SUPPLY CHAIN
Compiled by Yamini Sequeira
POST-COVID IMPERATIVES
Presantha Jayamaha calls for risk mitigation by geographic diversification
Q: In what ways did COVID-19 induced lockdowns impact global supply chains?
A: There was a major impact especially when China went into complete lockdown, causing total disruption among factories and supply chains the world over.
As ‘the factory of the world,’ China’s lockdown not only affected finished goods – including consumer items, clothing and medical equipment but also raw materials such as chemicals.
For example, Nissan Motors stopped producing certain models in Japan due to key components not being available as factories in China were shut. Japan now has a multi-billion dollar fund to help factories relocate from China back to its shores.
As a result of COVID-19 and its impact on global industry, people have woken up to the realisation that it’s time for risk mitigated supply chains that are spread across different nations.
From early last year, there have been a growing number of companies actively rethinking the need to spread risk instead of relying solely on one nation. The trade war between the US and China, and COVID induced disruption of supply chains, has aggravated the situation and prompted many industries to initiate discussions suggesting a shift in manufacturing out of China.
If your supply chain isn’t sustainable, you’re out of business. So in the grand scheme of things and though important, cost may not be a major driver. What’s important is the sustainability of the supply chain and transparency. You may have more eggs in one basket because it’s cheaper; but overall, if one falls, you have two other suppliers and can easily ramp up.
Q: How much disruption did the outbreak cause?
A: The disruption of global supply chains occurred due to the concentration of production and manufacturing in a few countries. Indeed, the world has to diversify its sourcing centres to de-risk global industry from a slowdown or stoppage in one nation.
If for any reason there is a biological war or a related issue in one region, the rest of the world should be able to continue economic activities because risk – and thus supplies is spread across many countries and can operate independently.
Q: Some businesses have moved away from China – could this be temporary since few others can match China’s margins?
A: It will affect China the most but might even impact Sri Lanka as certain buyers may want to near-shore production to the EU or US.
Today, there are three drivers of supply chain strategy cost, resilience and market proximity – whilst over the past few decades, it was clearly cost. COVID-19 has driven the resilience factor to the surface. These movements will be long term.
Q: So does this present an opportunity for Sri Lanka?
A: It presents a phenomenal opportunity to grow our export revenue and industries. Sri Lanka must be strategically positioned as a viable option when these global supply shift discussions are in play.
However, we need to be objective and address the local conditions for large industry power and energy costs are high, and there are landownership concerns and a shortage of skilled labour.
For instance, if a foreign investor wants to set up a million dollar logistics centre in Sri Lanka, it can’t own the property.
These are serious concerns for investors; a policy conversation must take place at the government level about how to handle labour, incentivise companies and project Sri Lanka as a viable alternative to others in the ASEAN or SAARC region.
Q: What should Sri Lanka do to attract businesses to shift here?
A: Sri Lanka has a location advantage and is being positioned as a logistics hub. But it has to offer more as other countries in the region are competing to entice the same investors.
For example, India is offering a US$ 6.5 billion incentive for companies to relocate their smartphone manufacturing to its shores.
So Sri Lanka may need to offer tax breaks, concessions or other incentives to attract these companies. Conversations have begun and some US companies are moving into the region.
The present time offers probably one of the largest opportunities in the last two decades and this needs to be harnessed. This is a time for Sri Lankan entrepreneurs to stretch their thinking. Since our economy is small, even a small share of that business could be a game changer.
Q: Are there opportunities for Sri Lanka to harness to its advantage?
A: Together with the US Agency for International Development (USAID), we are conducting a study with American consultants to evaluate which companies or industries are most likely to relocate their manufacturing or sourcing operations.
We’re also engaging with the private sector and some local chambers to formulate a plan for Sri Lankan companies to grab emerging opportunities. We are hopeful that the new government will build consensus and big businesses will move into Sri Lanka.
If we can attract even a sliver of the global supply chain including some of the backward integration such as textile or raw material production, we could increase apparel exports substantially.
Sri Lanka can also do more in the hard rubber segment with solid rubber tyres and in high technology to manufacture high end components.
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