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Why Covid-19 Demands Our Full Attention

16-2-2020 < SGT Report 19 1247 words
 

by Chris Martenson, Peak Prosperity:


This is an unprecedented moment for our hyper-connected planet


There’s a reason we’ve re-directed so much of our attention towards reporting on and trying to understand the novel coronavirus (covid-19) that originated in Wuhan, China in December.


The heart of our approach is to be “systems thinkers.”



“Learn how to see.  Realize that everything connects to everything else”


~ Leonardo Davinci



We don’t see the economy as a closed ecosystem to be analyzed and understood all on its own.  It’s connected to energy flows, especially oil.  So we investigate those, too, with an eye towards working out how fossil fuels’ eventual dwindling will impact an economic system that is utterly dependent on perpetual growth.



Without a healthy planet, without intact and functioning ecological systems, nothing matters in either the economy or the energy markets.  Both impact the ecological world And vice versa.  So we analyze and report on the environment, too.


Which is why we’re confident in claiming that humanity is now facing its greatest threat.  Our current path of depleting our essential resources at an accelerating rate in the pursuit of “more growth” is both unsustainable and self-destructive.


So here we are, with a global economy that’s very cost-efficient but not resilient.  It’s wonderful that Walmart has worked out how to order a new tube of toothpaste from China the second one is pulled off a shelf in Topeka, KS. But that means there is no deep storage to draw upon in times of disruption to the status quo.  No warehouses stocked with 12 months of future goods.  Just a brilliantly-complicated supply chain thousands of miles long that has to work perfectly for things to keep running.


As an example that drives home this point: we learned during the 2011 earthquake in Japan that there was just one single factory making a necessary polymer gel for the odd-shaped lithium batteries used in smartphones and iPods.  There was no backup factory.


We watched closely during that enormous crisis (which also spawned the Fukushima nuclear disaster) as electronics companies scrambled to triage their remaining supplies and attempt to find new sources.  It was very touch and go.  Vast portions of the battery-fueled electronic industry came within a whisker of simply shutting down production — all for want of an esoteric polymer gel.


Yes, the most cost-effective way to make that gel was to house it all in a single plant.  But it made no sense from a redundancy and resilience standpoint.


And did ‘we’ learn from that experience?  Nope.


Supply Chain Armageddon


The global economy is more interdependent than ever. Its supply chains are built on a huge network of dependencies with many ‘single points of failure’ strung along its many branches.


Can anybody predict what will happen next?  No.


But we’re already seeing early failures as Chinese plants, factories and ports sit idle from the country’s massive quarantine efforts:



China set to lose out on production of 1M vehicles as coronavirus closes car plants


China exports about $70 billion worth of car parts and accessories globally, with roughly 20 percent going to the U.S.


Feb. 5, 2020, 4:32 PM EST


By Paul A. Eisenstein


China could suffer the loss of a million vehicles worth of production as factories in its crucial automotive industry remain shuttered until at least next week — and likely longer in Wuhan, the “motor city” at the center of the coronavirus outbreak.


With more than 24,000 people infected, the impact of the highly contagious disease is also beginning to be felt by automakers in other parts of the world. Hyundai is suspending production in its South Korean plants because of a shortage of Chinese-made parts, and even European car manufacturers could be hit: Volkswagen and BMW could see a dip of 5 percent in their earnings for the first half of 2020, according to research firm Bernstein.


(Source – NBC)



We’re predicting that these auto shutdowns are just beginning.  All it takes is a single component to be unavailable and the entire line has to be shut down.


Is China the sole source for many critical components in the auto industry?  Absolutely.


Here’s an inside view:



On Monday, Steve Banker and I had the opportunity to speak with Razat Gaurav, CEO of Llamasoft. Razat had some interesting takes on the outbreak, especially as it relates to the automotive and pharmaceutical supply chains. On average it takes 30,000 parts to make a finished automobile.


Due to the virus, production facilities have already indicated that they will have lower than normal parts volumes. This has left companies scrambling to make contingency plans. During my conversation with Razat, he mentioned that inventories for most of these automotive parts are managed on a lean just-in-time basis.


This means that, on average, companies have anywhere between two and twelve weeks of buffer inventory on-hand for automotive parts. As production volumes are decreasing, this has the potential to cause quite the global shortage of parts. The buffer inventory will only last so long, and once the pre-holiday supply runs dry, the industry is going to be in serious trouble. According to Gaurav: “Most OEMs single source components for new vehicles and China is a large supplier of those.”


(Source – Logistics Viewpoints)



“Single sourcing” is exactly what it implies.  There’s a single factory somewhere churning out a single component that is absolutely vital to make a motorized vehicle.  If that factory goes away for any length of time, a new source has to be identified or – worse, from a time and cost standpoint – built from scratch.


But this vulnerability to China-dependent supply chains is by no means unique to the auto industry:



Last month, the U.S.-China Economic and Security Review Commission held a hearing on the United States’ growing reliance on China’s pharmaceutical products. The topic reminded me of a spirited discussion described in Bob Woodward’s book, Fear: Trump in the White House.


In the discussion, Gary Cohn, then chief economic advisor to President Trump, argued against a trade war with China by invoking a Department of Commerce study that found that 97 percent of all antibiotics in the United States came from China.


(Source – CFR)



That’s as close to a ‘sole source’ as you can get.


And to put the cherry on top: guess the name of the region in China responsible for producing all if these antibiotics?  Yep, Hubei province.  With Wuhan its most important production hub.


Can we find another source for our generic drugs and antibiotics?  India, possibly.  But here again we run into the same global interdependency issue:



Another industry that is feeling the impact of the coronavirus is the pharmaceutical industry. The average buffer inventory for the pharmaceutical industry is between three and six months. However, this does not tell the full story. Gaurav mentioned that China is responsible for producing 40 percent of the active pharmaceutical ingredients (APIs) for the pharmaceutical world.


Additionally, China supplies 80 percent of key starting materials (KSM’s), which are the chemicals in APIs, to India. Put together, this represents 70 percent of all APIs across the world.


(Source – Logistics Viewpoints)



India’s production is directly tied to uninterrupted supply from China:


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