The trajectory of how Ai Group members have experienced COVID-19 has really depended on their level of exports, product categories and how prepared they were for a long Lunar New Year. Meat and premium fruit exporters suffered an immediate drop in orders, whereas dairy and grocery type exporters only experienced a moderate drop initially, before the disruptions to the freight market occurred. Importers of inputs didn’t really start to hurt until towards the end of February. The disruption to global air and sea freight rates and availability has been a shock to everyone.
When and how much COVID-19 has affected your business will depend on the structure of your supply chains and your reliance on China for both imports and exports. However, this isn’t simply a story about China; the impact to supply chains and logistics has been a global domino chain reaction, especially as major trading partners Japan and South Korea and industrial partner Italy start to close schools and villages to stem infections. While very few of these impacts are within your control, how you react and treat your customers and suppliers is in your control and may have repercussions long after the crisis has abated.
As the impact of the crisis in China became apparent the Chinese Government promoted the availability of Force Majeure certificates to Chinese companies. Force Majeure clauses in contracts enable companies to void penalty linked key performance indicators in the event of a ‘Major Force’ – a large and unforeseeable event. The foreign media picked this up and implied that claims were widespread, though in the first week of February the Government had only issued about 20; by week two 1600 had been issued to cover Chinese exports to the value of AUD 22 million, and by week three over 3000 certificates had been issued. Despite the large numbers, they are miniscule compared to China’s exports of over $2.41Trillion; however, given the reliance Australia has on imports from China, they do foreshadow significant supply issues for Australian companies.
Source: ABS, Macquarie Macro Strategy
Packaging materials are the commodity most often cited by members as being in short supply, perhaps due to their characteristics; they can take a lot of room and are usually easy to source.
Reports that Vietnam is now struggling to fulfil export orders due to Chinese inputs supply issues are a good reminder that you should be checking with second and third tier suppliers as well to understand the impact on your business.
Whether you have supply chain issues or not, it is important to maintain communication with your customers to ensure that they aren’t second guessing your ability to supply and to demonstrate your reliability as a good business partner.
Systematic Supply Chain Management simply measures risk and reward and the overall return on investment. However, relying only on data does not necessarily protect you in such a crisis, when relationships will be key. There are reports that Chinese exporters are applying for Force Majeure certificates in anticipation. However, we think that where possible you should be contacting your suppliers now, even if there is no problem as yet, to discuss options and, if necessary, revised timelines.
From 20 February, reported new infections confirmed outside of China have exceeded the number confirmed inside China (https://www.who.int/emergencies/diseases/novel-coronavirus-2019/situation-reports/); however, the factory closures and enforced home confinement of much of the population in major cities are still having a disruptive effect. Members are reporting that their Chinese factories are unable to reopen unless they can implement additional health and safety measures around virus containment.
Source: WHO Coronavirus disease (COVID-2019) situation reports
Internal transport is also compromised, beyond the port closure at Wuhan. Some Australian exporters who have managed to get product into the country have reported that their products are sitting on the wharf with no one around to transport them. Some ports are providing discounts on demurrage charges; however, there is no official policy on this and cold storage facilities continue to charge full rates.
Cargo shipments are being delayed for a few weeks due to various air and sea freight cancellations. With travel bans to China and reduced demand for travel across Asia, airfreights costs are increasing as supply is decreasing. It is difficult to say if this will improve even if the ban on Chinese travellers is lifted, as beyond the official bans it is the lack of demand has been impacting supply as there simply aren’t enough passengers to fill planes.
Less exports from China mean that there are less ships departing China, especially to Australia, which in turn means less ship space for Australian exports in returning ships. Reduced ship movements are disrupting global logistics, including shipments to the USA and the rest of Asia, as China isn’t sending enough ships into the global system. This is both restricting available space and pushing up freight rates. Members in the Cold Chain Logistics industry are reporting that they are at capacity as food exporters try to wait out the crisis.
As we approach the Asian Trade Show season, exhibitors should be cautious about committing funds as some shows are cancelled or delayed and should manage expectations on the number of visitors to any show that does go ahead.
Chinese provincial authorities have been carrying the load in containment. However, as the Central Government starts to stress that the country gets back to business, they are slowly moving from strict viral control to risk weighted operating. It is a slow and uneven return to business with the retail and hospitality/entertainment industries moribund as people still self-quarantine – apparently 90% of bookstores remain closed in Beijing.
We can expect that China will now start to focus on stimulating the economy and the Peoples Bank of China has already cut rates, moving to create more liquidity. Spending heavy lifting is done at the provincial level in China while the national Government does tax collection and there has been national encouragement to offer tax holidays, rent waivers, etc.
No date has yet been set for this year’s National People’s Congress, after being confirmed as delayed, and this is when any major stimulus will be announced.
The Australian Industry Group, along with other peak industry bodies, are joining a weekly briefing on COVID-19 with Department of Foreign Affairs and Trade, the Embassy in Beijing, Department of Industry, Department of Agriculture, the Department of Education and the Australian Trade Commission (Austrade) to monitor the impact on Australian industry and to receive regular updates from experts on the ground. If you’d like more information or to contribute your own experiences, please don’t hesitate to contact Louise McGrath: louise.mcgrath@aigroup.com.au
Louise has a broad range of experience in international policy. She has particular interest in trade and border regulations, international transport, cross cultural communication, and digital trade policy. In her role as Ai Group’s Head of Industry Development and Policy she provides strategic leadership and guidance for Ai Group’s policy agenda in building competitive industries through global integration, infrastructure development and innovation. She ensures that through policy leadership members have a voice at all levels of government, by representing and promoting their interests on current and emerging issues. Louise represents Australian Industry in several multilateral forums, such as the B20 Taskforces, Global Business Coalition, and the East Asia Business Council working group on RCEP. She advocates for the interests of Ai Group members during Free Trade Negotiations and translates those agreements to support the strategic aims of members. She is a member of CSIRO’s Responsible Use of Artificial Intelligence Think Tank and the Manufacturing Advisory Group, the NESP Sustainable Communities and Waste Hub and the Advisory Group of The Australian Consortium for ‘In-Country’ Indonesian Studies (ACICIS).
