Covid-19 Impact: Potential Of SEZ’s To Drive Recovery

Covid-19 pandemic is significantly impacting supply chains across the world. China was forced to halt production for two months. This accounts for one-third of global manufacturing. It is difficult to quantify the losses due to the shutdown on a global scale but from Chennai port alone, import cargo volume was down by 60%. SEZs across the country have witnessed a dip in trade volumes. Due to the massive disruption in trade and freight, the impact on the logistics sector has been significant and the availability of shipping containers and the increase in logistic costs have hampered supply chain and business operations.

Now Covid-19 is on an exponential growth curve in the western world, already major European countries have had to act with unprecedented actions; closing schools, restricting gatherings and social distancing.  The effect is major economies around the world being put into stasis for an extended period of time.  China’s manufacturing capability will gradually get back online, however, the demand will dwindle to a fraction of normal levels. This will cause significant financial pressure as their revenues drop.  For every global manufacturer in China there are hundreds of SME suppliers whose survival is dependent on the continued production of the big players.  Lots of suppliers will go out of business. This health disaster has exposed a major weakness in the global supply chain. The manufacturing base was too centralised to one region.

When the covid-19 pandemic is resolved, stake holders in the global manufacturing and supply chain sectors will strive to mitigate against this happening again. The goal is to de-risk global supply chains.  This is important economically but more importantly to ensure robust global supply of pharmaceuticals and medical equipment going forwards.  It is vital to diversify the location of manufacturing across the world.  India is in a unique position to become a major part of the solution.  

Supply Chain Disruption
How will supply chain look in a post covid-19 world? Businesses were ultimately price driven when sourcing suppliers, the parameters post covid-19 will be more complex and must include weighting other variables higher than before.  Businesses will likely keep more raw materials, components, finished goods in stock, ready to be deployed under future interruptions.   The manufacturing facilities should be location diversified.  Given the new goals it makes sense to move some capacity to a country like India, with an enormous domestic market, advantageous geographic location and highly skilled labour at competitive rates.  

Impact on Manufacturing
Global manufacturing is undergoing an acute slowdown, as more countries take protective measures to try to prevent unchecked spread of the virus.  Currently the only action available is social distancing.  Clearly this will impact non-essential production severely but as of now an increasing number of governments around the world are imposing such measures and for an open-ended period of time.

With this new reality, however brief or long it turns out to be, what options do businesses have?  Behavioural change. All employees required to wear personal protection equipment, be fully aware of transmission pathways within the workplace and be trained on how to minimise spread.  Comprehensive and regular disinfection of the workplace.  Thorough monitoring of employee’s health with onsite containment measures.  This approach could surely be adopted; however, it would take time and expense and considerable effort from all involved to be implemented successfully.  But these are crisis management strategies and unlikely to be adopted long term with little benefits as and when a vaccine becomes available.  

Another route is accelerating the transition to industry 4.0 and automation, reducing staff numbers to achieve the same output. This sounds, at least operationally, very appealing under the current climate. This will require large capital investment and also for the technology to improve.  An increase in additive manufacturing (3d printing) would both reduce supply chain pressure and add significant manufacturing flexibility.  This strategy would have transformative benefits during a prolonged covid-19 environment but much more significantly post covid-19 as businesses seek to de risk all aspects or operations.        

Mitigation against similar crises will be a huge part of the recovery. Rebalancing of global manufacturing and supply chain will be an absolutely necessary part of that puzzle.  
Foreign Investors who wish to set up new manufacturing units will find the SEZs as attractive investment hubs.  Nearly one -third of Indian Exports are out of SEZs, which now have the potential to become a strong pillar of the Indian economy and allow integration of technology and businesses to tap and drive the growth potential of the country. Multi sector Special economic zones offer a true ecosystem of operations.  They are located near large metropolitan areas and transport hubs with superb connectivity domestically and internationally. The facilities are world class, offering manufacturing and warehousing plug and play solutions with excellent infrastructure, simple and fast start up of operations and operational flexibility to react effectively in the future.  SEZ’s can promote themselves as a very attractive solution for global businesses.  

Author ; 

Sunil Rallan -Chairman and Managing Director, J Matadee Free Trade Zone

Chennai FTZ