exposed vulnerabilities in the global supply chain, and highlighted just how interdependent we all are on each other.”

 

Changing demands and interrupted supply 

Although demand for essential and emergency goods and equipment has surged, said Sally Peng, Managing Director at FTI Consulting, the reality is that retail stores are closing and inventories are building up. Order cancellations resulting from the drying up of payment flows, have also impacted importers – especially those from the United States and the European Union. 

On the supply slide, factory closures in major production countries such as China, Vietnam and Bangladesh have halted production lines and have made procuring import material a major difficultly. Supply capacities have been further curtailed by the Covid-19 related guidance on customs clearance and trade that have been put in place. 

Michael McCool, Managing Director at AlixPartners, stressed that while demand shifts in the short and medium term may be temporary, companies should monitor and adapt to permanent shifts brought by trade imbalances and possible increase in protectionism ahead. 

He further cautioned against “sugar-coating” the current disturbances in the global supply chain.

“The disturbances are so great that it is now out of balance and it will be volatile for many months to come,” he said. “That is going to hamper restarting, and finally all of that is going to lead to a crisis of confidence. When we try to restart, suppliers will no longer trust the customers are good for their order.”

Changes to supply and demand chains have also generated various issues on the legal front, particularly on the application of the force majeure provision – which refers to an extraordinary event beyond the control of the parties involved. 

Taking the examples of Mainland China and the United States, Benjamin Kostrzewa, International Trade Attorney at Hogan Lovells, pointed out that China’s contract law “has a provision concerning impossibility of performance and Covid-19 is widely recognized as a force majeure event,” while the United States “does not have a general law of force majeure and the issue is normally addressed largely by analysing what the applicable contract provides on the force majeure issue.” Variations would still exist depending on jurisdiction, governing laws and specific contract provisions. 

“Trading is a long-term business, and it is a relationship that is nurtured and developed over the years,” said HKGCC’s Vice Chairman Leland Sun, moderating the event. Repairing the crisis of confidence between parties along the supply chain should therefore remain an important item on the agenda as businesses re-negotiate contracts, and devise strategies to mitigate risk.

 

Looking ahead

Peng recommends that impacted producers, distributors and retailers adopt a three-fold strategy – review the production and revise projections, do alternative sourcing, and maintain open communication through the development of key response teams.  

Companies can also regain agility by monitoring government policy guidelines, reviewing supply chain redundancies and weak links, and taking advantage of government stimulus and relief programs, said Kostrzewa. Alternative transportation methods should also be sought in light of potential decreases in global air and sea freight.

The effects of the novel coronavirus are still rippling across the globe, and successful recuperation of business supply chains will require investment of time and effort. As McCool said: “This is bad, and it’s probably going to get worse. Everybody in the industry should pull together to get through this.”

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