Though it may seem difficult to believe in the current state of quarantine and closure, it is likely that these types of overseas connections will actually grow.
The COVID-19 upended day-to-day life—and nowhere is this more evident than in supply chain management and international business. As the virus began to spread across industrial Wuhan in the early weeks of 2020, shutdowns immediately began to affect businesses around the world who source materials from the Chinese region. Soon national quarantines halted many manufacturing, production and trade activities around the globe. With businesses scrambling to sustain themselves during this unprecedented time, they’re also looking ahead to the post-COVID-19 environment. What will happen to the international ties that exist within businesses of all sizes – including foreign suppliers, employees and customers? Though it may seem difficult to believe in the current state of quarantine and closure, it is likely that these types of overseas connections will actually grow.
How can this be? Many are calling for fewer foreign partnerships in an effort to reduce the likelihood of future supply chain interruptions and support national employment. Such appeals have been a constant response since the Smoot-Hawley tariffs enacted around the Great Depression.
Shortly after closures began in China, a whopping 94% of Fortune 1000 companies began experiencing disruption in supply chain management before most formal North American lockdown procedures were put into place. Understandably, this triggered an immediate call for a removal of production from the region in order to prevent similar future stoppages. And while some organizations diverted operations at least partially away from the area, it does not mean that all activities will now become localized. In fact, the best recovery tactic for businesses may be to diversify their overseas suppliers, vendors and other relationships to ensure they can produce, regardless of any future localized delays or stoppages.
Why international partnerships exist
There are numerous reasons to partner with an international vendor, the most obvious of which is a cost-saving benefit. However, this is not necessarily the biggest benefit as it was in past decades. A combination of rising wages in emerging markets and lower employee benefits in the US has led to a smaller gap in labor fees. Still, it’s mostly cheaper to source or manufacture items overseas and if that option were not available, prices would rise and be put onto the consumer, an option that companies would not favor, especially given the current economic climate.
Additionally, foreign partnerships allow for growth in ways that may not be available locally including sourcing international talent and scaling operations to increase output. Access to specialized or skilled staff in other parts of the world is a huge benefit to any company as they would not be limited to potential applications available only in their immediate area. Likewise, some overseas facilities have the capability of producing or creating on a larger level due to resourcing or accessibility.
In recent years, even small and newer businesses are seeking to include an international component in order to take advantage of these benefits. In a competitive landscape, such partnerships allow organizations to deliver rapidly and operate in a more agile way.
Accessing global customer bases
One of the biggest – yet least discussed – benefits of international sourcing is gaining access to a new audience. For example, many US car manufacturers produce vehicles in Asia in part because they sell a great deal to consumers in surrounding countries. Similarly, European and Asian car makers have US- or Canadian-based production in North America to more easily access that market. Because effortlessly reaching more customers is so important to businesses of any size, it’s unlikely that this practice will change.
Demographic shifts have also long played a part in a business’s need for accessing other markets. US and other developed countries have an increasingly aging population and businesses are looking abroad for other consumers.
The lasting effects of the US-China trade war
Many are quick to point out that the US-China trade war was already causing companies to consider a movement away from the country due to rising tariffs. Yet many chose to shift to other Asian or South American locations which could quickly handle the tasks needed with existing infrastructure. Although global trade did decrease during the height of the trade war, nearly $19 trillion in goods still moved internationally in 2019.
Because of the sheer volume, businesses will likely diversify their overseas relationships, rather than sever them. Already there is evidence of foreign contracts moving from a single source like China to Vietnam, Mexico, India and many more. Such transfers mean that rather than disappear, international business relationships will likely increase in numbers and local businesses could find themselves working with multiple new foreign partners.
Behavior during past crises
COVID-19 isn’t the first unexpected crisis to hit supply chains. The 2011 Japanese tsunami affected multiple factories, including two regional operations which produced nearly the complete global supply of BT, a sealant vital to electronics. The reliance on a single location demonstrated the need for expansion, not isolation. However, reconstructing supply chains and heeding the lessons of past challenges is not easy and change can be costly and time-consuming. During past closures some businesses made a concentrated effort to diversify their international partners, while others did not, taking the risk that the disruption was isolated. Despite the significance of the current pandemic, it is likely that a number of businesses, particularly smaller operations with fewer resources, will not adjust their international patterns.
The 2008 financial crisis
Global partnerships were a major factor in the eventual market recovery from the 2008 Financial Crisis. Prices for goods were able to stay low and countries could essentially support each other through mutual growth. Indeed, a reduction in international relations and partnerships would have been detrimental to all businesses and make it significantly more difficult for each single organization to recover and regrow, as it would lead to material shortages and price increases.
Of course, the COVID-19 is already more damaging than the 2008 crisis in many ways. Short-term forecasts are largely unreliable as the situation is rapidly evolving around the world.
Summary
Following the COVID-19 pandemic, businesses are looking towards their new reality once quarantines are lifted. Because supply chains and other international relationships have caused delays for local businesses, many are calling for a change in process in order to avoid future stoppages. As is the case in many past economic downturns, some are seeking a form of protectionism and a move away from the current state of global importing and exporting. Though understandable, there are numerous benefits to these worldwide endeavors such as the ability for companies to conduct their operations for less money, on a larger scale and with access to both more talent and customers. Though the US-China trade war did cause some businesses out of China, many simply relocated to other regions in order to diversify their operations. In fact, such changes are likely to be more widespread once the pandemic subsides. The past financial crisis has shown that international partnerships are a vital part to reinvigorating the global economy and serve many benefits. As such, once the local closures are lifted, businesses can expect to work with more overseas partners – not fewer.
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