Sourcing in Turbulent Times

Panic around the economic impact of COVID-19, fears of supply chain disruptions and the 2020 US election have roiled equity markets and led the Fed to cut rates to historically low levels as measured by 10-year notes. 

Nobody knows how much longer Asian supply chains will experience disruptions, whether the US economy will be pushed into outright depression, nor to what extent the COVID-19 pandemic will worsen or burn out. 

Here is what we do know:

  1. The Trump administration will do whatever it can to reignite growth prior to the election. There are still tools available, including tax cuts and infrastructure spending.

  2. Unlike 2008 or 1929, the Fed has acted swiftly and decisively. It is unlikely that the financial system will seize up. However, federal debt and a ballooning fed balance sheet will likely result in inflation longer term.

  3. The US is one of the least trade-dependent countries in the world. Its ratio of trade over GDP stands at 25% compared with Germany’s 90%, and China’s 40%, therefore domestic demand is likely to remain strong for the remainder of 2020.

  4. COVID-19 is creating panic and likely will spread over the next few months. However, as testing is expanded, its reported mortality is likely to drop. Given the accelerated pace of vaccine development and therapeutics under US Pharma leadership, it is likely that COVID-19 will be a manageable disease by early 2021.

  5. China is being reevaluated as a supplier for all but the very largest manufacturers such as Apple, and policymakers underestimate the private sectors ability to adjust and realign or diversify supply chains. (WSJ)

  6. The Chinese leadership is highly motivated to do whatever it takes to return to work. China’s handling of the 2008 financial crisis provides a useful guideline (Wikipedia)

  7. Growth in the developed world is far less driven by incremental energy, food, and raw material consumptions, but rather by innovation and the consumption of intangible bit and bytes. (The Great Decoupling, Andrew McAfee)

Implications for CEOs:

  1. Diversification and strengthening of supply chains is a critical and competitively differentiation issue requiring direct CEO leadership.

  2. Short-term supply constraints are not a reason to accept worse terms, as they are short-term labor disruptions and not driven by industrial capacity reductions nor excess global demand (quite the opposite, Europe, Japan are weak)

  3. China suppliers are open for negotiations and may offer the best opportunity since the financial crisis for US firms to improve terms substantially and lastingly.

Inaction is the worst strategy. Smart companies leverage these uncertain conditions to their advantage, and approach the problem analytically and counter-cyclically.

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