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Most multinational firms have been caught by surprise. This is not the first time they have suffered shocks to their Asian supply chains. The tsunami that hit Japan in 2011 and devastating floods in Thailand the same year disrupted production for many big firms. More recently, Donald Trump’s trade war with China has exposed the risks of supply chains that rely too heavily on the mainland. But the bosses of such businesses have done little to prepare for shocks such as that inflicted by the outbreak of the new coronavirus.
Investors are punishing companies for this failure. The shares of American firms with strong exposure to China have underperformed the s&p 500 index by 5% since early January, when news of the outbreak first broke.
There are three reasons to think the coming months could prove even more unpleasant for many firms. First, big multinationals have left themselves dangerously exposed to supply-chain risk owing to strategies designed to bring down their costs. For example, many keep only enough stock on hand to last a few weeks, confident that they can always replenish their inventories “just in time”. That confidence is misplaced, argues Bindiya Vakil of Resilinc, a consultancy.
Read the complete article at The Economist>>
