Earthmoving Equipment maker JCB hit by coronavirus induced supply chain hurdle

JCB, the world-renowned heavy equipment manufacturer, has announced that it will be reducing its manufacturing operations in the United Kingdom on account of component crunch it is facing due to the coronavirus outbreak in China. The company currently sources as much as 25 per cent of its components from China, which helps it to cut costs and stay competitive in the European markets. The outbreak has slowed down supply chains with the majority of components stuck up the manufacturers’ premises. The heavy equipment manufacturer is only one of those many companies that have been facing heat because of the coronavirus outbreak.

The coronavirus outbreak has had a significant impact on the world economy in the short period it has surfaced in the Wuhan province of China. Â The virus is impacting the Chinese economy severely as a large part of the country is in a lockdown, leading to less movement of goods inside the country and well as outside the country. Badly affected are the airline companies and shipping companies which are responsible for the movement of goods and personnel in and out of the country. Last time around when the SARS epidemic broke out, the Chinese economy lost an estimated 1 per cent of its GDP due to the outbreak. This time around the impact may not be so severe as the authorities already have sufficient experience dealing with such an epidemic but a substantial economic impact can still be expected. The country, which had already been going through a slowdown, has been further battered by this outbreak. In December last year, the country had reduced import tariffs on more than 850 products on account of a severe shortage of these commodities emanating out of the domestic economic slowdown. These tariffs were even lower than the Most Favored Nation tariffs, under which 706 products were being taxed last year. The government of China, while making the announcement, stated that the products under this new tariff regime would range from sophisticated engineering products like semiconductors devices to everyday consumables like avocados and frozen pork.

Over the years, China has worked hard and established itself as a strong manufacturing base. The country is today amongst the cheapest manufacturing destinations in the world, a fact which it has been vehemently promoting in order to attract manufacturers from around the world. In this endeavour, the country has also become the world’s largest consumer of basic raw materials and the cheapest manufacturer and exporter of intermediate goods. For years now, several of the top manufacturing companies have been making China their home taking advantage not only of its manufacturing prowess but also, it's the increasingly affluent middle class, which is the second largest after the United States of America.

China, which at some point in time, was ill-reputed because of its poor quality of manufacturing, has also significantly improved because of this increased exposure to international manufacturing companies and their quality standards. It is not surprising these days to find a Chinese made component in almost any durable consumer product or an automobile component. Chinese products have been inundating the international market like never seen before, with several countries now imposing tariffs on these products to protect their local industries.

The situation in the manufacturing sector in the United Kingdom is even more complicated. The country recently withdrew itself from the European Union. During the past forty-seven years that it had been a part of the Union, it had taken advantage of the relaxed regulatory and taxation regime and started sourcing its intermediate engineering goods and other components from less expensive manufacturing destinations of Europe. This advantage, in particular, helped the automobile industry of the United Kingdom become globally competitive and export nearly 70 per cent of its products. With the advent of Brexit, this advantage is suddenly gone. The supply chains that were developed over the years are suddenly disrupted, leading to a severe component supply crunch. The industry not only stands to lose its global edge as the best in class automobile manufacturers, but in the short run is facing production shortfalls because of this reason. China, in this regard, provided an excellent alternative and many manufacturers of United Kingdom have turned to that country for their requirements. However, as things stand now, even this alternative is now at risk. For the United Kingdom, it would mean reduced manufacturing and assembling activity in the country and/ or importing these essential components from European Union countries at new and enhanced tariff levels. The consequences again will be the same; the industry will become less competitive.

The British government, on its part, probably would not have anticipated this problem. When they left the European Union, they were hopeful that they would be able to recreate the advantage of being in European Union through comparable trade deals with the rest of the world where the net effect of the withdrawal will be neutral for the domestic industry. The British Foreign Secretary has in the past few weeks, visited several Asian countries to forge economic and trade agreements with countries with whom it had a historical relationship as colonies. With the outbreak, the economies of several other Asian countries are also deeply affected, particularly those countries which heavily depend on trading with China. The restrictions on travel and goods movement are not only in place in China but also in many of the nearby countries where cases of coronavirus outbreak have been reported, making trading with them as difficult as with China.

JCB has decided to reduce working hours of nearly 4000 thousand workers and bring it to 34 Hours from the established 39 hours per week. The workers, however, will be paid for the full 39 hours with the company deploying them back during the year and the overtimes for the foreseeable period have been suspended. The company expects the situation to remain disruptive for at least the next few weeks when the authorities in China are expected to be able to contain the spread of the virus. Mark Turner, the CEO of JCB, while commenting on the situation stated that the company would not be able to meet its production and revenue figures for the year and corresponding would be the effect on the profitability of the company for the year.