February 14, 2020
LLamasoft CEO discusses the coronavirus impact on the global supply chain with BBC RadioListen to LLamasoft CEO Razat Gaurav talk with Calum Mcdonald of BBC Radio about the coronavirus' implications being complex and very specific yet different for each industry.
See the transcript of this interview below.
Calum Macdonald: Now, we do want to look at one of the other sides to this outbreak of the coronavirus in mainland China, and it's the effect that it's having on the world's supply chains. Wuhan is a major center for technology, as well as cars, the automotive industry. So we wanted to find out what the contingency plans are for these things. Razat Gaurav is the CEO of LLamasoft, which is a global logistics provider, and I asked him, first of all, what effects these quarantines, that are on such a huge scales, are having on supply chains?
Razat Gaurav: This is the largest quarantine in human history, with 60 million people, and China is in many ways the largest exporter in the world, which means they're a source of supply, either for raw materials or component parts or finished products, to a whole variety of industries, like high-tech, electronics, automotive, fashion apparel, pharmaceutical industries. So when you have people who are unable to get back to work and these production lines are unable to operate at normal levels, it's causing significant disruption to supply chains around the world. Essentially, typically seasonally, most companies shut down over the Chinese New Year holidays for about two weeks and this year that was extended by several days. Even this week, on Monday, everyone was expecting that people would be back at work, but from all indications, most production lines are not operating at normal levels. It's causing a lot of disruption and concern in terms of inventory availability for supply chains across a whole variety of industries, because China just plays such a very large, important role in the supply chains.
Calum Macdonald: Is there any resilience built into these systems at all? I know that in Europe, when it comes to building a car in the UK for example, that the parts can be transported across Europe and it's the sort of the just-in-time model, where things arrive exactly when they're needed. To me, that feels like it's not a very resilient system actually, things can be knocked out pretty quickly in terms of disruption. In China, in Wuhan, in the areas you've mentioned, is there any resilience in their systems at all?
Razat Gaurav: Yeah. There are two dimensions to resiliency or managing risk. One is in the amount of buffer inventory companies carry. In certain industries, particularly the automotive industry that you just talked about, everyone has been operating on a lean principle. Everyone is trying to manage inventory on a just-in-time basis, so you have anywhere from two to 12 weeks of supply in your inventory across the supply chain. In certain other industries, you may have larger buffer inventories. That's one dimension of managing or creating resiliency. The second dimension is optionality for alternative sources of supply, right? If your production lines are not operating around Wuhan... By the way, it's not only the Wuhan area, which was the epicenter for the coronavirus, but there are over 11 provinces that are under quarantine right now and the Wuhan area is just one of them. Optionality for alternative sources of supply, in many cases, companies that have contingency plans for example, their contingency plans were formulated more in situations of earthquakes or floods or union strikes and things like that. So sometimes their backup production lines may be in China, but those production lines are also not operating at normal levels right now.
Many companies are scrambling to figure out what the alternative sources of supply may be in other countries. Depending again on the industry, like in the automotive industry, many companies are looking for parts from other centers, like in East Europe, Morocco, Mexico, South Korea, Japan. But in the automotive industry, China exports about $40 billion worth of automotive parts to the rest of the world, so it's a very large number of component parts. Even some component parts that may be getting manufactured in other parts of the world, the raw materials in many cases actually come from China.
This is quite disruptive in the automotive industry. It's also very disruptive in the high-tech industry. If you think about the percentage of smart phones or laptops or computers that are manufactured in China. It's a very high percentage, and the production capacity doesn't exist in most other countries. Companies are looking for alternative sources of supply or production in countries like Korea, Japan, India, but in the high tech industry, China just has a disproportionately large percentage of the overall capacity. To create that new capacity is billions of dollars of capital investments and it takes months, if not years, to put that sort of capacity into place. In the short-term, it's going to cause some disruption once we start seeing the buffer inventory start to deplete and it could cause shortages.
The pharmaceutical industry is also very interesting, because there, a lot of the active pharmaceutical ingredients, the short form for that is APIs, they get manufactured in China. In fact, China supplies 40% of the world's APIs, and those APIs then go into the making of the finished drugs, it could be generic prescription drugs or medicines. They supply to pharmaceutical companies all over the world. In those situations, finding alternative sources of supply is even more complicated because you've got to go through regulatory approvals for every new medicine or every new ingredients manufactured in every new location and sometimes getting through the regulatory paperwork can take months, if not years. Thankfully, there's about three to six months of buffer inventory in the pharmaceutical supply chain, so they may have a little bit more time.
Hopefully the coronavirus, the epidemic, will get under control, and people will be able to get back to work and transportation links and the container shipping links outbound from China will become operational again. But the longer this continues, the greater the risk of significant inventory shortages across some of these industries we just talked about.
Calum Macdonald: Razat Gaurav there, the CEO of LLamasoft, talking us through the logistics and how they're being affected actually by the spread of the new coronavirus.