February 24, 2020
LLamasoft CEO Razat Gaurav discusses the coronavirus threatening global economic growth on BBC RadioLLamasoft CEO Razat Gaurav talked with Dotun Adebayo, host of Up All Night on BBC Radio 5 Live, about the impact the coronavirus is having on global supply chains.
"China, as we all know, accounts for about 1/3 of global trade, over $2.5 trillion of exports, over $2 trillion of imports. So it's a massive economic powerhouse and the ongoing issues with the coronavirus are significantly impacting manufacturing production in most of the active manufacturing companies of China and that's clearly impacting global supply chains across automotive, pharmaceutical, retail and high tech industries," he said. "I think the impact is going to be quite significant not only for China, but for the global economy."
Listen to the full interview below and check out Up All Night on BBC Radio 5 Live here.
Dotun Adebayo: It's expected the figures on China's industrial activity due to be published today, will show a plunge in factory output in February as currency measures have affected the country's supply chain. The Head of the International Monetary Fund, Kristalina Georgieva, has warned that global economic growth is at risk because of the coronavirus. She's also said that the continued spread of the virus could have dire consequences and that the IMF is ready to provide support, particularly for poorer countries. Razat Gaurav is the CEO of LLamasoft, the company that helps other companies with supply chains and analytics. Razat, from what you know, how bad do you think this China trade figures are going to be?
Razat: Look, we'll see how the numbers span out, but China, as we all know, accounts for about 1/3 of global trade, over $2.5 trillion of exports, over $2 trillion of imports. So it's a massive economic powerhouse and the ongoing issues with the coronavirus are significantly impacting manufacturing production in most of the active manufacturing companies of China and that's clearly impacting global supply chains across automotive, pharmaceutical, retail and high tech industries.
So as we are all monitoring the situation very closely and the quarantine continues, and this by the way is the largest quarantine in human history, with over 60 million people under quarantine. And now we're beginning to hear news of the virus spreading across parts of Japan, Korea, even Italy has had some cases reported recently. I think the impact is going to be quite significant not only for China, but for the global economy.
Dotun Adebayo: I know the size of the Chinese economy not withstanding, is industry though much more heavily, personnel reliant and the supply chains and so are much more personnel reliant, then let's say the American industrial activity would be.
Razat: Yeah, there is a large reliance on labor in China. Now they have been putting in automation. But even for automation equipment to function, you need skills labor, just the skills are a little different. Some of these factories in China, for example, the Foxconn facility in Shenzhen, employs over a million workers. And if you see at any given time, there's about a million people working in some of these factories. So yes, the production and the massive production capacity is reliant on people. And of course, with the quarantine, most people are not being able to return to work after the Chinese New Year.
Dotun Adebayo: And how long do those issues take to set in as such? When we talked about supply chains, sometimes a lot of the supply chain goods would have been already dispatched over the course of months and weeks or months or years even. I just wonder how long does it take for the impact of the quarantine to set in on a global level?
Razat: Yeah, it's a good question. Look, it depends on the industry we are talking about. Most industries carry buffer inventory and you can measure that in days of supply. So for example, in the pharmaceutical industry, where you're carrying active ingredients that go into making medicines or drugs. Typically, most companies carry anywhere from three to six months of buffer inventory.
On the other hand, you look at the high-tech industry for example, there you're carrying more like three to 12 weeks of buffering inventory. In the automotive industry where most companies operate on a much more lean basis and they just have more just in time inventory, they have just anywhere from two to 10 weeks of inventory. So it just depends on the industry and typically leading up to the Chinese New Year, there's a seasonal buildup in inventory levels that most companies, that's how they operate because of the Chinese New Year because most people are out of work for anywhere from 10 to 12 days.
That's what happened this time around as well, except after the Chinese New Year, people should have gone back to work on a regular basis about two weeks ago and that hasn't happened. So I think if the current situation still continues as we go into the second half of March, I think we're going to start seeing some massive impacts on inventory availability and as a result, massive disruptions in the ability for production plants that are relying on component parts from China or inventory levels for certain goods and merchandise that are being sourced from China, finish goods and merchandise that are being sourced from China not being available. So I think the longer this continues, the higher the risk levels and the risk really varies based on which industry we are talking about, based on their buffer inventory strategies.
Dotun Adebayo: And of course, the flip side of this question is what about the recovery. Once this crisis is over and it will end at some point, this coronavirus crisis, how long will it say supply chains to recover?
Razat: Yeah, that's a good question because obviously people have to come back to work, production volumes have to resume at normal levels. And then again, depending on the industry, if you're moving things on ocean container ships, you're talking about beyond just the cycle time for production, it takes anywhere, for example, it takes roughly about 14 to 21 days for a container ship to arrive from a port in China to North America. Similar time frames for it to go from ports in China to ports in Europe. So there's still going to be a lag time of a few weeks, even after normal production volumes resume, for the inventories to hit the shores in Western Europe and North America, specifically.
Dotun Adebayo: Appreciate talking to us about it, Razat. That thank you very much. It's a fascinating topic, by the way. Razat Gaurav there, who's the CEO of LLamasoft, a company that helps other companies with supply chains and analytics. And I think over the coming days and weeks as the coronavirus spreads even further than its spread already, I think this issue of the cost of it will stop being very, very prominent.