5/24/2020 Here's how global supply chains will change after COVID-19 | World Economic Forum

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Here's how global supply chains will

change after COVID-19

The coronavirus pandemic is fundamentally reshaping global trade. Image: REUTERS/Stringer

06 May 2020

Jesse Lin
Project Specialist, Digital Trade, World Economic Forum

Christian Lanng
Chief Executive Officer, Chairman and Co-Founder, Tradeshift

• The coronavirus crisis has revealed the fragility of the modern supply chain.

• Recent data shows the devastating economic impact as week-on-week trade in China, the US
and Europe halved because of the crisis.

• Diverse sourcing and digitization will be the key to building stronger, smarter supply chains and
ensuring a lasting recovery.

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The COVID-19 pandemic has hit global trade and investment at an unprecedented speed and
scale. Multinational companies faced an initial supply shock, then a demand shock as more and
more countries ordered people to stay at home. Governments, businesses and individual
consumers suddenly struggled to procure basic products and materials, and were forced to
confront the fragility of the modern supply chain. The urgent need to design smarter, stronger and
more diverse supply chains has been one of the main lessons of this crisis.

What the data tells us

Recent data from Tradeshift, a global platform for supply chain management, reveals the
magnitude of the impact on trade and demand. It suggests the effects of the initial shock may
continue to linger for the coming months. In China, domestic and international trade transactions
suffered a week-on-week drop of 56% beginning mid-February. The United States, United
Kingdom, and Europe followed suit, with a combined initial drop of 26% in the beginning of April,
and a continuing decline of 17% in late April.

Furthermore, trade has flatlined in every region affected by the lockdown. Overall weekly
transactions on the Tradeshift platform since March 9th are down by an average of 9.8%,
compared to pre-lockdown figures, with a pronounced decline in invoices and orders since the
end of March.

Image: Tradeshift

Two side effects of the contractions in global trade have emerged. One is that it takes longer to
settle an invoice, reversing a previous trend of faster payments. According to Tradeshift’s data,
businesses took an average of 36.7 days to settle an invoice in 2019, compared to 36.8 days in
2018. In the first quarter of 2020, average payment terms have risen 1.7% to 37.4 days.

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Secondly, the lack of orders going through the supply chain is building up to another tidal wave
with new orders slowing and invoices dropping off. Average weekly order volumes on the
Tradeshift platform have dropped by 15.9% since March 9th. Invoices have dropped by 16.7%
during the same period. So far, businesses are still receiving money from orders placed before the
lockdown, but those are drying up. The coming months could be very difficult for suppliers
globally.

Despite recent efforts to reopen factories and ease lockdown restrictions, China continues to feel
the effects of the broader slowdown. Factories may be reopening, but consumers aren’t buying.

Average weekly order volume Image: Tradeshift

China’s trade activity surged briefly after factories reopened, but that activity is now beginning to
stagnate even after lockdown measures were eased in Wuhan. The return-to-work rate in China
has crept up as more companies resume production, but the domestic landscape remains
drastically altered.

China’s reputation as the ‘factory of the world’ is also causing problems as many of the country’s
trading partners remain in lockdown. Exports account for a fifth of China’s GDP. As orders are
flatlining in the US and other key trade partners, it is doubtful whether China can orchestrate a
recovery purely on its own terms.

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Image: Tradeshift

With a sizable portion of the global economy still in lockdown, optimism about a so-called ‘V’
shaped recovery is beginning to wane among business leaders. According to PWC’s April CFO
Pulse survey, cash flow is the primary concern, with 77% of CFO’s implementing cost
containment measures. 56% of respondents thought they could get back to ‘business as usual’
in three months, down from 90% when the survey ran in mid-March.

Image: Tradeshift

Although governments and central banks have reacted with impressive speed to inject liquidity
into the system, the efficacy of such measures are fading. For a growing number of multinational

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companies, the reality of the crisis presents an increasingly stark choice between self-
preservation and supplier solvency.

Median small businesses have enough cash in reserve to keep them solvent for 27 days. If cash
flow dries up, it could have a devastating impact on supply chains, lengthening any recovery
period dramatically. Companies such as Unilever have already agreed to pay suppliers earlier.
However, such measures won’t be possible in every case. Financing arrangements will need to
adapt to give smaller suppliers better access to working capital.

Reshaping the future

COVID-19 has exposed the vulnerabilities of complex global supply chains built on lean
manufacturing principles. This is particularly true in the healthcare sector, where the scramble for
protective equipment has laid bare the inherent risks of inventory and single-sourcing models
driven exclusively by cost control.

The impact of China’s lockdown and its dominance in key areas of manufacturing have further
highlighted the problem with modern supply chains. When Chinese factories closed,
manufacturers struggled to pivot due to a lack of flexibility in their supplier base. One likely
consequence is that global firms will diversify their supply chains in the future, instead of relying
only on China. Manufacturing hubs such as Vietnam, Mexico, and India are likely to benefit from
that shift.

We will also see a decentralization of manufacturing capacity, with companies looking to bring
production home. This trend grew with the likes of automation and small batch production, which
had become so cheap that a number of countries started moving portions of their supply chain
back home. Policymakers may be increasingly pressured to consider whether certain products
need to be manufactured in the country or the region.

The transition to a new model for supply chains will be underpinned by a rapid and wholesale
digitization of the paperwork that accompanies global trade.

What is the World Economic Forum doing about digital trade?

Show

Despite rapid advances in technology, the relationship between buyers and suppliers remains
predominantly paper-based. Digitizing the buyer-supplier relationship is a fundamental element
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for building sturdy supply chains, and will make identifying and recruiting new suppliers far less
time-consuming. With technologies like artificial intelligence and the Internet of Things, supply
chains could quickly switch to alternative providers when regular suppliers face disruption.

The current crisis is an opportunity to reset a system that has relied on outdated processes.
Creating smart and nimble supply chains is the key to building a global trade and investment
network that’s capable of weathering future storms.

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World Economic Forum articles may be republished in accordance with our Terms of Use.

Written by

Jesse Lin, Project Specialist, Digital Trade, World Economic Forum

Christian Lanng, Chief Executive Officer, Chairman and Co-Founder, Tradeshift

The views expressed in this article are those of the author alone and not the World Economic Forum.

The World Economic Forum COVID Action Platform

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