Global Reliance on China and Just in Time Supply Chains Under Fire
As if construction contractors and US manufacturers haven’t faced enough obstacles with the tight labor market, escalating tariffs, stringent environmental oversight, and fierce global competition, along comes the COVID, impacting shipping and the US supply chain.
Even before the outbreak, the Trump administration initiated much-needed action with the Defense Production Act to reduce China’s leverage in critical trade negotiations involving over-reliance on the Asian industrial giant for rare earth minerals and uranium as the industry watchers at Resource Erectors reported early this quarter in January 2020.
Now, over-reliance on China for everything from electronic components and computers to toys and sportswear is in the spotlight. The disruptions on supply chains and trade flow have refired the debate, prompting Jeffrey Witherell, the chief executive of Plymouth Industrial to remark that “A lot of companies seem to regret all the outsourcing to Asia”. As China’s factory capacity dwindles companies around the world are moving to substitute sources.”
The S&P-owned trade data company Panjiva’s analysts cited Google and Microsoft as examples of companies already responding to the urgency created by the virus to accelerate the “switching away from China” that began with the trade war. Analysts at Citi warned that extended disruptions from the coronavirus outbreak could be “crippling to global supply chains”.
As of this writing, China’s workforce is still burdened by the sickness itself and the quarantines that follow, both preventing Chinese suppliers from getting factories up and running again and back to full capacity.
Factory shutdowns in China will have an impact far beyond the short term as US ports “brace for cargo volumes to drop by 20% or more in the first quarter” according to an informative report at the Financial Times. Manufacturers in the auto industry will face significant cost increases for shipping by air to make up for the lag in components coming from China.
That could cost up to 5 times more than maritime shipping.
In an interview for Industry Week, former GM buyer Dan Hearsch warns that “Thirty to 40 days after the shutdown is when you will see the parts shortages hit.”
Coronavirus Impact on the Construction Industry
In the construction industry, the situation isn’t quite as dire as for those in the manufacturing sector reliant on the now tenuous Just in Time shipping practice, though commercial builders relying on material imports from China could face higher material costs and slower project completions.
While it’s estimated that just 30% of all construction materials come from China some American construction firms use less costly Chinese imports for 80% of their material supply and those firms will definitely feel the impact.
In the construction sector, the number 1 concern is employee health and safety, and OSHA has determined that for those in the workforce outside of the healthcare sector the risk for coronavirus transmission is low. OSHA at the time of this writing is providing guidance for COVID-19 safety in the workplace but so far no new mandatory regulations have been set in place.
Still, the level of uncertainty about government reaction prompted construction attorney Steve Lesser to advise readers at constructiondive.com that a “wait and see” attitude is the safest course for construction decision-makers. “The smart money rests on the principle that full speed ahead with a planned construction project does not make business sense,” said Lesser. In more severely affected areas like the city of Seattle Lesser is concerned that “factory workers, construction workers, supervisors, and managers could all end up quarantined”.
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