Coronavirus: Business interruption and supply chain impact

In addition to causing chaos in an increasing number of cities and countries around the world, the outbreak of the infectious disease poses a significant threat to corporates and their suppliers, given China’s role as the world’s manufacturing superpower. What are the major areas of disruption and how can companies mitigate the potential impact?

by MoneyMarketing on March 5, 2020

In addition to causing chaos in an increasing number of cities and countries around the world, the outbreak of the infectious disease poses a significant threat to corporates and their suppliers, given China’s role as the world’s manufacturing superpower. What are the major areas of disruption and how can companies mitigate the potential impact?

The outbreak of 2019 Novel Coronavirus (2019-nCoV), which originated in Wuhan City in the Hubei Province of China at the end of 2019, has already caused significant disruption with members of the public having to be quarantined and screening and safety measures being implemented around the globe. After being identified by the World Health Organization, there were more than 75,000 confirmed cases of coronavirus and well over 2,000 deaths in China alone in the first two months of the outbreak.

Supply chain issues and potential business interruption are now pressing risks from the outbreak, given the disruption of China’s manufacturing network with ripples already being felt across a number of different industries. According to the Chinese Passenger Car Association, auto sales at dealerships plummeted by more than 90% during the first half of February compared with a year earlier. Given it is the world’s largest car market any fall in sales in China also hurts the global industry.

Meanwhile, auto giant Daimler has warned of risks for the economy and its own business, noting that coronavirus “may not only affect the development of unit sales, but may also lead to significant adverse effects on production, the procurement market and the supply chain”. Fellow carmarker, Jaguar Land Rover has noted coronavirus could lead to production problems at its plants in the UK, given their reliance on parts from China. With Chinese factories in shut down mode or operating at reduced capacity, it is predicted that assembly lines around the globe will run short of essential components in future.

Outside of the automotive sector, Foxconn, the world’s largest contract manufacturer of electronics and Apple’s main iPhone assembler, is another business impacted by coronavirus with many of its production lines in China having been halted, meaning its plants outside of the country – such as ones in Vietnam and Mexico – have been pushed to full capacity . This illustrates the potential wider impact coronavirus could have on global electronic supply chains. Much of the world’s electronics come out of China’s factories, filled with parts also made in China. Further production delays could impact the overall supply.

Pharmaceuticals is another impacted sector. Drugmakers in India, which is estimated to produce around 20% of the global supply, are also braced for potential disruption given almost 70% of the raw materials they use in manufacturing are imported from China, according to brokerage firm SBICAP Securities. Hubei province is a major production hub. Any problems would obviously have further implications for the global supply chain.

With many companies which are dependent on China’s manufacturing network having to confront the reality that business may not go on as usual in future, Maarten Van Der Zwaag, Global Head of Property Risk Consulting at AGCS and Ryan Du, Senior Risk Consultant at AGCS discuss some of the major factors behind the ongoing disruption and what companies can do about it:

What are the major factors behind the disruption of production for companies in China?

There have been a number of situations that have caused disruption for businesses, all of which impact production. First of all, the Chinese New Year holiday was extended for a much longer period than usual in February in a bid to contain the outbreak of the virus. At the same time this also raised the prospect of triggering supply chain disruptions, given the lockdown of a large number of cities in China obviously impacts the availability of manpower and the potential production and transportation of materials, products and goods. A number of large companies and suppliers are located in and around Wuhan City, so it is anticipated that these companies could be subject to further production delays, even when the virus situation improves.

Some companies have managed to restart operations but have then had to close down again following confirmed cases of coronavirus in their plants. Therefore, precautionary measures are required to be taken, such as providing masks for employees and sanitizers. However, a potential shortage of surgical masks – demand for these items is obviously high but supply is struggling to keep up given mask

manufacturers themselves face disruption – poses a challenge for companies as this could also prevent employees from working, since it is now compulsory to wear such masks in many Chinese cities.

Then there is the psychological effect of the outbreak of the virus – many people may refuse to return to work for fear of becoming infected or being quarantined, meaning labour-intensive industries in particular could suffer from a lack of workers.

What is your advice to companies whose sites are closed or those companies who have suppliers in China that are affected by the virus or may be affected in future?

Be prepared and make a plan. Having a fully comprehensive business continuity plan (BCP) in place and ready to be rolled out is crucial in such a scenario. A BCP (see below) can identify the potential threats to an organization – from pandemic to supply chain disruption – and analyzes what impact they may have on operations and business objectives. It also provides a way to mitigate these threats and their consequences and entails having a framework in place which allows key functions of the business to continue even if the worst case scenario happens. For example, companies who have suppliers in China should have already started to look for alternative solutions based on their BCP setting, if they have one. For companies whose sites are closed, diversification or replication of manufacturing facilities may be the best way to mitigate downtime if the recovery time objective is particularly short.

Insurance coverage

Typically, standard property/business interruption insurance policies do not provide coverage as physical damage is usually required as a trigger. Therefore, plant closures due to the coronavirus are generally not covered by standard property/BI policies. Special covers for business interruption without property damage (non-damage BI extensions) are available but are not widespread. In addition, in many cases, this type of coverage, requires an outbreak at the premises itself to claim for “notifiable” disease, as well as a “denial of access” order by public authorities.