COVID-19 to accelerate supply chain shifts in fragmented trade system: Moody’s

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Asian countries could benefit from movement away from China
But need to cultivate sound fundamentals, infrastructure and human capital stock
Regionally focused supply chains likely results of virus
Diversification possible to reduce reliance on one supplier

The COVID-19 pandemic will likely accelerate fundamental shifts in trade relationships globally and particularly in Asia, Moody’s Investors Service warned in its latest report yesterday.

Ensuring supply security by enhancing the strength of supply chains will become an overarching objective of governments and companies, overtaking cost and efficiency considerations, it said in a sector in-depth report.

Asian countries will stand to benefit from diversification away from China provided that these countries have sound economic fundamentals, reliable infrastructure, sufficient human capital stock and low geopolitical and supply security risk.

“Nonetheless, any supply chain shifts will occur in a multi-year process, particularly as China will retain a number of advantages over other economies. Supply chains will likely become more robust, fragmented and regionally focused,” Moody’s said.

Supply chains in many sectors will become shorter and less-just-in time, leading to a more fragmented global trade system with a greater range of suppliers for similar products and increased regionalisation of production.

“Companies will use both diversification and localisation strategies to build robust supply chains. Diversification will aim to reduce reliance on any single supplier, whether a single producer or a group of producers from the same country, while localisation will aim to relocate production closer to home markets,” the report added.

The level of supply security, the degree of reliance on a single supplier, the economic fundamentals of the new production base and geopolitical considerations will shape supply chain strategies and the choice of location, said Moody’s.

The extent of supply chain shifts will vary by sector depending on the overarching consideration of the security of supply. The largest shifts will be in industries with the greatest strategic significance, such as pharmaceuticals.

Significantly, credit implications for Asian export economies and producers will vary. Some Asian markets ex-China will stand to benefit from supply chain shifts, particularly as companies look to diversify their sources of supply. However, localisation of production that moves productive capacity out of the region to the US or the EU will have negative effects for Asian producers, notably those in strategic sectors.

Free trade agreements could help mitigate some of these effects by offering producers preferential access to advanced markets, said Moody’s.