During the coronavirus crisis, the global economic network has shown weaknesses in the supply chains. These do not include temporary delivery shortages for toilet roll.
The People's Republic of China is Germany's most important trading partner. In 2019, according to information from the Federal Statistical Office, goods to the value of €205.7 billion were traded between the two countries. Imported “Made in China” goods were at the top of this, with a value of almost €109.7 billion. China is a market for German products, an important production location for German industrial firms and the start of several global supply chains. This data makes it clear that if the Chinese economy gets into trouble, this will also affect Germany and all its other trading partners.
These dependencies are particularly problematic for functioning supply chains. When the factories in China shut down due to the coronavirus pandemic, there was a shortage of primary products for producing electronics, clothes or medicine elsewhere in the world. “There are a lot of supplier companies in China for the electronics industry. When they shut down, and Wuhan is one of the central locations for electronic components, then production in other places also grinds to a halt,” explained Professor Horst Raff from the Department of Economics. But, Raff said, “the world isn't quite as connected as it is often made out to be. Because a lot of supply chains are extremely regional.” Germany, for example, is at the centre of supply chains in Europe and very well connected to its neighbouring countries, and China is mainly very closely linked to Japan, Korea and Taiwan, whereas the USA is linked to Canada and Mexico. “The impact on the German economy is far more dramatic if Italy or France shut down,” emphasised the professor of microeconomics. “And that, in turn, affects lots of other sectors,” added his colleague, Professor Frank Meisel from the Institute of Business. “We then very quickly arrive at food or similar goods, which we do not get from China or south-east Asia, but from our regional partners.” Meisel is a professor of supply chain management and holds a lecture on Economics and Management of Global Supply Chains together with his colleague from economics. The consequences of the pandemic for trade and industry were the topic of their first online lecture in the summer semester.
The world isn't quite as connected as it is often made out to be.
One example of a very vulnerable supply chain is the car industry, which has up to a thousand suppliers on it. The majority of the suppliers for German factories may be located in Europe, but important parts come from China, like electronic components in particular. And at the end of the day, if just one person can't deliver, then that's enough. “These days, cars are manufactured according to the just-in-time principle. If the assembly factories don't get precisely the right parts from their suppliers on time, because these companies had to close temporarily, then they have nothing to fall back on. Then the production across the entire supply network has to shut down. Either everyone works or nobody does,” said Frank Meisel.
The coronavirus pandemic did not just cause broken supply chains, it also caused increased demand for certain goods. This was the case for protective masks. “Even though the need for protective masks and the like increased enormously, it wasn't possible to simply up the production capacities drastically,” said Meisel. “Because there are supply chains behind this production process, too. And if the necessary materials can't be supplied from other regions, this causes shortages.” Transport problems are added to this. Container ships need too long, and passenger aircraft, which could transport these types of goods in their cargo holds, were barely flying.
All of these aspects, however, played no part in the toilet roll issue. The problem here was that panic buying caused a sudden great demand. Stocks were sent to the shops and sold faster than they could be produced again. But it was clear that this demand would not remain so high. At some point there is enough toilet paper in people's houses, so less is required in the shops after a few months. “This is why these companies aren't interested in investing in increasing their production capacities,” said Meisel. These fluctuations in demand, which can build up and intensify a lot, are a known phenomenon in supply chain management and are termed the bullwhip effect.
Despite many difficulties and shortages – the coronavirus pandemic will not signal the end of globalisation. Horst Raff is sure of this. “It makes sense to produce goods in China where they can be manufactured much more cheaply. Internationally spreading the workload has such big advantages that this will stay as it is.” But there may well be some revised ways of thinking. “Many companies organised their supply chains according to the just-in-time principle. Warehouse stocks were drastically reduced to increase efficiency. I'm not sure if this process will continue with the same amount of vigour after the crisis.” Frank Meisel recommended keeping an eye on the transparency of supply chains. Companies should look more intensively at what their supply chains look like. “Lots of manufacturing companies know their own suppliers, but not the suppliers' suppliers. And if you want to build up inventories in future, then the best idea is to do it where a shortage of capacities is to be expected.”
Author: Kerstin Nees