While COVID-19 has created an unprecedented global health crisis, an equally serious economic threat looms on the horizon that will engulf the United States over the next six to eighteen months.  The global supply chain is broken.  No facet of the domestic or global economy will emerge unscathed.  Each year, $5.3 trillion worth of goods transit through the South China Sea to customers around the world, with $1.2 trillion of that total destined for the United States.  The devastating impacts of the coronavirus on China and other Asian countries will cripple this vital trade artery.  In just the first four months of 2020, approximately 485,770 Chinese companies declared bankruptcy. This number will only grow in the coming months. Additionally, the Chinese economy shrank 6.8% during Q1 of 2020 compared to a year earlier. This is the first contraction of this size since 1976. No business large or small will be immune to the challenges posed by the fractured global supply chain.

What is the Global Supply Chain?

Simply, the global supply chain is the complex worldwide network which companies everywhere rely upon to purchase goods or services.  Every business, no matter whether it is a supplier, manufacturer, or seller of consumer or business products, is dependent on the smooth and uninterrupted operation of the global supply chain.  For example, if you manufacture a product which is composed of ten component parts sourced from several different countries, you are intimately familiar with the challenges of the global supply chain.

You know that if the factory tasked with the production of Part 3 has shuttered its doors, your operations come to a halt.  It doesn’t matter if you have the other nine parts; you cannot manufacture your product if you cannot obtain Part 3.

Even if you are not in the manufacturing business, your company is dependent upon the global supply chain to survive.  Your suppliers are dependent on component parts obtained somewhere along the chain.  Our advice is that you act now to ensure your company will weather the impending economic fallout caused by the pandemic.  By taking measured steps today, you will improve the odds of your company successfully emerging even stronger on the other side.

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Numerous supply chain relationships and contracts have been, and will continue to be, severely damaged due to the effects of COVID-19.  Companies relying primarily on China as a sole source of supply are particularly at risk.  Your company must make decisions about its future course.

First, at a minimum, companies currently relying on suppliers in China need to seek out multiple, not single, suppliers in China.

Second, seriously evaluate the need for significant realignment of supply chain needs out of China and into other countries.  The countries most likely to benefit are in Southeast Asia (Philippines, Vietnam, Cambodia, Malaysia, Indonesia), but there will also be realignments to South America and Mexico.  India also has some unique advantages.

Third, there will be significant reshoring of American supply chains from Asia back to the United States. This will result in significant legal challenges for companies as they move through the process.

Fourth, contracts governing supply chain relationships must be intensely scrutinized to determine where the risk of loss lies.

For more information about COVID-19 and its impact on the worldwide supply network, please contact any of Meyer, Unkovic & Scott’s Global Supply Chain Group attorneys. Phone numbers and e-mail addresses are available by clicking on any of the biography links below.