Covid-19 – likely fallout and how manufacturers are preparing

Heads of industry representing trade bodies, associations and academia gave evidence to the International Trade Committee on 6 May 2020 regarding the impact of Covid-19 on UK manufacturing, now and in the future.

Covid-19 has presented a deep shock to the manufacturing industry and the global supply chains that support it.

Certain sectors, such as food and drink and consumer packaged goods, have seen an upswing in activity in recent months, whereas others including aerospace and automotive and their associated suppliers have seen a marked decline.

To assess the current impact and better identify what the future may hold, several industrial stakeholders were asked to give evidence to the International Trade Committee, including:

  • Paul Alger, International Business Director, UK Fashion and Textile Association (UKFT)
  • Elizabeth De Jong, Director of Policy, Freight Transport Association (FTA)
  • Mike Hawes, Chief Exec, Society of Motor Manufacturers and Traders (SMMT)
  • Philip Law, Director-General, British Plastics Federation (BPF)
  • Carlos López-Gómez, Head of Policy Links, Institute for Manufacturing (IfM), University of Cambridge
  • Stephen Phipson, Chief Exec, Make UK

Tariffs

The first issue raised by the Chair, Angus Brendan MacNeil, MP focused on tariffs, an issue weighing on the minds of many executive teams.

Stephen Phipson (Make UK) noted that the UK needs to avoid tariffs between itself and the European Union as far as possible as a high proportion of the UK manufacturing industry relies on European supply chains.

Similarly, Elizabeth De Jong (FTA) argued that we need as frictionless trade as possible, while Carlos López-Gómez (IfM) said that the World Trade Organisation (WTO) are worried that tariffs could cause a domino effect.


Brexit - United Kingdom and European Union - image courtesy of Depositphotos.


Trade

The WTO is predicting a fall in global trade between 13% – 32% in 2020 as the Covid-19 pandemic disrupts normal economic activity and life around the world. It’s thought that some of the most affected businesses will be those that operate complex, multinational supply chains.

The UK faces an additional factor, the outcome of negotiations over the future trading relationship between the UK and the EU at the end of the transition period. Currently scheduled to end on 31 December 2020, the transition period that might yet be extended for an additional 12 – 24 months, something that would require agreement by both the UK and EU to do so by 1 July 2020.

The Chair asked the witnesses how Covid-19 has impacted the overall global trade in manufactured goods and how will the situation develop in the mid to long-term?

De Jong (FTA) said that logistics volumes can be used to indicate the health of manufacturing – logistics tracks both supply and demand and there have been significant shocks caused by Covid-19. She predicted that there is going to be future fragility in the supply chain in an expected global recession.


Port Terminal Panorama Industry Global Trade Exports Economy Supply Chain Stock - image courtesy of Depositphotos.


Supply Chains

The current situation has led many organisations to consider how to create greater resilience into their supply chains. Instead of single sourcing of raw materials, such as components, from traditionally low-cost manufacturers countries, companies increasingly may start adopting dual-sourcing in effort to mitigate future disruptions.

López-Gómez (IfM) commented that policy responses will be important in how countries recover in a post-Covid-19 world and there will be a number of responses not only from different countries but also sectors.

He noted how IfM had been analysing the way in which several countries had established “national supply chain task forces” in response to the global demands from medical equipment and PPE in particular, the learnings of which need to be codified.

De Jong (FTA) highlighted that there has been a slump in demand of containers due to the pandemic bringing activity to a halt; however, the impact of a second wave may potentially be less severe as organisations are now better prepared – or at the very least, better understand the risks.

Phipson (Make UK) referenced several CEOs from larger companies all of which have suggested that the efficacy and importance of ‘just-in-time’ may need to be revised in light of the pandemic. As a potential alternative, he indicated that companies are now more seriously considering re-shoring or on-shoring production.

The UK must avoid high-value manufacturing being interrupted by small components, or lack thereof, being produced on the other side of the world, Phipson noted.


car automotive manufacturing - depositphotos


Exports

A a significant number of UK manufacturers have reported a decline in exports, according to López-Gómez (IfM); while Phipson (Make UK) reported on the acceleration of food and drink production, with some businessees operating at up to 120% capacity.

While medical devices manufacturing has been sustained, there has been decline in other sectors, including automotive and a late decline in aerospace, leading to a cancellation of orders in the aerospace supply chain, he added.

López-Gómez (IfM) highlighted that lifting the lockdown wouldn’t necessarily mean a return to pre-crisis level demand. But when lockdown does happen Phipson (Make UK) advocated for a “joined up approach”, referencing air freight in particular.

Many manufacturers utilise the pace of air freight to quickly acquire parts and materials, but reduced capacity has led to, in some cases, an increase of up to 500% in air freight charges, limiting the ability of some businesses to respond to the current situation in a timely fashion, if at all.

Global competition

López-Gómez (IfM) highlighted that countries are preparing roadmaps to emerge stronger from the current crisis and a key part of their strategies is to strengthen their sovereign manufacturing capabilities.

Singapore has it’s ‘Emerge Stronger’ initiative which includes support for businesses to adopt digital technologies, South Korea is looking at boosting domestic demand, and China is encouraging textile manufacturers to move into more value-add sectors such as producing protective clothing for the space industry, for example.

With nations hardening their borders and providing stimulus packages to boost their domestic industries, the UK government will need to not only assess but act decisively to avoid any detrimental impact to UK manufacturers, Phipson (Make UK) concluded.


*All images courtesy of Depositphotos