Tony Lugg
Chairman of TAPA APAC

Nearly two decades separate the SARS and Coronavirus outbreaks. In that time, China has grown from the world’s sixth-largest economy to the second biggest today, behind the U.S. The country has been a main growth driver worldwide, with the International Monetary Fund (IMF) estimating that China alone accounted for 39% of global economic expansion in 2019.

SARS or Severe Acute Respiratory Syndrome first emerged in China’s Guangdong province before spreading to other countries. CNBC reported that the virus infected about 8,000 people, claimed almost 800 lives worldwide, and shaved 0.5% to 1% off China’s growth in 2003, according to various estimates.

So, what’s the difference today with Coronavirus or, to give it its now official name, COVID-19?
The Coronavirus, which was first detected in Wuhan, hit hard at the manufacturing base of China and the centre of the logistics supply
chain. Forbes, quite rightly, reported that even if you don’t assemble finished product in China, you might be dependent on a supplier based there for components. Many people have been looking at whether firms have suppliers in Hubei Province, where Wuhan is located, because they think these will be the supply chains that are impacted first.

Following the lockdown of 58 million people and the continued closure of businesses after the Chinese New Year holiday, the impact was brought home to Tony Lugg, Chairman of TAPA APAC, when one TAPA member from China wrote to him expressing their concern, stating: “The global manufacturing base is closed for business.”

The Forbes article also points out that the Chinese manufacturing model of the last three decades has been powered by migrant workers who come from inland provinces like Hubei, Shaanxi, Anhui, Hunan, and others. They are recruited by factories, where they live in dormitories in an environment that is much like a small city.

In a similar tone, the Nikkei Asia Review reported: “From food chains to steelmakers, many Chinese companies are staying closed after an extended Lunar New Year holiday due to Coronavirus concerns, denting hopes that the epidemic-hit economy would return to normal after the break.” It isn’t just Wuhan that is impacted. In Hong Kong, for example, Cathay Pacific asked its 27,000 employees to take up to three weeks’ unpaid leave.

Within a short period of time, OEMs were reporting shortages of raw material and other goods manufactured in China. The knock-on effect had already started to impact supply chains. One Risk Manager of a leading electronics company stated: “Our production team are trying to locate raw material to keep our production running. They haven’t had much of a holiday. Most have been working around the clock from home trying to source raw material from alternative suppliers.” Within China, many companies have been ramping up their business continuity plans from scratch. A survey completed by International Crisis Room 360 (ICR360) showed that a staggering 63% of respondents had no (BCRP) Business Continuity & Recovery Plans in place for their supply chains in China. “Even allowing for a margin of error, this raises important questions, most notably in relation to the amount of investment that has actually been committed to ensure robust BCRPs are in place. The payback of having a robust plan in these kinds of conditions is substantial,” TAPA’s Tony Lugg stated.

Reuters reported that production at all of Toyota Motor Corp’s production plants in China would remain suspended through February 16, joining a growing number of automakers facing stoppages due to supply chain issues as the Coronavirus spreads.

The Japanese automotive company, which operates 12 vehicle and components factories in China, said it would extend its production stoppage “after considering various factors, including guidelines from local and region governments, parts supply, and logistics.” “I personally believe, based on the information we have on new or enhanced control measures, that factories could start to slowly open using a segregation program in their plants to ensure that production continues.” Tony Lugg added. “It’s all about risk management, which, if done correctly, will enable companies to continually assess the situation due to the isolation period of all employees.”

Bloomberg also reported that the Hon Hai Precision Industry Co. told employees at its Shenzhen facility not to return to work following the end of the Lunar New Year break. It’s unclear whether the Shenzhen policy extends to all employees or to Foxconn’s other facilities. Hon Hai, which makes the vast majority of the world’s iPhones from the central Chinese city of Zhengzhou in Henan province, officially resumed production on February 10 but, in a statement, the company said that workers returning to Zhengzhou from outside the province will be sequestered for 14 days.

“As a matter of policy and for reasons of commercial sensitivity, we do not comment on our specific production facilities,” Foxconn said in a statement in response to Bloomberg’s queries. “We have been closely monitoring the current public health challenge linked to the Coronavirus and we are applying all recommended health and hygiene practices to all aspects of our operations in the affected markets.”

In the cases of Automotive OEMs, much of the supplier base is localised for various reasons, hence the impact to this industry sector could be significant, especially in the first half of 2020. In relation to business continuity, governments offer guidelines on BCRP plans. However, these are generalizations of the program and invariably do not consider factors such as diverse supplier bases, local environment or operational complexity.

Tony Lugg said: “In light of the statistics coming out of the ICR360 survey, back-to-back contractual agreements with suppliers must be urgently written up, agreed and signed off. There needs to be management buy-in at the highest level and supplier BCRP audits with evaluation of the plans covering the critical assets required for production. This should be outsourced if possible to expedite the process and also ensure segregation of duties to prevent any ethical issues. Auditors should be warned in advance of the serious consequences should any evidence be overlooked.”

Several manufacturers have confided that supplier footprints are generally not studied or mapped against ongoing environmental, natural or other events. Some manufacturers source using DDP (Delivered Duty Paid) terms, pushing all responsibility onto the supplier, which sounds risk adverse until the same supplier cannot support production. This particularly impacts manufacturing when dual sourcing was never considered to be an option. A thorough BCRP would have called out that issue to management.

Accountability for the BCRP role is a key factor in this apparent failure within supply chains. It appears that, in some cases, Crisis Managers’ roles are three or more layers down from the Board. “This is a complete lack of responsibility in my view,” said Tony Lugg. “We see too many cases where senior management have passed the role to a supervisor or mid-level manager who has no power to implement a BCRP. The role of the Crisis Manager must be based on full engagement across all functions. This is difficult to achieve, particularly in Asian culture, when the Crisis Manager needs to be at the same level as other management to obtain their buy-in.” At the time of publication, the Coronavirus is affecting 37 countries and territories around the world, with more than 81,000 people being infected and over 2,750 deaths as a result of contracting the disease.

Read TAPA Vigilant February Issue here.