Pandemic to accelerate global supply chain shift: Moody's

13 Aug '20

2 min read

Pic: Shutterstock

The coronavirus pandemic will likely accelerate fundamental shifts in trade relationships and supply chains globally, with some Asian economies benefiting from diversification away from China, according to a new report by Moody's Investors Service, which expects supply chains to turn 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.

"Ensuring supply security by enhancing the strength of supply chains will become the overarching objective of governments and companies, overtaking cost and efficiency considerations," said Michael Taylor, a Moody's managing director and chief credit officer for Asia Pacific.

"The Asian countries that stand to benefit from diversification are those with sound economic fundamentals, reliable infrastructure, sufficient human capital stock, and low geopolitical and supply security risk," added Taylor in a press release.

Diversification will aim to reduce reliance on any single supplier, whether a single producer or a group of producers from the same country, while localization will aim to relocate production close to home markets.

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

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

The credit implications for Asian export oriented economies and producers will vary. Some Asian markets ex-China will benefit from supply chain shifts, particularly as companies look to diversify their sources of supply.

However, localisation of production or reshoring that moves productive capacity out of the region to the US (Aaa stable) or the European Union (Aaa stable) 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, the report said.

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