The Coronavirus Reveals Inconvenient Truths

Mr. Naoyuki Haraoka's picture

The spread of international supply chains has played a key role in advancing globalization as well as enabling greater production efficiencies at multinational corporations (MNCs) because it has facilitated the division of labor. This has especially been the case where manufacturing industries, an engine of the global economic growth, such as automobiles, are concerned.

The contemporary global Covid-19 pandemic, however, has revealed the vulnerabilities created by global supply chains. Previously, to achieve the most efficient production system, a large proportion of global supply chains was concentrated in a few venues—above all China—where they could benefit from the least costly production system. The supply chains of Japanese MNCs and many others became excessively dependent upon China because they expected to profit from its extremely low-cost labor, among other things. Once the pandemic hit China, the global supply chain concentrated in China was disrupted. This episode has demonstrated that to cope with such disruptions and surmount vulnerabilities, supply chains needs to be resilient rather than efficient. They not only need to be diversified, but the sources for parts, components, and materials need to be redundant so that MNCs can respond to risks such as pandemics in more flexible manner. Inventory levels also may need to be kept higher than in the past in order to respond to unexpected events. Resilient production is key to managing these risks. One should not forget that modern-day supply chain risks further entail geopolitical risks. To be more specific, MNC business decision in the future need to prepare not only for so-called “Black Swan” events such as pandemics, but also political confrontations such as the escalating US-China Cold War. Globalization cannot be stopped despite the coronavirus. Nevertheless, in the post-pandemic globalization era, efficiency will no longer be the dominant objective for business, resilience will be.