Changing the Future Part III

Although the United States has not yet turned the corner combatting the pandemic, we are beginning to turn attention to what happens next. CSIS recently posted a commentary on that subject: Pandemic Pandemonium. The following comments build on that article’s predictions about supply chains. You should also read my colleague Scott Miller’s excellent piece on supply chains.

First, we can expect permanent changes in the structure of supply chains. In the short term, we are seeing the classic panic response of both inbound and outbound restrictions in order to maintain domestic supply, primarily in the medical sector, but in some cases, expanding to food and the movement of people. Past columns have explained why those actions are big policy mistakes, and I will not repeat that again. Hopefully, those will subside as we move past the panic stage, although the uneven nature of the pandemic’s spread and recovery means that protectionist actions will continue on a rolling basis as the virus spreads to still more countries.

In the long term, however, we should expect companies to build resilience and security into their supply chains instead of just focusing on price, quality, and delivery. That will mean a movement away from “just in time” delivery and the restoration of inventories, shortening, and simplification of supply chains, which was already happening, and redesign of products to allow for more substitutability of inputs. These actions will take time. They will not be meaningful responses to the current crisis but rather will leave companies better prepared for the next one. They will also cost money, both in terms of testing and certification of new sources of supply, as well as the likelihood that such sources will be more expensive. 

On the service side, anything involving people-to-people interaction has been severely curtailed, while home delivery continues, subject to the availability of products. While we can safely assume people will go back to eating in restaurants once they reopen, they may not all go back to retail shopping. Once people get used to online ordering, online exercise classes, telemedicine, and other online activities, they may be slow to return to doing things in person, particularly if they lack confidence in the government’s assertion that everything is fine. Schools have been forced to upgrade their online capabilities quickly, and I doubt they will entirely abandon them when the crisis passes.

Some services like tourism, but also business travel, will depend on individuals’ willingness to go back out into the world. While virtual tourism is a poor substitute for the real thing, virtual business meetings are a growing trend that will not disappear. Expect travel industry recovery to be slow and difficult.

Second, the uneven nature of the recovery will delay supply chain reconstruction. Some are taking the view that the big winner emerging from the pandemic will be China because they have contained it and will be first to recover, having been first to suffer, but it is not that clear. While China has the advantage of not yet having launched a massive stimulus program—leaving it in somewhat better fiscal shape than the United States or the European Union—it is by no means clear that the virus is contained and the country will not see a resurgence of cases.

Even if it is contained, there are three other limiting factors on China’s recovery. First, a supply chain is exactly that—a chain. Its successful operation depends on more than one part. Chinese manufacturers may well find themselves ready to produce, but with the rest of the world still in the throes of the virus, there may be nobody available to take their products, and there may not be a sufficiently robust transportation system to deliver them. 

The second factor is that Western companies, particularly American ones, have long been rethinking their relationship with China. China’s drift back to more state control of the economy, its crackdown on journalists and minorities, rising wages in China as the population ages, and President Trump’s tariffs have combined to make doing business with and in China much more difficult. It remains an attractive market, but the drawbacks of either being there or relying on Chinese producers for critical components are starting to outweigh any advantages. As a result, we should expect more companies to rebuild their supply chains to make them shorter, closer to the United States or their final market, and less reliant on China.

The third factor is technology. In the current crisis, for example, hospital technicians and doctors have turned to additive manufacturing—3D printers—to supply them with parts and protective equipment. The printing companies are not medical device or equipment companies, but the technology has allowed them to jump in faster than larger but slower manufacturers. Other technologies that will get a closer look include everything autonomous, such as delivery drones, autonomous long-haul trucks, container ships, and more automated production. If China is nimble, it could capture the lead in the production and use of these new technologies, but state-controlled economies are rarely as agile as market economies. If the United States is smart, it will make sure it leads the way in their development. There is a cliché about the Chinese characters for crisis (危机) being a combination of the characters for danger and opportunity. So far, public debate has focused on the danger, but there are opportunities here for the country smart enough to seize them.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2020 by the Center for Strategic and International Studies. All rights reserved.