What the virus spread has revealed is that it is difficult to predict where it might emerge next and with what ferocity.
What has surprised the world about the new Coronavirus, Covid-19, is how quickly it engulfed the globe and how the unlikeliest of places emerged as hotspots for the epidemic. Starting in a deep interior region of China, it quickly spread across the world and became an epidemic in places that one would not have imagined have a link with the original location. The globalized world of air travel and deep, cross-linked supply chains meant that the virus was able to quickly spread out. It took root in a few places (even as it was quickly contained in Singapore) finding fertile ground in Iran and Italy. The jury is out on whether this can be safely contained in other places where the outbreak is starting to be reported like the USA, Europe, the UK, India, and other countries.
What the virus spread has revealed is that it is difficult to predict where it might emerge next and with what ferocity. Containment strategies are being drawn and debated across the world – from community immunity to social distancing. As the containment strategies largely start to coalesce around social distancing, it is beginning to have unanticipated impact on a wide variety of supply chains. Many corporate houses have banned travel and events, and work-from-home is the new reality; even housing societies and individuals are beginning to keep away from unnecessary contact.
We look at a few types of supply chains to assess the impact of social-distancing. It is difficult to predict how the shock flows through the system – the location and impact of the disruption will be known only over a period of time and via the many linkages that exist. We present a framework to think about the impacts across various types of supply chains.
Impact on supply chains
Supply chains which involve perishables are the most at risk immediately. In the time-related supply chains, the world is witnessing a significant drop in bookings (and indeed, large-scale cancellations!) at airlines, hotels, restaurants, movie-halls, etc. Airports and retail outlets are facing a significant fall in footfalls, leading airports to demand a higher fee from passengers. Time-related perishability is very difficult to do away with, especially if the asset is owned and cannot be closed down – fully or partially. In case of leases, the pain from lack of revenues gets pushed one level up to the landlord or the lessor. Consumer prices may come down in such sectors but the lack of demand is not due to inability to spend but the unwillingness to do so – lower prices will not overcome the need for social-distancing.
The flip side of time-related perishability is the time available at hand for doctors, paramedics, etc. Their time and availability being finite and limited, there will be a huge surge in value for the same. Similarly, for teachers, etc. who are now suddenly free because schools and tuition classes are shutting down, will find their time being valued less – and could lead to loss of salaries and business incomes. This equation will play across organizations and supply chains where some skills will be highly-valued and some will simply not be required.
Freshness-related perishable products typically are food products, dairy, flowers, etc. Here the markets are typically well-balanced in terms of supply and demand. As India knows very well, even small changes in the demand-supply equation sends prices scurrying in either direction (refer onion, pulses and sugar prices over the last few years). Every year, hence, the government gets active to balance the demand-supply by either opening or closing the export (or import) market. As footfalls at restaurants reduce and the marginal consumer demand drops, India is already witnessing a cascading effect on agricultural commodity prices.
As the Rabi harvest comes to the market over the next few weeks, the softness in prices may continue. The most dramatic fall has been witnessed already in the case of crude – as the production continued unabated, even as demand from airlines for the final refined product eased, the most immediate impact was felt in the price of crude. As offices, malls, schools, etc. across the country start to encourage people to work from home or stay there, the demand-supply equation of power production could get challenged. This will either make the marginal producers unviable or will require the shuttering of the base-load producing plants. Any commodity in which marginal pricing applies and which typically remains tightly balanced could see a sudden price movement.
For some items, an inventory can be created for a short period of time to smoothen out consumption. This includes non-perishable groceries: the fight for food, toilet paper and sanitizers across the world shows that panic reaction in inventorying consumables. This could lead to sudden stock-outs and surges in pricing for goods that are seen to be in demand. This blip is going to be a short-one: eventually there is only so much consumption of a product that is possible. As the crisis abates or countries go into lockdown, there will be a round of demand shock – the same prices which shot up would find no support.
Deferred or denied consumption
Items which are not of immediate use or are simply inaccessible because of lock-downs will see deferred or denied consumption. Over the last year, in India we have witnessed how disruptive deferred consumption can be. The entire auto industry went through a massive slow-down in volumes as customers deferred purchases for a wide variety of reasons including the upcoming BS-VI regulations. Such deferment led to sharp bull-whip effects across the value chain disrupting various ancillary production units and impacting the non-tenured (or contract) workers the most.
As transport of human beings start to get replaced with telecommunication, eating or shopping out gets substituted by e-commerce, and entertainment moves online, we can see a dramatic rise in the requirement of broadband capacity. In most countries, data is priced on an all-you-can-eat model and hence the marginal cost to consumers may not be as high (if the pricing model continues to remain the same). However, the infrastructure of delivery will require significant upkeep and investments – as the large work-from-home options clogging the internet are indicating.
What will surprise us are not going to be some of the issues that we have already discussed – it will be something which suddenly will be found to be the lynch-pin holding the entire edifice together. At my government accommodation in Lutyens’ Delhi (in a previous avatar), what caused the biggest stress was when the fellow did not report at 6am to turn on the motor to get the water up to the tanks. Such critical and key levers holding together the local and the global economy will be exposed.
With luck and perseverance, we will have the ability to solve these issues in the long-term and improvise effectively in the short-term while the virus roams. We look at some responses in the next article.
The author is Head, Strategy and New Initiatives, Axis Bank. Views are personal.
Originally published in The Financial Express.