Covid-19 Pandemic: An important link in the global supply chain.

China's "broken chain" effects on global supply chains from China to Europe and Germany

Covid-19 blows up international supply chains. Companies are now learning how fragile the global production system really is. The lockdown and quarantine actions initiated by China led to the closure of the factory in the world's second-largest economy, disrupting supply chains globally. In the next few years, as a production base and sales market, China's importance will continue. After the pandemic, most companies may reorganize their supply chain. Will the global industrial chain really underly a "Decoupling" from China in the short term?

How does bdp help their clients through this unprecedented situation?

Due to our branches in China and Germany, Spain and Poland, bdp had to experience the consequences of Covid-19 twice with a time delay. While in China, after several weeks of shutdown and home office, operations are now slowly continuing, Germany is still in the initial stage of the pandemic and the situation in Germany still uncertain. 

We have gained rich knowledge and technical expertise in the process of providing consulting, financial, tax and audit services to many German SMEs. During the financial crisis of 2008, our corporate restructuring business was well ahead in the German market. The composition of cross-industry experts has established the leading consulting position in the restructuring market. We have helped many medium-sized enterprises to overcome difficulties. Since the outbreak of the Covid-19 pandemic, bdp has always paid attention to the trend of the pandemic. In this extraordinary period, get our help early and you'll have more options available to you through our expertise and capabilities, we're happy to help you find the best solution, contact us.

Since the beginning of the pandemic, we have received many inquiries from customers and non-customers. Our colleagues at bdp China have been in close contact with the local authorities in order to understand and clarify the latest subsidy policies for bdp clients e.g. rent reduction, social security reduction, deferred payment of social security, tax incentives etc. to help mitigate the economic damage caused by the standstill due to Covid-19. Our financing team and company restructuring experts as well as the legal departments in Germany and China are of course under steam 24/7. In the current exceptional situation, we reply client’s questions e.g. force majeure clauses in the contract, corona subsidies for individual entrepreneurs, freelancers and small profit enterprises (Corona-Hilfe für Einzelunternehmer, Freibrufler und Kleinstunternehmen), reduced working hours subsidy (Kurzarbeitergeld) and bank loan etc. round the clock.

Companies because of high losses, can no longer survive the situation without state support. And that in this respect, particularly with liquidity loans, Europe is currently doing far more than China, Germany's successful experience and practices in supporting the development of SMEs China can learn from, and can provide support for more companies in this respect. 

The impact of the pandemic on German domestic supply

Although China's pandemic situation has been basically controlled, the Chinese production started unexpectedly well. However, the global supply chain has made global a highly interdependent community of common destiny. The pan affected Chinese suppliers' export of intermediate products to our European customers which led to the interruption of our European customers' production and insufficient supply. One or two months of safety stocks have been used up and the warehouses are getting empty. Container ships cannot enter the port in time, and the efficiency of customs clearance decreases. A cabinet for railway transportation is hard to find. In order to connect the supply chain as much as possible, many companies have to switch to expensive air transportation. Moreover, car sales caused by the pandemic are greatly affected, economic downturn and orders are delayed. SMEs are facing pressure from cash flow and costs. 2020 full-year sales and profits are unknown. Cost control must be increased throughout the year.

Why can't the company simply reorganize the supply chain?

Supply chain management involves many factors, such as production, procurement, logistics and operations. For international business, firstly the regional difference in the country of purchase should be analyzed: such as environmental protection policy, political factors, regional development policies, cultural differences, information transmission differences, etc., one also needs to consider hedging exchange rate fluctuations and raw material price fluctuations. Secondly, one needs to be familiar with the international technology standard differences, process differences and the industry trending and dynamics. Finally, even regarding standard parts and small batches which can be easily purchased from dealers, the product grades should be concerned as well (e.g. grades of bolts). For safety parts and non-standard customized parts, it may take several months to years to complete the sourcing, technical review (TR), supplier audit, comparison shopping, order, tooling development, sample submission, small batch production, mass production and switching of the suppliers.

Normally, German companies distribute their own supply chain in eastern Europe, China, Japan, Korea, Singapore, etc. For India, the industry foundation and political environment are weak compared to China; and for Japan, Korea, Singapore, their operation cost is higher compared to China. Eastern Europe and China are the sourcing and production centers for Europe and Asia, and it is common practice for German SMEs to build a factory in each of these countries, which is a common approach adopted by many companies, in order to radiate the surrounding countries and regions and spread the regional supply risk. But what do we do when there is a global pandemic and supply chain risks cannot be spread? 

As everyone knows, most German companies rely on Chinese suppliers. For China, due to the previous China–United States trade war and the impact of the current pandemic, many Chinese SMEs lack orders, and due to industrial upgrading, they will be eliminated. Especially after China's rapid return to work and production, due to the global economic downturn, many excellent companies lack orders and have idle capacity. 

Under the current situation, the best solution is to work together to further break through the barriers between Europe and China, reduce the "bullwhip effect" (Peitscheneffekt), and shorten the length of the supply chain. Although the supply chain will be restructured, China will remain an important sales and supply chain market, the safest place of investment, and German companies must find a balance between costs and risks. 


In summary, the pandemic exposed the weak point of over-reliance on a single procurement model. Diversification, intelligent and localized procurement are used to diversify risks, shorten the length of the supply chain, and distribute the supply chain in a regional manner. Although this layout is detrimental to economic efficiency, it will at least reduce the risk of the supply chain.

Finally, in view of the unpredictable "epidemic black swan event" and responding to the "gray rhino risk", companies need a very comprehensive risk management system. The risk control department must quickly assess the potential damage and the impact on the sustainability of major incidents in order to achieve a rapid response and gradual implementation, to ensure that problems are detected, analyzed and resolved in the first place, and to ensure that the potential losses caused by this risk are controlled within the tolerable range of the company to ensure that the company survives the difficulties.

Dr. Michael Bormann 
Tax advisor and founding partner of bdp Bormann, Demant & Partner

Fang Fang
Partner of bdp China and COO of bdp Mechanical Components