Coronavirus has caused significant public health concern both in Australia and internationally. The virus is also impacting business activity. Australia is particularly vulnerable to the effects given our close trade relationship with China. This impact on business, particularly disruptions to supply chains, is expected to get worse.
Disruption Business Supply Chains
The first wave of economic disruption hit airports, airlines, travel agencies, casinos, hotels and educational institutions. Now, as many factories in China remain closed, the virus is having a second wave of economic chaos, disrupting business supply chains and reducing business activity.
While all business is likely to feel the effect, the impact is likely to be felt hardest by those with direct exposure in their supply chain to China, particularly:
- Construction – tiles, glazing, vanity ware, window furnishings, furniture, carpet & vinyl flooring
- Fashion – clothing, footwear, health & beauty products
- Retail – electrical goods, white goods, computers & mobile devices.
- Tourism – tourism destinations, tourism event, activities & operators.
- Education – vocational and educational institutions, language schools, universities
And the list goes on….
Top 10 Supply Chain Risks
According to Resilience360 by DHL the top 10 risk to supply chains are being caused by:
- Lockdowns cause labour and supply shortages in factories
City-wide lockdowns and quarantines have triggered labour and supply shortages as Chinese authorities from different jurisdictional levels seek to contain the coronavirus outbreak. Some of the most notable provinces and cities imposing transport restrictions on the movement of residents and vehicles include the provinces of Guangdong, Jiangxi, and Liaoning as well as the cities of Tangshan (Hebei), Nanjing (Jiangsu), Hangzhou (Zhejiang), Zhengzhou (Henan), and Ningbo (Zhejiang).
- Regulatory uncertainty slows the restart of factory operations
Production has resumed for companies in most provinces across China as of February 10 following a government-mandated delay to restart normal business operations aimed at mitigating the virus outbreak. However, some jurisdictions, predominantly at the municipal and district level, have imposed different production schedules and requirements for resuming normal operations sometime between February 17 and March 1.
- Public health requirements impact industrial operations
In anticipation of firms returning to normal operations, some authorities have also issued additional requirements mandating that factories apply for permission to reopen operations or meet specific coronavirus prevention standards. These list of requirements for local companies to obtain permits to resume production include, but are not limited to, (1) setting up a prevention and control protocol; (2) quarantining non-local and/or migrant workers; (3) supplying protective gear for all workers; (4) conducting routine temperature checks and disinfection; and (5) providing protective gear like masks, gloves, temperature guns, disinfectants, etc.
- Suppliers invoking force majeure clauses on the rise
On top of disruption to production and delays in orders, companies dealing with suppliers in China will be confronted with legal defences like force majeure clauses being invoked for non-performances, shielding such suppliers from legal and financial liability. Force majeure refers to unexpected external circumstances that prevent a party to a contract from meeting their obligations, typically natural disasters. While force majeure clauses rarely mention diseases, they frequently provide relief in the event of unforeseen acts of government, for which the government-mandated shutdowns may qualify.
- Provincial border checks exacerbate trucking shortage
Overall, trucking availability has been reduced to 40 percent within the Shanghai city area, while capacity is been down to 10 percent from Shanghai to other cities as drivers reject trips to inland provinces to maximize the number of runs per day. No drivers from outside Tianjin were reportedly allowed to enter the city, while only 10 percent of the local drivers were able to offer services. These developments have led to delays and a sharp increase in trucking prices.
- Closed borders delay movement from and to Vietnam and Hong Kong
As of February 11, cross-border traffic between Vietnam and the Chinese provinces of Yunnan and Guangxi remains severely disrupted.
In Hong Kong, authorities have started to quarantine for 14 days all Chinese citizens coming into the territory as of February 8 to drastically reduce the number of travellers into Hong Kong. Cross border truck drivers have so far remained exempted from the measure, and cross-border deliveries continue to be possible, albeit requiring advanced booking. Since January 31,
Russia’s 16 border crossings with China along a 4,000 km border have been closed to prevent the spread of the coronavirus, likely affecting trade volumes. No reopening date has been announced yet, but Russian authorities indicated that the closure may be extended until March 1.
- Labour shortage causes congestion at airports and seaports
With limited trucking capacity available, congestion has started to build at air cargo terminals and warehouses. This is due to inbound shipments that have either not been cleared by customs brokers or for which delivery and pick-up services could not be arranged. As a result, cargo operations have slowed down; shipment (including critical medical device shipments) delays and demurrage costs are also starting to materialize.
- Reduced ocean freight capacity out of China
About 82 trans-Pacific sailings have been cancelled into March, taking out around 198,500 TEU off the market, while carriers have blanked around 54 sailings in total for trade between Asia and Europe, according to Sea-Intelligence Maritime Consulting. According to some shippers, a delay of three to four weeks for containers to arrive at European destinations can be expected.
- Limited air and rail cargo capacity to increase prices
Similarly, the large number of cancellations of both passenger and freighter flights combined with factory and logistics operations restarting in the coming weeks are expected to cause an air freight capacity shortage that could last until April. In total, more than 25,000 flights have been cancelled per week so far, reducing air freight capacity by approximately 50%. In addition, Emirates Airlines has reportedly cancelled freighters from Guangzhou to Dubai until March 27, while Etihad has cancelled freighters from Shanghai to Mumbai and Chennai until March 30. The expected capacity crunch could lead to an increase of air freight rates by 300-400 percent, according to The Load Star.
- Ripple effects felt across supply chains overseas
The coronavirus outbreak has also had major implications on industrial production and global supply chains spanning beyond China’s borders. Some companies have also been faced with severe financial stress due to the coronavirus crisis. American medical device maker Valeritas that makes insulin patches filed for Chapter 11 bankruptcy citing the coronavirus as having worsened its supply chain problems. Hong Kong airline Cathay Pacific similarly asked its suppliers for price reductions after being forced to cut flight capacity by 90 percent to Mainland China over the next two months due to the coronavirus.
You can access the full Resilience360 report here.
Steps to Mitigate the Impact on Your Business
Given the impact that is likely, take steps now to insulate your business from the impact.
- Discuss supply chain issues with your suppliers
Find out what impact they are expecting including delays, shortages and cost increases. Negotiate new terms to protect your business.
- Find alternative supply chains
Even if you don’t deal directly with China it is likely your suppliers and contractors rely on China for materials. Look for alternatives before your competitors start doing the same.
- Discuss the impact with your customer
Talk to your customers, let them know what your experiencing, hearing and trying to do to mitigate the issue. The best thing to do is get in front of the issue. If these issues are impact you, they will be impacting your competitors as well. Be the one that delivers bad news first and in personal where possible.
- Understand the impact on your Finances
If you are going to have supply chain issues how will that effect your finances? Will you be able to deliver on contracts and terms? Negotiate funding requirements with your bank to help you through the issue. Do it early rather than when the cash crunch hits.
- Get legal advice
What risk are you exposed to in your contract terms? What impact will Force Majeure clauses have on your supply chain and can they be passed on to your customers? How will you manage the additional legal risk this issue creates? What do you need to change in your contracts going forward to isolate the issue to current contracts?
Coronavirus has the potential to cause significant and prolonged disruption to business activity across the global. Australia is particularly vulnerable to the effects given our close trade relationship with China. It is prudent for all businesses to consider the impacts on their business and plan to mitigate the risk.
At Solve Accountants we specialise in helping client with complex and challenging issues. We can help you weigh up various options to get the best outcome possible and protect your business.
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