MNI INTERVIEW: Pandemic Diminishes China, Not Globalization

--ISM CEO Says Health Crisis Will Encourage Shorter Supply Chains

By Ryan Hauser

     WASHINGTON (MNI) - The coronavirus pandemic will diminish China's economic

reach without undoing a half-century of increased global trade and capital

flows, the CEO of the world's largest supply management organization told MNI.

     "The demise of globalization is a little over-stated, honestly," Institute

for Supply Management CEO Thomas Derry said in an interview. "Globalization is

being redefined."

     Since the 1980s, Derry said globalization often meant manufactured and

sourced in China. Now Eastern Europe and Latin America may grow in those roles

because China's "massive labor cost advantage" over the past few decades "is

mostly gone," Derry said. 

     Major shipping delays amid COVID-19 have also exposed potential weaknesses

in sending parts across borders to assemble at lower cost. National security

concerns about relying on far-flung networks for supplies like medical masks is

now accelerating trends put in motion by the U.S.-China trade war, Derry said. 

     "What's clear from the current crisis is that the hidden cost of a very

efficient, price-driven supply chain is resiliency," Derry said. "People are now

realizing the extent to which we had outsourced much of our healthcare economy"

to China, said Derry.

     --CHINA REACTION

     China's Ministry of Commerce said Thursday the coronavirus won't weaken its

position in global supply chains and hasn't caused the flight of foreign

capital. "The current global supply chain is the result of joint efforts and

choices made by enterprises from various countries over the years, and no one

nor any country can change it at will," spokesman Gao Feng said.

     Derry acknowledged this argument, saying that China is "too important" and

"too advanced" in manufacturing and infrastructure for global companies to

"completely walk away." 

     Average input lead times have doubled for suppliers in Asia and Europe, and

China's hold-ups are the longest at 222%, according to an ISM survey published

Tuesday on COVID-19 disruptions. More than half of respondents expect input lead

times to lengthen further through the end of April.

     "The supply-side stuff is going to recover," Derry said, but the

demand-side "is going to be the longer-term issue in the U.S. economy."

     --COMPETITIVE ADVANTAGE

     Amid the upheaval it's becoming clear that pressure from tariffs imposed in

2018-2019 have given some companies a head start in reforming supply chains, he

said. Finding alternative suppliers in tariff-exempt countries, building up

inventories or bringing the final links in supply chains closer to end markets

have created "a little bit of a competitive advantage" for some firms, he said.

     "Companies are realizing there are benefits to more regionalized supply

chains," he said. Those include being closer to customers, and offering more

customization for last-mile delivery, Derry said.

     Those private incentives make Derry skeptical about some Republican

Senators who have talked about forcing companies to locally source more supply

lines. At the same time, creating tax incentives so "we have the ability to ramp

up in a time of crisis" or stockpiling medical equipment could be successful, he

said.

--MNI Washington Bureau; +1 202 371 2121; email: ryan.hauser@marketnews.com

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