Supply chains

The MCO is rightly shielding essential goods and services as defined by the
government but the longer the restrictions continue, the harder it may be to
disentangle these essential goods and services from the rest of the economy.
Probably most of us have heard examples of businesses connected to essential
services that are struggling to operate under the restrictions. The farmer that cannot
make deliveries because no hauliers are available or the manufacturer who cannot
procure the spare part. What this points to is the interdependence of our economy
through supply chains. Let’s take the example of food supply. The shops and
supermarkets are receiving their products from manufacturers and processers who
in turn receive their inputs from our farmers. They in turn are supported by several
cross-cutting industries – fuel, utilities, machinery, distribution.

Most of these activities are (in theory) exempted by the MCO, although operations
on the ground are facing some teething problems to say the least. The problem
comes when we consider that each industry playing some role in the supply chain of
food, has a supply chain of its own. The metal needed to repair the fan used in the
farms, or the auto repair workshop to fix a broken-down truck delivering supplies to
supermarkets. Over times the restrictions across the wider economy will start to have
an effect on those industries we are trying to maintain. As the MCO is extended,
firms will drawn down on inventories and need to look to their suppliers to continue
operations.

International trade

The problems get more complicated when we consider international supply chains.
Trade is coming under pressure in a number of ways. Exporting businesses are
caught by restrictions, reducing their output and some exports are being deprioritised
in favour of meeting domestic demand. We must ensure we can supply Malaysia
with the goods and services we need, but to do so we may need to be encouraging
trade rather than restricting it.

Combating the virus is a global struggle and restrictions are not just emerging in
Malaysia but also in other countries. This is something we need to address, given
the internationalisation of supply chains, including for essential goods and services.
Taking the example of food again, it is well known that we rely heavily on imports. It
is clear that this raises fundamental questions of food security, but these cannot be
fixed overnight. The tonnage of food and agricultural products we import is more
than double what we produce, once palm oil is excluded. Domestic suppliers will not
be able to ramp up activity to meet that demand, especially when their own supply
chains are under pressure. Furthermore, what we export does not match what we
import: the palm oil we sell cannot replace the sugar we buy. So simply redirecting
our exports for domestic consumption will not maintain our current supplies.

Along with medical supplies food is perhaps “the” essential good, so rightly our focus
should be on securing our supplies. But over time the strain on supply chains both
domestic and international trade may be felt in other areas. With so much working
from home, IT servicing may even become crucial if restrictions continue for an
extended period. Thinking about other industries, again we need to think about the
supply chain that makes our economy work. The majority of what Malaysia exports
are what we call “intermediate goods”, which means they are used to produce
something else, such as semiconductors made in Penang and shipped to Korea to
make a smartphone. Some of the smartphones end up back in Malaysia. The same
is true for what we import — most of it is taken and processed here. This means that
our exports cannot easily be redirected to meet our domestic needs — there’s not
much we can do with the semiconductor on its own. What we need is to continue to
keep the supply chains functioning as much as possible — starting with the essential
goods, such as medical supplies and food, but as restrictions continue more widely
across the economy.

What next?

What does this mean? The goods we consume are the product of complex local and
international supply chains that are coming under severe strain. We must continue to
take all necessary measures to ensure we combat the virus, but we must also take
all possible steps to mitigate the economic impact of doing so, that means we need
to focus more attention on preserving supply chains.

As with everything else on Covid-19, there are no easy answers. What we can do, is
learn the lessons of the last ten days. If restrictions need to continue, we must also
look hard at the exemptions and redirect resources within government to ensure
decisions to enable businesses to operate can be taken quickly. We also need to
recognise the essential role of trade in sustaining Malaysia’s economy and think
again about restrictions on exporting and importing firms. And we must urgently work
with our partners to keep trade flows open, particularly for the supply chains of
essential goods. Nowhere is the case clearer for this than with food.