We may or may not yet be officially using the “R” word but with the stock market in freefall, house prices plummeting and the sterling exchange rate reminiscent of the 1990s, it certainly feels as though recession has well and truly arrived.
One of the few economic factors on the increase is, of course, unemployment – two million or more out of work in the UK by Christmas, say the pundits. For anyone involved in supply chains the numbers imply a raft of looming problems. UK car sales for example, were down by 18.6 per cent in August – to the lowest figures since 1966 according to the Society of Motor Manufacturers and Traders. By October the knock-on effect on the supply chain was apparent: automotive parts supplier GKN was predicting a 30 per cent fall in fourth quarter profits, along with global job cuts and plant closures, as its shares slumped 20 per cent. It was one of many companies in a similar position: in the UK business failures increased by 28 per cent in the third quarter.
In the high street the more gloomy forecasters were predicting the worst Christmas sales for 30 years – which also inevitably meant cut-backs in orders from suppliers worldwide. In China, for example, Wang Zhiguang vice chairman of Dongguan Toy Industry Association told the Guangzhou Daily: “..of the 3,800-odd toy companies in Dongguan, no more than 2,000 are likely to survive the next couple of years”. “Toy companies go broke in Dongguan” may seem as exciting a news headline as “Small earthquake no-one hurt” but the supply chain considerations are significant.
Over the past few years it’s been a buyer’s market: plenty of suppliers to choose from, plenty of alternative sources, plenty of eager sellers after your business. As the numbers of buyers dry up then obviously those numerous suppliers are fading from the scene – be that the closure of a local car automotive plant or a remote contract factory in the Far East. And, of course, shutting things down is a great deal easier than starting them up again.
While some pessimistic economic forecasters make comparisons with the Great Depression of 1929, the more optimistically pragmatic talk in terms of an 18-month dip in trade. As the orders are cancelled and production staff join the dole queues, then trading relationships nurtured over many years also hit the dust. When demand picks up, those helpful suppliers at the end of a telephone might no longer be there to make those just-in-time deliveries. Instead of having half a dozen possible component suppliers to choose from, maybe there will be only two or three – all with filling order books and premium prices.
Maintaining business continuity and whatever B2B relationships that can be salvaged from the current chaos will also be important: keeping track of people and databases, of capabilities and skills to get those supply chains moving quickly again come the day.
Over the past few years much has been said, and written, about the virtues of global datapools and trading exchanges, about how easy they can make it to find new product sources and ensure information consistency. Much of the message has fallen on deaf ears as companies prefer to go it alone in a competitive and booming market. Perhaps in a year or two such datapools really will come into their own as the survivors search for new global trading partners?
Indeed, as the current “downturn” reminds us, our world is truly “global” and is likely to become more so. A survey by Deloitte of 105 chief financial officers, published in October, concluded that more than half planned to cut current employee numbers and capital spending while 70 per cent expected to cut future hiring and – significantly – 29 per cent were contemplating moving capacity offshore (up from 13 per cent in a similar survey six months earlier).
Obviously if these “contemplations” turn into reality then it is bad news for UK plc, equally – given the global nature of large corporates – it makes sense from their perspective to move activities to low cost areas to maximise profitability. Come that upturn it could make not only global sourcing more complex but global distribution, too, as products move to those markets which emerge most quickly from recession.
Long before the credit crunch hit home, futurists were talking about the shift eastwards in economic power as growth in the likes of Russia, India and China continues to outstrip the traditional “Western” economies. Who knows what patterns of trade will emerge when the credit crunch is finally over?
Penelope Ody is a regular columnist for SCS and is a retail market specialist.