Supply chains in the time of COVID-19. First trends are emerging

It seems that some general trends are already visible. The question is whether there’s more to it than meets the eye and what else can happen in the coming months and years.

Trend #1: relocation of production from China

There are many voices demanding a return of some of the production from China to Europe or to other parts of the world, especially when it comes to the production of critical materials. This is already happening.

Recently, the Japanese government announced that it will pay Japanese companies if they decide to move production from China to Japan.  European governments may also implement such measures. In that case, would we really be dealing with a mass return of production to the old continent?

Being fully aware that any anticipation of future developments is a fortune telling, I believe that we should not expect a massive and rapid relocation of production to Europe. There are several reasons for this.

First of all, companies that have invested in China or anywhere else in the Far East, and these are often huge investments, may fear that by withdrawing production from the Far East they will not get their money back. Second, investments in China also involve long-term commitments in terms of contracts with suppliers. In many cases, the cost of their early termination may be high enough to kill the idea of moving production. Third, the relocation of production to Europe may mean the construction of new production facilities on our continent. And this is yet another, oftentimes tremendous investment. Even assuming that companies planning to relocate to Europe would be looking for new locations in cost-attractive countries, the investment and production-related expenses may be so high that they will not justify this move.

So won’t the coronavirus exact a toll on relations between China and Europe? In my opinion, there will be changes, but not in the form of a rapid increase of production in Europe while phasing out production in China. Certainly, a part of production, especially for the most critical products, will be relocated to Europe. China may once again become a supplier of simple, easy to replace products, or those that European customers will be able to do without for at least a certain period of time.

I do expect, however, that European companies will increase their stockpiles and look for suppliers on our continent. It is also likely that the New Silk Road (Belt and Road Initiative), i.e. rail transport from China at the expense of sea transport, will be developed faster.

For the logistics landscape in Europe, especially the CEE region, this may mean an increased interest in leasing warehouse buildings and services of logistics, freight forwarding and transport operators. It is also certainly an opportunity for the development of the Polish logistics market. Our geographical location, the size of the domestic market, EU membership and the existing rail links to China predispose Poland to be a logistics hub at least for Eastern Europe.

Trend #2: rising costs

If my forecast concerning the increase in demand for warehouse space and general logistics and transport services in Poland works out, an increase in logistics costs seems likely. The demand and supply law comes into play here: the greater the interest in services, the higher their prices.

Some of the increase in costs and prices can be amortised by personnel costs, which are likely to decrease. At this point it is difficult to judge the impact of rising unemployment on the cost of logistics companies’ personnel. We also do not yet know what impact the epidemic will have on the headcount of foreign workers in Poland, mainly from Ukraine. Foreigners work mainly as temporary workers, towards whom the companies using their services have practically no obligations.

It may be that companies looking for savings will reduce the number of temporary workers and rely on permanent employees. The opposite is also possible – due to the lack of commitments and flexibility of temporary workers, companies may be even more interested in their services than they are now.

Trend #3: in-house warehouse management

Let’s keep one thing in mind: customers using logistics companies won’t look on passively at the rising costs of the supply chain. On the contrary, let’s expect that rising logistic costs will cause trade and manufacturing companies to put greater emphasis on cost control and look for cost reduction wherever possible. This may mean that a certain number of potential customers of logistics operators will decide to keep their logistics operations in their hands.

This is the trend I would expect in contract logistics in particular. The times when companies maintained their own vehicle fleets to ensure the distribution of their products to their customers belong to the past. The situation is different for warehouse management. Many companies may come to the conclusion that managing your own inventory can be cheaper than using a specialised warehouse operator. The issue of whether in-house warehouse management is cheaper than cooperation with a logistics operator is a topic for a separate discussion. In my opinion, there is no clear answer to this question.

It is therefore quite likely that some of the companies that will take over the management of their warehouses will, however, decide to cooperate with third-party operators after some time. A lot depends on how the labour market will look like. If the black scenario comes true and unemployment increases, the costs of warehouse staff will decrease. Such a situation will favour opting out of logistics outsourcing.

Trend #4: eCommerce

There are many media reports on the development of the eCommerce sector and the relocation of trade to the Internet, as a result of restrictions imposed on shopping malls and significant restrictions on bricks-and-mortar trade. Companies with extensive online sales channels are increasing their turnover, while their competitors in bricks-and-mortar stores are on the verge of bankruptcy.

It is hard to contradict this trend, all the more so because it fits into the much broader phenomenon of growing eCommerce at the expense of traditional sales. Nevertheless, I advise caution in forecasting long-term growth of online sales. It all depends on how quickly the economy, especially production, will recover from the collapse caused by the pandemic.

Long-term production downtime means increased unemployment and a decrease in consumer purchasing power. Obviously, this will affect the turnover of online trading. If consumers are forced to make savings (e.g. due to job losses), they will spend less money both in bricks-and-mortar stores and online.

The second phenomenon comprises likely changes in the rules of online sales. eCommerce will look for savings just like all any other business. I wouldn’t be surprised if it turned out that many online stores will limit e.g. the possibility of free return of purchased products, limit the assortment or extend the delivery time. I would also expect an increase in the purchase amount, from which the delivery is included in the price.

Last but not least, online shopping is not a perfect remedy for all the problems caused by the coronavirus epidemic. Thousands of online stores are also offering products imported from China. Current problems with supply chains also have a negative impact on eCommerce.

One thing is certain – we will not avoid changes, and we will see how big they are in a few months. As always, the invisible hand of the market will get onto the stage.