How Coronavirus Is Hitting China Firms, Global Supply Chains

SMITH BRAIN TRUST – As the coronavirus outbreak has disrupted social life and the day-to-day economy for China’s 1.4 billion residents, many are wondering how can the country’s small-to-medium-size enterprises – including their global supply chain partners – will weather the storm?

Daylight ahead? There were at least 74,185 infections and 2,004 deaths, as of Wednesday, Feb. 19, Chinese officials were predicting a peak in infections by the end of February and were subsequently dismantling some highway checkpoints while businesses started to reopen. Further illustrating the uptick, Hyundai, South Korea’s largest automaker, announced all its domestic car plants had resumed operations this week after several days of shutdown caused by a delay in parts shipments from China.

Supply chain lessons from SARS: Such supply chain activity, on a broader scale, becomes critical three months into disruption from an epidemic, says Maryland Smith research professor and supply chain risk expert Sandor Boyson. “At three months, buffer stocks or strategic inventory stocks get depleted,” he says. And pharma exemplifies a critical industry in these crosshairs. About 80% of the ingredients in U.S.-branded pharmaceuticals and over-the-counter drugs start out in either China or India. “This is a concern,” Boyson says, one that will be keenly felt as consumers look to fill prescriptions in their local CVS or Walmart pharmacies.

The SARS epidemic of 2003 was a wakeup call for businesses to focus on epidemics and pandemics – to prioritize buffer stocks and establish contingency plans that can leverage alternative vendors outside of an area of an outbreak's maximum impact, Boyson adds. Ideally, the lessons from SARS have led to “enough strategic inventory to withstand the potential volatility.”

Q&A: Enterprise Survival in an Epidemic

Kislaya Prasad, research professor and academic director of Maryland Smith’s Center for Global Business, shares further insights about the coronavirus disruption, in a Q&A with Maryland Smith’s China Office:

How can/should government help small and medium-size firms during a coronavirus-level epidemic?

Prasad: The first and most important steps involve ensuring liquidity – providing access to cash, reducing interest rates and making it easier for businesses to refinance. The government has already taken significant steps in this direction. [The government] would eventually also need to provide temporary support to consumers, many of whose incomes will have taken a hit from the forced absence from work. However, what firms need most of all, is a speedy return to normalcy, which requires managing the epidemic, and the health needs of the population. This is a race against time. The longer it takes for things to return to normal, more small and medium businesses will be forced to shut down.

What steps can small and medium-size businesses take at the operational, financial, and capital levels to reduce the impact of the epidemic?

Prasad: It really is up to the government to take steps. One big priority for the country should be to prevent mass unemployment, especially if the crisis drags on. I would say that companies need to resist the temptation to lay off workers. Alibaba has promised to create new positions. I think this is a welcome development, but I would guess a small step in light of the scale of the problem.

In 2003, SARS prompted the rise of China's e-commerce. What new social changes and industry trends might emerge from the coronavirus epidemic?

Prasad: The epidemic will provide a push toward more teleworking. While teleworking has been easier to implement at large companies, small and medium sized companies have found it harder to follow suit. Having lived through this mass quarantine, their future planning will involve finding ways to continue operations via teleworking. Of course, this is not possible in all business sectors. Large companies also have the ability to spread their operations out over a large geographic area, and build-in some redundancy. They will do more of this in the future. It will be difficult for smaller firms to follow suit. Educational institutions will, likewise, use the ability to take classes online (So, universities with vibrant online programs will have an advantage now and in the future). In a similar vein, the trend toward telemedicine will accelerate.