MANAGEMENT

OF FOREIGN
ECONOMIC
ACTIVITY

The main risk

in FEA in the
situation of
pandemic
Yuliia Pekar

506
GROUP
Risks

Foreign economic activity does not go beyond the economic situation in the world. Where a
stringent policy response is deemed necessary, business will inevitably be impacted, with both
near-term effects and less-expected longer-run consequences.

1. Risk related to global values chain

During the last two decades China has become crucial to the global economy. China’s rising
importance in the global economy is not only related to its status as a manufacturer and
exporter of consumer products. China has become the main supplier of intermediate inputs for
manufacturing companies abroad. As of today, about 20 percent of global trade in
manufacturing intermediate products originates in China (up from 4 percent in 2002).
Figure 1 shows China’s current integration in global value chains across sectors as measured by
the GLI. Chinese manufacturing is essential to many global value chains, especially those related
to precision instruments, machinery, automotive and communication equipment. Any
significant disruption in China’s supply in these sectors is deemed to substantially affect
producers in the rest of the world. Indeed, many companies around the world are fearful that
the measures put in place to contain COVID-19 (i.e. restrictions to economic activities and
movement of people), could hinder the supply of critical parts from Chinese producers,
therefore affecting their own output.
Ways to manage risk

Short-term actions: Do it now

Develop a high risk for supply chain disruption monitoring and response programs for countries
impacted by the virus and potential supply chain exposure from tier 1 and below. If lower tier
transparency is missing, start building up the program and prioritize discovery to get a full
picture rapidly. It’s also important to assess how customer spending might be affected.

The next step is to make sure all inventory is within reach and outside impacted areas and
logistical hubs. Additionally, supply chain leaders should work with their legal and HR
departments to understand any financial implications of not being able to deliver supply to
customers and provide guidance to employees located in the impacted areas.

Midterm actions: Do it this quarter

In the midterm, the focus should be on balancing supply and demand as well as building buffer
stock. Assess opportunities to diversify the supplier ecosystem and review or create the
organization’s overall risk management approach. Work with internal stakeholders and
strategic and critical suppliers to establish a congruent risk management approach to monitor
and prepare for potential material and manufacturing capacity shortages.

Long-term actions: Do it this year

Once the initial impacts of the crisis are mitigated, it’s all about foreseeing the next “when.”
Supply chain leaders and their teams can, for example, conduct a scenario planning exercise
and develop action plans. This is the time to discover or develop alternative sources and
diversify value chains.

Tackle strategic and concentrated supplies with high value at risk where internal risk capacities
to absorb, such as alternative sources, routes, inventory and cash reserves, aren’t sufficient
enough to mitigate any major disruption. Being better prepared than the competition might
even open new opportunities when the next disruption comes around.
2. Access to the countries and markets

A pandemic can have severe consequences in impacted areas and geographies, making them
inaccessible for an extended period of time.

Ways to manage risk

• From a pandemic planning perspective, companies should pay closer attention to the
geographical concentration of these critical activities and functions, and how to segment
them for work transfer to alternate locations and sites. As prudent risk management and to
the extent possible, companies should look to diversify supplier base, customers and third-
party service providers across geographies to avoid single points of failure and increased
exposure due to regional outages and geopolitical events.

3. Quarantine regime and risk of no possibility to get into the workplace

A pandemic requires employees to stay home to limit exposure and to prevent or slow down
the spread of the disease, requiring the activation of remote working capabilities. Unlike an
occasional weather event, which may prompt some employees to work remotely, a pandemic
may lead to a complete shutdown of the entire facility in an area, forcing a high number of
employees to work remotely for an extended duration. This may in turn result in heavier-than-
normal traffic on remote connectivity networks, causing capacity and load access issues.

Ways to manage risk

• Companies should invest in tools to enable personnel to work remotely and collaborate
virtually, assess their current bandwidth to support remote work, perform periodic network
stress testing and identify workarounds for critical tasks that are not executable from home.
It is worth noting that while remote working is a viable option for the service sector, it does
not work as well for manufacturing, thus resulting in critical impacts on product supply
chains.
4. Reliance on third parties

Companies today have increased interconnectedness with third parties such as outsourced
vendors, cloud service providers, data processors, aggregators, payment processors and
suppliers for delivery of products and services. These third parties are also vulnerable to
pandemic events.

Ways to manage risk

• Companies must develop a thorough understanding of their critical third, fourth and fifth
parties, and their resilience programs, and develop alternate plans, for instance insource
strategies or substitutability, if the critical third party’s ability to perform services is impaired.

• Companies should also validate alignment between their alternate plans and those of their
third parties. Conversely, companies should also identify instances where there may be
opportunities to rely on certain third parties with geographically dispersed operations to
assist with critical activities performed internally. However, in planning for such third-party
alternatives, companies must recognize that their peers and competitors may look to the
same third parties for assistance during a market contagion, leading to concentration risk.

• Companies must assess third-party capacity and bandwidth considering these market
dependencies and, where possible, explore opportunities to embed contractual clauses that
allow companies to be prioritized for products and services in relation to their competitors.
5. Customers’ related risk

As observed during natural catastrophes, customers are generally more empathetic to

degradation or discontinuation of certain products and services during disruptions that are
beyond a company’s control and involve life safety concerns than they are toward those that
are perceived to be preventable (e.g., system glitches). However, they expect transparency and
timely updates.

Ways to manage risk

• Companies must continue to communicate with customers through multiple channels,
reinforce that customer interests are a priority and provide information to alleviate their
concerns. Customers may have specific questions around a company’s supply chain,
especially if resources are located in impacted areas, and also may have questions around
how those resources may pose any potential risks to them for future use of the company’s
products and services.

• A clearly drafted frequently-asked-questions document published and disseminated through

multiple channels, including the company’s website and social media, can prove to be a
useful tool to proactively address customer concerns. Additionally, companies may consider
reaching out to affected customers to check in on their safety and offer assistance, where
appropriate.

• Develop a robust communicating strategy (including social media)