New Normal

Covid-19: what's the new normal for supply chains, working capital, and trade finance?

Companies must decide between capital expenditure spending amid an unknown future or accept stretched balance sheets in a post Covid-19 world.

Until a vaccine is developed and becomes widely accessible, businesses remain in the middle of a Covid-19 transition.

The pandemic creates new assumptions over future operating costs, from social distancing to office space demand. But identifying which changes are temporary from those that will become permanent spurs new challenges going forward.

The uncertainty also reexamines multinational supply chains. Although economic factors established the current system, renewed political opposition and pending trade tariffs question the sustainability of the existing framework. The novel coronavirus appears to be the most effective conduit to prompt change, amplifying the influence from any politicians before it.

This entails that companies either embark on a costly gamble over future capital expenditure or accept stretched balanced sheets as part of the new business normal. “If a company decides to diversify its supply chain away from China while its competitors stay put, the cost of such a transition might affect the company’s bottom line and stock price,” according to Aidan Yao, Senior Emerging Asia Economist at AXA Investment Managers.

Most agree that few good options exist. Yao argues that an immediate exodus is unlikely, since the economic shock experienced in China is present in other countries.

More Than Profits

But the trend towards maximising profits and efficiency may fade as companies prioritise the longevity of their businesses. “Other than cost concerns, national security and reliability of supply will be critical considerations for corporates in deciding the distribution of global supply chains in the future,” says Dick Yu Sze Ngai, Economist at OCBC Bank.

In practice, this too will prove difficult to achieve, possibly generating unintended consequences. Medical equipment such as personal protective equipment (PPE) and rubber gloves, may be branded as essential during a national health emergency. But unless the upstream rubber producer that provides the raw materials for the downstream medical equipment manufacturer is also classified as essential to the supply chain, production bottlenecks are to be expected.

Instead, a prisoner’s dilemma is created which raises costs and lowers total output. This was evident during the Covid-19 pandemic when a shortage of PPE and ventilators became apparent.

Focus on Liquidity

In the post pandemic cycle, Ngai argues more companies will need to fine tune a balance between ‘just-in-time’ delivery convenience and fixed inventory storage. Most end manufacturers have primarily relied on the former rather than keep inventory on site, as the latter stretches a company’s balance sheet and impacts working capital.  

This adds to the liquidity challenges many are already facing as part of the post pandemic normal, particularly as capital availability is unevenly distributed. This concern is echoed as governments globally are asking banks to channel more money to small and medium sized enterprises (SMEs) that do not have access to capital market products like corporate bonds.

“With APAC economies and supply chains rocked by lockdowns, supply chain finance and factoring has never been more needed in the region to boost SMEs’ cash flow” explains Kheng Leong Lee, Asia Head of HPD LendScape speaking to FinanceAsia.

“Even before the crisis, many SMEs faced barriers to accessing the finance needed to grow their businesses” notes Lee. The IFC estimates that SME's in Asia face a funding gap of $2.4 trillion.

Navigating through the perplexities is increasingly frustrating considering detailed information about intraregional supply chains remains unknown. Ultimately “when it comes to the exports of services, it is regulation and restrictions that matter,” says David Owen, Chief European Economist at Jefferies.

Maintaining a policy framework that quickly adapts to coronavirus’ evolving influence is nearly impossible. Especially considering that the complete data on which policies are based is inadequate. “Even the very detailed database that the OECD provides cannot distinguish between domestic firms and the foreign affiliates of firms” explains Owen.

Calling the peak of globalisation is premature, however changes are foreseeable. Shortening the supply chain which moves final production closer to end customers or incorporates more locally based inputs does address national security and is politically popular.  But this trend is less about the coronavirus and more about avoiding tariffs, suggesting modern supply chains are not yet prepared for the next health pandemic.

¬ Haymarket Media Limited. All rights reserved.
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