What the COVID-19 surge in China may mean for the supply chain

January 3, 2023

COVID-19 cases are once again surging in China. On December 30, the World Health Organization (WHO) even met with Chinese officials from the National Health Commission and National Disease Control and Prevention Administration to discuss strategies to deal with the increasingly dire situation.

While both groups are understandably treating the resurgence of COVID-19 as a public health crisis, the problem could also spiral into being an industrial problem, as occurred with the first outbreak.

In early 2021, when COVID-19 first took hold of China before quickly spreading to the rest of the globe, the world faced one of the greatest disruptions in the supply chain in modern times. Most importers, exporters, and other enterprises in the supply chain were caught flat-footed: They went into crisis management mode, doing their best to get their goods or raw materials where they needed to be, with mixed results.

As COVID-19 once again threatens China, businesses should be better prepared. Here is how the COVID-19 surge in China may affect the global supply chain and, more importantly, what businesses can do to ensure the continuity of their supply chain.

Negotiating power shifts to exporters

In normal market conditions, the negotiating power between exporters and importers is with the latter. Importers are the customers, after all. If the situation in China continues to worsen, this power will shift to exporters. This is due to the law of supply and demand.

As it did during the first pandemic, China may take increasingly draconian measures with businesses and localities, such as shutting down borders, limiting outbound shipments at ports, and even preventing residents from leaving their homes and thus reporting to work. These measures would severely limit the number of goods available for export.

As the world’s largest exporter since 2009, China is known as the world’s factory, exporting 3.2 trillion worth of manufactured goods in 2021 alone. Viewed the opposite way, there are many importers who rely on Chinese goods and raw materials for their business. In a situation where these goods become scarce, exporters can pick and choose which importers to work with. They will naturally choose those importers that are better payees, rather than those who still request the long payment cycles.

Because importers will also be feeling a crunch in working capital, these businesses cannot simply pay their partner exporters immediately. One solution that offers a middle ground is invoice financing. With invoice financing, importers can upload an export receivable to get the exporter paid immediately, which will make their business relationship a priority even when the supply of goods is low. The importer then has a longer window in which to pay back the provider, which preserves their own cash flow.

Delays can be mitigated but not prevented

Even the best-prepared business will face disruption from a rise of COVID-19 cases in China. There will be delays in the shipments of goods and raw materials. Importers will have to find ways to adjust, such as by stockpiling products and components ahead of time, advising clients and customers of coming shortages, or even rationing out their products to end users.

But perhaps the best way to navigate this inevitable disruption is through communication. Importers will need to communicate with their partner exporters, so they can understand what delays will occur and plan and strategize accordingly. When faced with such a great disruption, exporters will be focused on restoring their own supply chain and may not have time to regularly communicate with their downstream partners. As with every business, exporters will naturally prioritize the importers they believe are important customers, as part of a key account management strategy.

Most importers will not belong in this category. They may have negotiated payment terms purely in their favor. Or worse, they may be frequent late payees or even non-payees. The few importers who regularly pay on time, such as through invoice financing, will remain in the good graces of Chinese exporters and be a strategic priority. These enterprises will get regular updates, which provides them with the second most important resource in any supply chain disruption, after the goods themselves: information.

Supply chain diversification will become multidimensional

When the COVID-19 pandemic surged throughout the world, many business leaders called for supply chain diversification. When referring to the need to diversify the supply chain, they were mostly talking about the locality.

At the national level, some were calling for businesses to choose additional suppliers outside China, so their base for goods and raw materials does not fall on one country, especially one that proved to be as susceptible to a crisis as it did. At the partner level, some were calling for businesses to diversify their partner manufacturers, suppliers, and exporters, even if they still mostly reside in China.

Both of these measures would derisk an organization, but only to an extent. To truly make a supply chain resilient, businesses need to think beyond only geography. In fact, the enterprises that will be able to best weather another supply chain disruption in China are those that diversify their business along multiple dimensions.

One important dimension to not overlook is the financial one. Importers should not have only one payment option for dealing with exporters. Relying on working capital to pay their partner exporters, at a time when cash flow may already be tight due to the looming recession, is a recipe for disaster. By diversifying their finance options to include invoice financing, importers can strengthen their financial position as it comes to working capital. Doing so is arguably as important as diversifying their partner exporters and their locations: Diversely located partners will not mean anything if there is no cash flow with which to pay them, after all.

In the end, the COVID-19 situation in China may continue to worsen, up to the point that it creates a major supply chain disruption like the previous outbreak. Since China is the world’s largest exporter, importers in particular need to be better prepared for this possibility. One means of preparation is invoice financing. By turning to invoice financing for some or all of their receivables, importers may improve access to the limited goods or raw materials that suppliers have to export, become a key clients for exporters when supply chain information is tantamount to agility, and diversify their supply chain along multiple dimensions. These importers will still no doubt be affected, but they can use this moment to once again revitalize their supply chain.