Why supply chains are sexy and TVs will stay cheap

The COVID-19 pandemic has turned the dry subject of supply chain security into an urgent political hot potato, and experts say it’ll accelerate changes already afoot.

There will be a bit more stockpiling, a little less just-in-time ordering, and a lot more attention on exactly what is going into supply chains.

Small cap Yojee (ASX:YOJ), which makes blockchain-based logistics software, is already seeing an increase in enquiries for its software as companies look for that transparency.

Zoono (ASX:ZNO) read the tea leaves in January when its Chinese supplier hiked plastic bottle prices by 100 per cent and set up an alternative factory in New Zealand.

The crisis has exposed the companies that don’t have a detailed and comprehensive understanding of their supply chain past the tier one suppliers, says Committee for Economic Development of Australia (CEDA) chief economist Jarrod Ball.

And the pandemic has also upset razer-thin just-in-time systems to a greater degree than most appreciate.

Consultancy McKinsey predicted in April that supply chains were so tight that carmakers had enough inventory of parts to get through to the end of April; clothing and high tech sellers had enough to last until the end of May.

But supply chains are more than just “bringing home manufacturing”, as they encompass everything from students to capital flows, and now is the time to look to what is coming up in Australia for drivers of an economic recovery.

What COVID did to supply chains

The immediate effect of the COVID-19-caused shutdowns was the closure of factories in China.

The next development, said Council on Foreign Relations fellow Shannon O’Neil at a Foreign Policy panel discussion this week, is delays to unloading ships as has been happening in Melbourne’s port, which then delays the return trip to reload from said factories.

The next phase will be uneven factory openings where some are open, such as those in China making parts, but others that normally take those goods are not.

The government response has been protectionist.

O’Neill says over 100 new measures around food and medical supplies have been registered with the WTO in the last two months, and countries such as Japan are spending billions in incentives to take advantage of China’s early closure and bring home industries.

Reshoring is a pipe dream

Protectionists in Australia have been using manufacturing as their front page pitch for reshoring supply chains.

Much has been made of Australian manufacturing companies shifting into ventilator production and the Victorian company bringing in the army to mass-produce personal protective equipment.

But it’s not an idea with a future after the pandemic: reshoring manufacturing would be too expensive and take too long, and even some of those companies say they’ll not be making these goods for long.

“We went offshore [in the 1970s and 1980s] to be able to concentrate on things we were much better at,” economist Phil Ruthvens says.

“The only way we can compete with offshore manufacturing is to lower wages, and that’s not a good way to make your population richer. I think you’ll start to see a much wider spread of sourcing rather than bringing it onshore.”

Diversification has been a trend for about 10 years. Companies have sought out cheaper places to make goods as wages and costs rose in China, which has benefited Vietnam in particular.

“I think we will see an acceleration as companies try to rethink,” Council on Foreign Relations’ O’Neill said.

“Is it better to be closer? Is it better to be domestic? Is it better to be regional? So other countries that have like minded governments, languages, foreign trade agreements and the like, those might be more important than, say, a huge mass production factory on the other side of the world.”

Another consideration will be how countries handle the pandemic as some, like Vietnam, are already reopening while others like Indonesia are struggling to contain the disease.

“The idea that you could currently move into a south-east Asian economy without risk around how they’re going to handle COVID-19 over the short and longer term, and how much disruption they’re going to have to their freight and logistics… I think that’s an option but I think that’s a longer term play,” CEDA’s Ball says.

But this crisis is a futurist’s wet dream

Treasurer Josh Frydenberg has already said the government will re-evaluate supply chains and look at boosting niche manufacturing.

Ball says Australia could finally look at making batteries using lithium produced in Australia, rather than exporting it, and considering how to support the small but active advanced manufacturing sector.

“Maybe we’ll get reinspired about what the future sectors of our economy look like, but I don’t think that will be easy,” he said.

Manufacturing makes up about 5 per cent of Australian GDP. Other supply chains more at risk from the COVID-19 pandemic are tourism and education.

Universities, which make most of their money from international students, saw student numbers put under pressure before the pandemic by the rise of high quality institutions in, economist Phil Ruthven says.

“They were being forced to rethink a way of doing universities before this happened,” he said. “Education will have to work hard to get exports going again. They can recover but they will have to make a lot of changes to get there.”

Tourism on the other hand is more complex.

There is enormous potential for pent up demand from Asia to look at a Gold Coast holiday once infection rates are under control, but there will be questions about how to manage it, Ruthven says.

Visitors might need a certificate of health to get in, or they may need to prove they’ve had a vaccination first.

“Once we get over the infection problem I think our tourism industry will absolutely boom again,” he said.

“Pent up demand from China and India is manna from heaven.”

Small government needs to get comfortable with big government

Elisabeth Braw, director of the Modern Deterrence project at the Royal United Services Institute, said this week the globalised just-in-time supply chain system was born in a different era, when the US was dominant and the world was more harmonious.

Today the environment companies operate in is more hostile as governments punish businesses as a proxy for the countries they’re from. As a result, and because so many goods — such as face masks — are newly considered “strategic”, governments need to be willing to participate in supply chains.

“The situation that companies operate in is no longer as harmonious as it was when just-in-time expanded,” she said.

“There is such a close connection now between the market and national security and the wellbeing of any given country that governments need to be willing to participate a bit more in helping maintain stable markets.

“Governments will inevitably realise they have to play a stronger role in the market than they have in the last 20 years.”