The Future Of Supply Chains And The Curves That Matter Most

Authors:   Gary Evans
                     Jon Custer

The following are the curves we are monitoring before even thinking about the path and date of the global economic recovery.

At Wednesday’s White House briefing, Anthony S. Fauci, the nation’s top infectious-diseases expert and the face of the U.S. response, said we could “relax social distancing” once there’s “no new cases, no deaths,” but the real turning point won’t come until there’s a vaccine. – Washington Post

Though most refer to new cases when speaking about “flattening the curve” the following FT chart charts the 7-day rolling average of deaths in each of the major countries.

The rate of change of the growth curves (second derivative) for Italy and Spain has turned negative, offering a green shoot of hope, whereas the U.S. and U.K. curves continue to accelerate or remain linear at best.  We are looking for the U.S. curve to start turning down by the end of the month.  That is our hope.

Death Curve_Apr2

Widespread availability of COVID-19 testing in South Korea has worked in combination with social distancing measures to isolate community spread clusters and possibly shorten the duration of restrictions on economic activity. But limitations on test availability have hampered U.S. efforts to combat the disease and resulted in less targeted and increasingly draconian public appeals from state officials to restrict social movement.  – CFR

It is also apparent in the data that Korea executed a superior plan to manage the crisis relative to other countries and China is pretty much through the first phase but still needs to be vigilant monitoring the potential for recurrence of new cases.

Extending school and work closures at the coronavirus’ ground zero in China may delay a second wave of infections, researchers said on Thursday, urging the rest of the world to take note.

With containment measures largely successful and the epidemic’s epicenter now in Europe, China has loosened a two-month lockdown in the city of Wuhan where the new coronavirus is thought to have jumped from wildlife to people late last year.

But a study in The Lancet Public Health journal suggested continuing Wuhan’s shutdowns until April would push a potential second wave of COVID-19 – the disease caused by the new virus – until later in the year. That would give health services more time to recover and expand, potentially saving lives. – Reuters

When Will The Global Economy Restart?

Though it appears the U.S. and U.K. have its darkest days ahead, we still maintain our “best guess” — everyone is in the guessing game, by the way — that the case and death curves peak in the U.S. in early to mid-May and the economy begins to recover sometime in August.   The next few weeks will be dark and cause some panic but we advise our customers to keep an eye on these curves.


The big question is how much damage the shuttering of the global economy will do to long-term trend growth and how quickly the private sector recovers and adjusts to the new reality.  We use the model or concept of hysteresis to frame our analysis.

Hysteresis in the field of economics refers to an event in the economy that persists into the future, even after the factors that led to that event have been removed. – Investopedia

We first heard the term hysteresis applied to international trade and explained by a young Paul Krugman at a World Bank luncheon years ago.  Though he was using the exchange rate as the exerting force on import and export markets, he explained it in simple terms,

If you put enough pressure on a spoon by bending it for a long enough period of time, it will never return to its original position. So to it is with export and import markets.  – Paul Krugman, paraphrased 

Though our base case is that the economy will experience a significant snapback staring about 30 to 60 days once the curves begin to turn down  — i.e., a sustained period of no new cases and deaths —  it is not likely that activity returns to “business as usual,” at least not immediately.    Some sectors will be hit exceptionally hard while others experience accelerated demand as the world settles into a “new normal.”

Setting aside the sorting out supply chain issues, we believe the electronics sector will be well-positioned to take advantage of the new reality.   The relative demand for electronic products will increase as business models, and even cultures, are transformed by a new reality of protracted social distancing, such as working from home and less business travel.   That is not to say some industries won’t experience a longer-term recovery, such as aerospace, however.

What To Do Now?

Manufacturers can take advantage of this crisis by  1) re-accessing and developing  a rigorous mapping of their supply chains; 2) using the weakness in commodities to lock-in longer-term contracts or hedge price increases, 3)  taking advantage of the collapse in interest rates by refinancing outstanding debt, locking in long-term financing, or hedging a future increase in interest rates.

Supply Chains

Once the crisis dissipates,  we suspect companies will fall into one of two categories. Those that do nothing, hoping such a crisis will never happen again, which is a very risky proposition, in our opinion. 

And the firms that learn the lessons of this crisis and make investments in mapping their supply network in order not to blinded when the next crisis strikes and are forced to rewrite their contracts.  This will allow for the discovery of quick solutions when future disruptions do occur. 

Suppliers in China made more than 3,000 force majeure declarations during the first few months of the coronavirus crisis, for example.  New contracts should also spell out expected recovery times and explicit methods of operating during periods of such stress.

High-tech industries have suffered the most during the crisis as many outsource all over the world and will probably take a little longer to recover.  Production stalls when suppliers are disrupted.

Computer shipments from China to the US dropped 64 percent in the first two weeks of March, according to a report from S&P Global Market Intelligence. Monitor and TV imports dropped 66 percent, against a broader 45 percent drop in total Chinese imports. Some analysts are already worried that the next round of iPhones could be delayed (although Apple insists the disruptions will be temporary).  – The Verge

We also suspect protectionism will rise and pressure to as well as the desire to onshore a larger portion of supply chains will increase on the other side of the crisis.  Over the longer-term companies with the ability to move to a more vertical supply chain will probably do so.

Finally, we believe the dominance of the just in time inventory management model will begin to fade.  Almost all companies throughout the supply chain will begin to carry larger inventories, which will require storage and financing thus pressuring profit margins.

Please contact us if you have any questions.

Data Appendix

Death Curve_Apr2_2

Death Curve_Apr2_3