China’s Supply Chain Crisis and Its Effect on e-Commerce – Taiwan’s View

It is apparent that with all the factories and warehouses shut down in the Hubei area of China following the lockdown, there is going to be a supply stagnation in China. However, if we look at the impact it brings, it is acutally way more serious than any other stagnation outbreak elsewhere, as China has become “the world’s factory” during the last 20 years.

Dependency on the Chinese Supply Chain

Statistics from OPEC highlight the countries that depend on China’s supply chain most. In 2015, 20% of global intermediate products came from factories in China. As time goes by, intermediate manufactured goods from China still dominate the world, especially for countries within the the Asian Supply Chain. Today, about 40% of the intermediately manufactured goods used in Cambodia, Vietnam, South Korea and Japan are from China. For Taiwan, it is about 30%, which is a bit lower but still going to cause a supply problem if China were to fall (Economic Daily News, 2020).

Mitigating the Effect of Supply Chain Disruption

A trend was observed in recent years for American, Japanese, South Korean and Taiwanese enterprises to move their supply chains out of China to Southeast Asian countries due to rising wages in China, the trade-war with the US, and compliance levels in China. The impact of factory shut-downs in China could be mitigated if this trend continues (Lin, 2020). What’s more, the economic benefits that helped the development of China before, could be passed on to local manufacturers in each developing country. Taiwan has been doing the same for years. Take Foxconn for instance. As one of the world’s largest electronics manufacturers, known for the large-scale production of iPhones for Apple, Foxconn expects a considerable decrease in its annual revenues becaus of the disruption in China’s supply chain, as it delayed the return of its Chinese workers in Zhengzhou for their own safety.  In response, Hon Hai (Taiwanese name of Foxconn) is utilizing its manufacturing plants in Southeast Asia and South America in full capacity and hoping to expand the plants in those areas (Financial Times, 2020).

On the other hand, the global supply chains of some intermediate products are still monopolized by China (Economic Daily News, 2020), and thus it will be particularly difficult for certain players to find alternative sources of supply. For example in Taiwan, the clothing or textile industry, PC and electronical equipment and non-metal mining take nowadays China as their main source of supply. As the Chinese supply chain becomes stagnant, not only does the inventory level fail to meet expectations, but the costs of late delivery and labor will negatively effect customer satisfaction. Therefore, the Taiwanese National Institute of Technology Industry Research reckons with the possibility for the electronics industry to have a chain-breaking crisis in March, if the pandemic continues.

How Does it Relate to e-Commerce?

In times like these, it is logical for e-commerce to prosper. However, the supply chain crisis affects even the e-commerce players in general. Take Amazon for example. About 40% of Amazon’s sales come from its wholesale suppliers, many of which rely on Chinese factories for product procurement. Business Insider points out that in mid-February, Amazon actively contacted multiple suppliers and placed orders to increase its inventory for products that are made in China, in response to the global epidemic crisis (Kim, 2020). We can observe that the slowdown in the Chinese supply chain is forcing e-commerce players to stockpile or reduce their offerings.

In Taiwan, there is a considerable increase in online sales. Due to the delay and suspension of the goods sourced from China, this phenomenon has indirectly promoted the growth of local e-commerce in Taiwan. ET Mall, a famous e-commerce player in Taiwan with a consolidated revenue of 380 million NTD (around 12 million Euro) in January, an increase by 29.56% compared to the same month one year before. Nintendo Switch’s sales volume on Life Market (生活市集) grew by 40%. In addition, Switch packages, consoles and other products on PChome also snapped up. Those are all big local e-commerce players in Taiwan (TNL Brand Studio, 2020).

All in all, the current situation is forcing Taiwanese enterprises to undergo a quick transformation. The COVID-19 crisis has proven once again that over-dependance of the supply on one country may not be the best long-term solution for the survival of an effective and efficient supply chain system. In this sense, the effect of COVID-19 is bigger than that of the so-called trade war between the US and China last year. The resourcing trend will need to be complemented with smart insourcing to fully mitigate the risk of over dependencies in the future.

Julia ZX Chen