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Research - 05/06/2020

Strengthening the chain

How the impact of COVID-19 on global supply chains could drive demand for UK warehousing

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The disruption caused by COVID-19 has raised profound questions about the viability of complex global supply chains. This could have important upside benefits for future warehousing demand, as UK companies look to future-proof their supply chains against further global supply shocks.

Who plans for a pandemic?

Prior to the COVID-19 outbreak, few UK companies would have factored a global pandemic into their assessment of supply chain risks, but it is now clear that consideration should be given to the potential impact of future epidemics and pandemics.

Indeed, COVID-19 may not be a one-off ‘black swan’ event; the World Economic Forum (WEF) warns that it is part of a pattern of increasingly frequent epidemics that have coincided with globalisation, urbanisation and climate change. Businesses should have contingency plans in case of future virus outbreaks, and supply chains should be designed to be resilient to similar major shock events.

Massive impact on global trade

Disruption to global supply chains started with the closure of factories in China’s Hubei province, where the COVID-19 outbreak began. As a major global manufacturing hub, closures in Hubei had knock-on impacts for companies across the world. Following this, trade disruption rippled out globally as countries went into lockdown, and ports and airports closed.

Predictably, international measures to contain the COVID-19 pandemic have drastically impacted world trade activity. The World Trade Organisation (WTO) forecasts that global trade volumes could be down by as much as 32% in 2020. In the UK, Purchasing Managers’ Index (PMI) data indicates that the manufacturing sector is in the midst of its deepest downturn in living memory.

 

World merchandise trade volume

merchant

Due to its complex, just-in-time supply chains, the car industry is among those most affected by the disruption. Technology companies’ reliance on components manufactured in China has also been highlighted, with the supply of products such as the Apple iPhone and the Nintendo Switch reportedly delayed by factory closures. 

Future-proofing supply chains


Daily number of ships visiting UK ports

Daily ships

While most factories in China have now reopened, and supply chain issues have started to ease in the UK (demonstrated by an uptick in the number of ships entering ports in recent weeks), it is likely to be years before trade is back to pre-crisis levels. Moreover, debate surrounds whether things will ever return to the way they were, following the experience of the pandemic.

Indeed, for many UK firms that import goods and components, the pandemic has highlighted an over-reliance on complex and lengthy supply chains, created out of the desire to find the most cost-effective suppliers wherever they may be in the world. Many global supply chains need to run like clockwork to be successful, and the failure of any single link in a chain can cause it to break down.

Companies whose supply chains have been found wanting during the current crisis may need to start by ensuring that they are fully abreast of their supply processes, understanding the identity of not just their suppliers, but who supplies the suppliers. It is also important to have a ‘plan B’; firms need to have alternative suppliers available should issues arise in their current supply chain.

Some firms will seek to shorten supply chains to reduce risk, or to diversify them so that they are not overly dependent on any single supplier or country. There may be a particular desire to be less reliant on Chinese suppliers, which could spur decisions to diversify manufacturing supply chains to other countries, such as alternative South Asian hubs, or to bring production back to home shores.

The reshoring of manufacturing activity to the UK was already gaining momentum prior to COVID-19, and it may now be given a turbo-boost. According to a recent poll, 59% of UK manufacturers expect the current crisis to trigger reshoring strategies. With international manufacturing hubs offering diminishing cost advantages, and risk becoming a bigger factor in supply decisions, this could ultimately lead to increased demand for UK manufacturing facilities.

Resilience over efficiency

The rethinking of supply chains could also have important consequences for logistics property demand. In a world of heightened risks, a change of emphasis may be needed in supply chain planning, so that resilience and flexibility are prioritised over cost efficiency – a case of less ‘just in time’ and more ‘just in case’. A key approach to mitigating future risks will be to hold larger inventories.

Higher inventory levels, alongside the accelerated adoption of e-commerce, could generate significant demand for warehousing space. Looking at the US market, Prologis has estimated that inventory levels could be raised by 5-10% as a result of COVID-19. If a similar increase were seen in the UK, it would translate to demand for tens of millions of square feet of logistics space.

Granted, companies would need to invest in additional logistics space to build additional resilience, but the costs of doing so could potentially be dwarfed by the revenues that they risk losing if they are unprepared for a future supply shock of a similar magnitude to COVID-19.

Reports heralding the end of global supply chains are likely to prove premature. However, the COVID-19 crisis will have thoroughly tested the robustness of firms’ supply chains and the lessons learnt over recent months will play an important role in shaping supply chain design for years to come.
 

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